UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to
___________________
Commission File Number: 000-2409
Com21, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3201698
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
750 Tasman Drive
Milpitas, California 95035
(408) 953-9100
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common
Stock, $0.001 par value, was 21,284,499 as of March 31, 1999.
<TABLE><CAPTION>
COM21, INC.
INDEX
<BTB>
PART I: FINANCIAL INFORMATION Page
<S> <C>
Item 1 Financial Statements
Condensed Balance Sheets - March 31, 1999 and December 31, 1998 3
Condensed Statements of Operations and Comprehensive Loss -
Three Month periods ended March 31, 1999 and 1998 4
Condensed Statements of Cash Flows - Three Months Ended
March 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
PART II: OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 24
</TABLE>
In addition to historical information, this Form 10-Q contains
forward-looking statements including statements regarding our
strategy, financial performance and revenue sources that
involve a number of risks and uncertainties, including those
discussed below at "Risk Factors" and in the "Risk Factors"
section of Com21's Annual Report on Form 10-K dated March 10,
1999 as filed with the SEC. While this outlook represents our
current judgement on the future direction of the business,
such risks and uncertainties could cause actual results to
differ materially from any future performance suggested below.
Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of
this Form 10-Q. Com21 undertakes no obligation to publicly
release any revisions to forward-looking statements to reflect
events or circumstances arising after the date of this
document. See "Risk Factors" below as well as "Risk
Factors" in Com21's Annual Report on Form 10-K dated March
10, 1999 as filed with the SEC.
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE><CAPTION>
COM21, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,918 $ 7,135
Short-term investments 63,843 58,609
Accounts receivable 11,216 4,834
Inventories 2,395 5,282
Prepaid expenses and other 986 586
---------- ----------
Total current assets 131,358 76,446
Property and equipment, net 6,438 6,247
Other assets 305 255
---------- ----------
Total Assets $138,101 $ 82,948
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,172 $ 4,033
Accrued compensation and related benefits 2,672 1,739
Deferred revenue 287 238
Other current liabilities 1,520 1,232
Current portion of capital lease and debt
obligations 968 1,120
---------- ----------
Total current liabilities 10,619 8,362
Deferred rent 290 284
Capital lease obligations 773 936
---------- ----------
Total liabilities 11,682 9,582
---------- ----------
Stockholders' equity:
Common stock, $0.001 par value, 40,000,000 shares
authorized; 21,284,499 and 18,685,560 issued and
outstanding at March 31, 1999 and December 31, 1998 21 19
Additional paid-in capital 176,848 122,131
Deferred stock compensation (74) (82)
Accumulated deficit (50,320) (48,699)
Accumulated other comprehensive loss (56) (3)
---------- ----------
Total stockholders' equity 126,419 73,366
---------- ----------
Total Liabilities and Stockholders' Equity $138,101 $ 82,948
========== ==========
See notes to condensed financial statements.
</TABLE>
COM21, INC
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
<TABLE><CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 19,214 $ 7,020
Cost of Product Revenues 10,746 4,676
---------- ----------
Gross Profit 8,468 2,344
---------- ----------
Operating Expenses:
Research and development 6,900 4,278
Sales and marketing 3,230 1,803
General and administrative 840 580
---------- ----------
Total operating expenses 10,970 6,661
---------- ----------
Loss From Operations (2,502) (4,317)
Other Income, Net 918 94
---------- ----------
Loss Before Income Taxes (1,584) (4,223)
Income Taxes 37 9
---------- ----------
Net Loss (1,621) (4,232)
Other Comprehensive Loss, Net of Tax:
Unrealized loss on available-for-sale investments (53) -
---------- ----------
Comprehensive Loss $ (1,674) $ (4,232)
========== ==========
Net loss per share, basic and diluted $ (0.08) $ (1.69)
========== ==========
Shares used in computation, basic and diluted 19,472 2,497
========== ==========
See notes to condensed financial statements.
</TABLE>
COM21, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE><CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash used in operating activities:
Net loss $ (1,621) $ (4,232)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 981 801
Deferred rent 6 12
Gain on sales and maturities of investments (319) -
Changes in operating assets and liabilities:
Accounts receivable (6,382) (1,431)
Inventories 2,887 974
Prepaid expenses and other (400) (417)
Other assets (50) 1
Accounts payable 1,139 830
Accrued compensation and related benefits 933 42
Deferred revenue 49 84
Other current liabilities 288 56
---------- ----------
Net cash used in operating activities (2,489) (3,280)
---------- ----------
Cash used in investing activities:
Purchases of investments, net (4,968) -
Purchases of property and equipment (1,164) (389)
---------- ----------
Net cash used in investing activities (6,132) (389)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock, net 54,330 -
Proceeds from exercise of stock options, net 389 62
Repayments under capital lease obligations (263) (182)
Repayments on debt obligations (52) (79)
---------- ----------
Net cash provided by (used in) financing
activities 54,404 (199)
---------- ----------
Net change in cash and cash equivalents 45,783 (3,868)
Cash and cash equivalents at beginning of period 7,135 17,950
---------- ----------
Cash and cash equivalents at end of period $ 52,918 $ 14,082
========== ==========
Noncash investing and financing activities:
Property and equipment acquired under capital lease $ - $ 203
========== ==========
Unrealized loss on available-for-sale investments $ 53 $ -
========== ==========
See notes to condensed financial statements
</TABLE>
COM21, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been
prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, these unaudited consolidated financial statements
include all adjustments necessary (consisting of normal,
recurring adjustments) for a fair presentation of Com21's
financial position as of March 31, 1999, the results of
operations for the three months ended March 31, 1999 and 1998
and cash flows for the three months ended March 31, 1999 and
1998.
The results of operations for the three months ended March 31,
1999 may not necessarily be indicative of the results to be
expected for the fiscal year ending December 31, 1999. These
financial statements should be read in conjunction with the
financial statements and the accompanying notes included in
the Company's Form 10-K dated March 10, 1999 as filed with the
SEC.
2. Investments
The fair value and the amortized cost of available-for-sale
securities at March 31, 1999 and December 31, 1998 are
presented in the tables below (in thousands):
<TABLE>
Unrealized
Amortized Holding Fair
Cost at Losses at Value at
3/31/99 3/31/99 3/31/99
---------- ---------- ----------
<S> <C> <C> <C>
Corporate Bonds $ 17,007 $ (23) $ 16,984
Government Bonds 46,892 (33) 46,859
---------- ---------- ----------
Total $ 63,899 $ (56) $ 63,843
========== ========== ==========
Unrealized
Amortized Holding Gains Fair
Cost at (Losses) at Value at
12/31/98 12/31/98 12/31/98
---------- ---------- ----------
Corporate Bonds $ 30,803 $ 7 $ 30,810
Government Bonds 27,809 (10) 27,799
---------- ---------- ----------
Total $ 58,612 $ (3) $ 58,609
========== ========== ==========
</TABLE>
Fair values are based on quoted market prices obtained from an
independent broker. Available-for-sale securities are
classified as current assets and all maturities are within one
year.
3. Inventories
Inventories consist of (in thousands):
<TABLE>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials and sub-assemblies $ 574 $ 142
Work-in-process 741 1,361
Finished goods 1,080 3,779
---------- ----------
$ 2,395 $ 5,282
========== ==========
</TABLE>
4. Stockholders' Equity
Secondary Offering - In February 1999, Com21 completed a
public stock offering and issued 2,480,000 shares of its
Common Stock to the public at a price of $23.50 per share.
The Company received net proceeds of approximately $54.3
million in cash.
Net Loss Per Share - The following is a reconciliation of the
numerators and denominators of the basic and diluted net loss
per share computations (in thousands, except per share amounts):
<TABLE>
Three Months
Ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net Loss (Numerator):
Net loss, basic and diluted $ (1,621) $ (4,232)
---------- ----------
Shares (Denominator):
Weighted average common shares outstanding 19,587 2,796
Weighted average common shares outstanding
subject to repurchase (115) (299)
---------- ----------
Shares used in computation, basic and diluted 19,472 2,497
---------- ----------
Net Loss Per Share, Basic and Diluted $ (0.08) $ (1.69)
========== ==========
</TABLE>
During the three months ended March 31, 1999 and 1998, the
Company had securities outstanding which could potentially
dilute basic EPS in the future, but were excluded in the
computation of diluted EPS in such periods, as their effect
would have been antidilutive due to the net loss reported in
such periods. Such outstanding securities consist of the
following at March 31, 1999: warrants to purchase 31,814
shares of common stock; 98,243 outstanding shares of common
stock subject to repurchase; and options to purchase 2,292,323
shares of common stock.
5. Litigation
In January 1998, Hybrid Networks, Inc. filed an action against
the Company, alleging the Company of infringing certain of
their patents. The Company settled this matter in January 1999
through a patent cross-license agreement that had no material
adverse effect on the Company's financial position, results of
operations or cash flows.
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
Com21's unaudited condensed financial statements and notes
thereto. The results described below are not necessarily
indicative of the results to be expected in any future period.
Certain statements in this discussion and analysis, including
statements regarding our strategy, financial performance and
revenue sources, are forward-looking statements based on
current expectations and entail various risks and
uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking
statements. Readers are referred to the "Risk Factors"
section contained in Com21's Annual Report on Form 10-K dated
March 10, 1999, and to the "Risk Factors" section contained
herein which identify important risk factors that could cause
actual results to differ from those contained in the forward
looking statements.
Overview
We are a leading global supplier of broadband access solutions
for delivering high-speed Internet access. Our systems enable
cable operators to provide high-speed, cost-effective Internet
access to corporate telecommuter, small office/home office and
residential end-users in the U.S. and internationally. Our
systems also enable cable operators to address the distinct
price, performance, security and other needs of these
different end-users. Our product family includes cable modems,
headend equipment, network management software and noise
containment technologies.
We were incorporated in June 1992. From inception through
April 1997, our operating activities related primarily to
establishing a research and development organization, testing
prototype designs, building application-specific integrated
circuit design infrastructure, commonly known as an ASIC,
commencing the staffing of marketing, sales and field service
and technical support organizations and establishing
manufacturing relationships. We shipped our first product in
April 1997. Since then, we have expanded our sales and
marketing and customer support activities. These activities
include commencing trials with our cable operator customers,
expanding our customer base, developing customer
relationships, marketing the Com21 brand, hiring field service
and customer support personnel, building distribution
channels, developing new products and technologies and
enhancing existing products.
Results of Operations
Total Revenues - Total revenues increased 174% from $7.0
million in the first quarter of 1998 to $19.2 million in the
first quarter of 1999. We experienced sales growth in both
cable modems and headend products over the comparable quarter
in the prior year. Cable modem revenue increased at a greater
rate than headend revenues as Com21's installed base of
headend products was able to support a greater number of cable
modems. Cable modem sales accounted for 63% of total revenue
in the first quarter of 1999 as compared to 39% in the first
quarter of 1998. Headend product sales accounted for 36% of
total revenue in the first quarter of 1999 as compared to 57%
in the first quarter of 1998. The remaining balance of
revenue is related to network management software.
The average sales price of cable modems continued to gradually
decline during the first quarter of 1999 due to competitive
pricing pressure. We expect that average sales prices of
cable modems to decline at a faster rate during the next few
quarters as additional DOCSIS or CableLabs-certified vendors
bring product to market. During the quarter ended March 31,
1999, international sales accounted for 45% of total revenues,
decreasing from the 50% of international sales in the first
quarter of 1998. This decrease was primarily due to a greater
proportional increase in sales of all products to large
domestic cable companies.
Gross Margins - Gross margins increased from 33.4% in the
first quarter of 1998 to 44.1% in the first quarter of 1999.
The increase is due primarily to our cost reduction efforts
associated with cable modems. Through increased volumes and
continued focus on cost reduction efforts the cost of our
cable modems declined during the period. The benefits
obtained as a result of this cost reduction program were
partially offset by a decrease in the average sales price of
cable modems. We continue to focus on cost reduction efforts
for our cable modems and anticipate obtaining benefits as a
result. We also anticipate substantial price decreases of
cable modems and headend equipment due to increased
competitive pressures in future quarters and the adoption of
industry standards for cable modems such as DOCSIS or
CableLabs-certified vendors, that may more than offset any
cost reduction efforts achieved, resulting in lower overall
margins.
Research and Development - Research and development expenses
increased 61% from $4.3 million in the first quarter of 1998
to $6.9 million in the first quarter of 1999. The increase
was attributable to higher costs related primarily to
increased personnel and consulting related costs. We expect
these expenses to increase in absolute dollars in the future
as we continue to invest in research and development.
Sales and Marketing - Sales and marketing expenses increased
79% from $1.8 million in the first quarter of 1998 to $3.2
million in the first quarter of 1999. The increase was
primarily due to higher costs associated with increased
personnel in sales and marketing organizations. We expect
sales and marketing expenses to increase in both absolute
dollars and as a percentage of sales in 1999 as we develop
more retail channels for our future DOCSIS cable modems. In
addition, we also compete in a very competitive labor market
and accordingly periodically make salary and other
compensation adjustments to hire and retain employees.
General and Administrative - General and administrative
expenses increased 45% from $580,000 in the first quarter of
1998 to $840,000 in the first quarter of 1999. The increase
was attributable to increased salary and personnel related
costs as well as increased professional fees associated with
operation as a public company. We expect general and
administrative expenses to increase in absolute dollars as we
continue to add personnel and incur additional costs related
to the growth of our business.
Total Other Income, Net - Total other income, net increased
from $94,000 in the first quarter of 1998 to $918,000 in the
first quarter of 1999. The increase was attributable to
earnings on higher cash balances available during the first
quarter of 1999, due primarily to the net cash received of
$62.8 million from the initial public offering of common stock
in May 1998 and the net cash received of $54.3 million from
the secondary offering of common stock in February 1999.
Liquidity and Capital Resources
At March 31, 1999, Com21's cash and cash equivalents and
short-term investments were $116.8 million, compared to $65.7
million at December 31, 1998, an increase of $51.1 million.
The increase is primarily a result of cash generated from
financing activities of $54.4 million during the period
largely resulting from the $54.3 million in net proceeds
received from the public offering of common stock in February
1999. These cash flows were partially offset by cash outflows
from operating activities of $2.2 million, excluding the gains
on sales and maturities and investments of $0.3 million, and
cash used in investing in property and equipment of $1.2
million. Com21's capital requirements primarily relate to the
working capital requirements and investments in property and
equipment. Com21 has funded its operations primarily through
its public offerings of common stock and private sales of
common and preferred stock.
Other than capital lease commitments, Com21 has no material
commitments for capital expenditures. However, Com21
anticipates it may increase its capital expenditures and may
increase lease commitments consistent with anticipated growth
in operations, infrastructure and personnel. Com21 intends to
establish sales offices and lease additional space, which will
require it to commit to additional lease obligations, purchase
equipment and install leasehold improvements.
Com21 believes that the current cash and cash equivalents and
short-term investments, will be sufficient to meet its
anticipated cash requirements for the next twelve months,
although Com21 may seek to raise additional capital during
that time period.
Year 2000 Readiness
Many currently installed computer systems and software
products are coded to accept only two digit entries in the
date code field and cannot distinguish 21st century dates from
20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates to
avoid system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in
similar normal business activities. As a result, many
companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000"
requirements.
Our Year 2000 plan which is currently in progress will
determine whether our products, internal systems, computers
and software, and the products and systems of our critical
vendors and suppliers are Year 2000 compliant. This plan is
being implemented in the following four consecutive phases:
I. Inventory and Data Gathering Phase: cataloguing of
products and systems and the products and systems of our
critical vendors and suppliers;
II. Testing Phase: determining whether cataloged products and
systems are Year 2000 compliant;
III. Replacement Phase: upgrading and replacement of non-
compliant products and systems; and
IV. Monitoring Phase: ongoing testing of our products and
systems for Year 2000 compliance.
Our Year 2000 plan has been implemented but not completed. To
date, results of our Year 2000 plan are the following:
Products. We have developed internal tests to ascertain
whether our products are Year 2000 compliant. Based on these
tests, we believe our current products are Year 2000 compliant
and, to the extent necessary, all previously shipped products
can be upgraded to become Year 2000 compliant with currently
available software upgrades.
Vendors. We are currently in the process of ascertaining
whether our vendors and suppliers are Year 2000 compliant. We
have received some confirmations from material vendors
indicating their expectation that the Year 2000 will not
materially effect the supply of product to Com21. We continue
to seek assurances from our vendors concerning Year 2000
compliance.
Manufacturing. Completion of our review of our assembly and
test equipment for Year 2000 compliance is expected to occur
by late 1999.
IT Systems. We conducted a preliminary survey of our
information technology hardware and software and anticipate
that any Year 2000 non-compliant hardware and software will be
upgraded or replaced prior to 2000.
Non-IT Systems and Infrastructure. Machinery and equipment
used in our operations have been inventoried and are currently
being assessed for Year 2000 compliance.
Although we believe that our Year 2000 plan will identify all
of our material Year 2000 issues, we cannot assure you that we
will be able to identify, evaluate and resolve all these
issues.
Costs. We do not currently expect that costs associated with
Year 2000 compliance will materially affect our operations or
financial position. However, if we discover Year 2000 problems
in the future, we may not be able to develop, implement, or
test remediation or contingency plans in a timely or cost-
effective manner.
Risks. We believe that the risks of noncompliance could
accelerate or delay purchases or replacement of our products
and services. Failure of third party products, such as a
breakdown in telephone, electric service or other utilities,
e-mail, voicemail or the World Wide Web could cause a
disruption in cable operators' service to customers.
Disruptions in the services provided by banks, telephone
companies and the U.S. Postal Service could a negatively
impact our business. Although our products are undergoing Year
2000 specific testing procedures, they may not contain the
date codes necessary to operate in the year 2000. Any failure
of these products to perform could result in the delay or
cancellation of product orders and the diversion of managerial
and technical resources from product development and other
business activities to attend to Year 2000 issues. These
events could have a material adverse effect on our business,
operating results and financial condition.
Contingency Plans. Until the completion of the Year 2000
compliance evaluation of our suppliers, and the completion of
internal IT and non-IT systems reviews, we do not believe that
it is practical to develop comprehensive contingency plans.
Even if these plans are completed and implemented in a timely
manner they may be insufficient to address any third party
failures. We cannot assure you that undetected internal and
external Year 2000 issues will not materially impact our
business, financial condition, results of operations and cash
flows. See "Risk Factors -
- - Our failure and the failure of our key suppliers and
customers to be year 2000 compliant could negatively impact
our business."
Risk Factors
You should carefully consider the risks described below before
making a decision to invest in Com21. You may lose all or part
of your investment. The risks and uncertainties described
below are not the only ones facing our company. Readers are
referred to additional risks identified in the "Risk
Factors" section contained in Com21's Annual Report on Form
10-K dated on March 10, 1999 as filed with the SEC.
We have a short operating history, have incurred net losses
since our inception and expect future losses.
We did not commence product shipments until April 1997. As a
result, we have only a limited operating history upon which
you may evaluate us and our prospects. We have incurred net
losses since inception and expect to continue to operate at a
loss through at least fiscal 1999. To achieve profitable
operations on a continuing basis, we must successfully design,
develop, test, manufacture, introduce, market and distribute
our products on a broad commercial basis.
Our ability to generate future revenues will depend on a
number of factors, many of which are beyond our control. These
factors include the following:
-the rate at which cable operators upgrade their cable
plants;
-our ability and the ability of cable operators to
coordinate timely and effective marketing campaigns with the
availability of upgrades;
-cable operators' success in marketing data-over-cable
services and our modems to subscribers;
-cable operators' success in setting prices for data
transmission installation service; and
-cable operators' success and timeliness in the
installation of subscriber site equipment.
Due to these factors, we cannot forecast with any degree of
accuracy what our revenues will be or how quickly cable
operators will adopt our systems. Therefore, we may not
achieve, or be able to sustain, profitability.
Our operating results in one or more future periods are likely
to fluctuate significantly and may fail to meet or exceed the
expectations of securities analysts or investors.
Our operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number
of factors, many of which are outside our control. Factors
that could cause our revenues to fluctuate include the
following:
-variations in the timing of orders and shipments of our
products;
-variations in the size of orders by our customers;
-new product introductions by us or by competitors;
-delays in introducing cable modems that comply with the
new data-over-cable service interface specification (DOCSIS);
-the timing of upgrades of cable plants;
-variations in capital spending budgets of cable operators;
-delays in obtaining regulatory approval for commercial
deployment of cable modem systems; and
-general economic conditions and economic conditions
specific to the cable and electronic data transmission industries.
The amount and timing of our operating expenses generally will
vary from quarter to quarter depending on the level of actual
and anticipated business activities. Research and development
expenses will vary as we develop new products.
We have a limited backlog of orders, and total revenues for
any future quarter are difficult to predict. Supply,
manufacturing or testing constraints could result in delays in
the delivery of our products. Any delay in the product
deployment schedule of one or more of our cable operator
customers would likely materially adversely affect our
operating results for a particular period.
A variety of factors affect our gross margin, including the
following:
-the sales mix between our headend equipment and cable modems;
-the volume of products manufactured;
-the distribution channel or customer mix;
-the average selling prices of our products; and
-the effectiveness of our cost reduction efforts.
In the past we have experienced decreases in the average
selling price of our cable modems and in the second quarter of 1999
we will lower our modem and headend prices to meet competitive
pressures, especially those pressures related to the introduction of
DOCSIS modems in the industry. In addition, the sales mix
between our headend equipment and modems also affects our
gross margin. Sales of our cable modems yield lower gross
margins than do sales of our headend equipment. In the future,
we anticipate that our sales mix will be weighted toward cable
modems. As a result, we expect to experience continued
downward pressures on our gross margin. If the price declines
are not offset by a decline in the costs of manufacturing our
cable modems or an increase in sales of higher margin
telephone and SO/HO modems, our gross margin will be adversely
affected.
Because of these factors, our operating results in one or more
future periods are likely to fail to meet or exceed the
expectations of securities analysts or investors. In that
event, the trading price of our common stock would likely
decline.
Certain of our current products are not compatible with
products offered by our competitors and are subject to
evolving industry standards. If our products do not comply
with any standard that achieves market acceptance, customers
may refuse to purchase our products.
Our headend equipment and proprietary cable modem products do
not interoperate with the existing equipment of other cable
modem suppliers. Therefore, potential customers who wish to
purchase broadband Internet access products from multiple
suppliers may be reluctant to purchase our proprietary
products.
We expect the data-over-cable service interface specification,
commonly referred to as the DOCSIS standard, to achieve
substantial market acceptance in North America. We have
developed a cable modem that we are in the process of getting
DOCSIS certified by CableLabs. The continuing evolution of
the DOCSIS standard may cause us to incur additional costs
associated with making our cable modems compliant with various
versions of the standard. On April 29, 1999, CableLabs
announced the result of the latest wave of certification for
the DOCSIS cable modem. Our DOCSIS cable modem was not
certified at this time. We cannot assure you that our DOCSIS-
certified cable modems will be introduced according to our
previously anticipated schedule, or that if introduced, that
it will meet with market acceptance. Our failure to introduce
a DOCSIS modem certified by CableLabs have an adverse affect on
revenues and operations.
The emergence or evolution of industry standards, either
through adoption by official standards committees or
widespread use by cable operators or telephone companies could
require us to redesign current products. Our current products
may not be in full compliance with relevant standards and
developing specifications as proposed by:
-Data-Over-Cable Service Interface Specification (DOCSIS);
-Digital Audio Video Interactive Council and Digital and
Video Broadcast Organization;
-Institute of Electrical and Electronics Engineers;
-Internet Engineering Task Force; and
-other relevant standards bodies.
Currently no generally accepted standard for data-over-cable
exists internationally. If any standards achieve market
acceptance and if our products do not comply with them,
customers may refuse to purchase our products. Additionally,
different implementations of the same specification could slow
deployment of our products if these differences cause our
products not to be interoperable with other companies'
products.
The widespread adoption of DOCSIS or other standards would
likely cause aggressive price competition in the cable modem
market and result in lower sales of our headend products and
lower revenues from licensing of our network management
software. Any of these events would adversely affect our gross
margin and our operating results.
The development of new competing technologies and standards
increases the risk that current or new competitors could
develop products that would reduce the competitiveness of our
products. If any of these new technologies or standards
achieve widespread market acceptance, any failure by us to
develop new products or enhancements, or to address these new
technologies or standards, would harm our business.
Our future success will depend in part upon our ability to
enhance our existing products and to develop and introduce, on
a timely basis, new products and features that meet changing
customer requirements and emerging industry standards.
The market for cable modem systems and products is
characterized by rapidly changing technologies and short
product life cycles. Our future success will depend in large
part upon our ability to:
-identify and respond to emerging technological trends in
the market;
-develop and maintain competitive products;
-enhance our products by adding innovative features that
differentiate our products from those of our competitors;
-bring products to market on a timely basis at competitive
prices; and
-respond effectively to new technological changes or new
product announcements by others.
If our product development and enhancements take longer than
planned, the availability of products would be delayed. Our
future success will depend in part upon our ability to enhance
our existing products and to develop and introduce, on a
timely basis, new products and features that meet changing
customer requirements and emerging industry standards, such as
the DOCSIS standard.
The technical innovations required for us to remain
competitive are inherently complex, require long development
cycles, are dependent in some cases on sole source suppliers
and require us, in some cases, to license technology from
others. We must continue to invest in research and development
to attempt to maintain and enhance our existing technologies
and products, but we may not have the funds available to do
so. Even if we have sufficient funds, these investments may
not serve the needs of customers or be compatible with
changing technological requirements or standards. Most
expenses must be incurred before the technical feasibility or
commercial viability can be ascertained. Revenues from future
products or product enhancements may not be sufficient to
recover the development costs associated with the products or
enhancements.
We depend on cable operators and cable systems integrators for
substantially all of our sales.
We depend on cable operators and cable systems integrators to
purchase our headend equipment and cable modems and to market
data transmission service to end-users. Cable operators may
not have enough programming channels over which they can offer
these services. Even if a cable operator chooses to provide
data transmission services, it may not choose our products to
do so.
Because we rely on cable operators and cable systems
integrators to purchase and market our products, our sales may
be unpredictable due to the varying marketing and deployment
efforts of our cable operators and cable systems integrators.
The future success of services providing data-over-cable
transmission depends upon the ability of cable systems to
support two-way communications. While many cable operators are
in the process of upgrading, or have announced their intention
to upgrade, their cable plants to hybrid fiber coaxial cable,
commonly known as HFC in the telecommunications industry, many
cable operators have delayed these upgrades for financial or
regulatory reasons. Cable operators have limited experience
with cable plant upgrades, and investments in upgrades place a
significant strain on their resources. Most cable operators
are already highly leveraged and may not have the capital
required to upgrade their infrastructure or to offer new
services such as data-over-cable transmission.
Even after installation, we remain highly dependent on cable
operators to continue to maintain their cable plants so that
our products will operate at a consistently high performance
level. Accordingly, the success and future growth of our
business will be subject to economic and other factors
affecting the cable television industry, particularly the
industry's ability to continue to finance the substantial
capital expenditures necessary to use our products
effectively.
The market in which we sell our products is characterized by
many competing technologies, and the technology on which our
product is based may not compete effectively against other
technologies.
The market for high-speed data transmission services has
several competing technologies which offer alternative
solutions. Technologies which compete with our solution are:
-telephone company-related wireline technologies such as:
-dial-up (analog modems);
-digital subscriber line, known as DSL and marketed
as "G Lite", ADSL, among others;
-integrated services digital network, known as ISDN; and
-wireless technologies such as:
-local multipoint distribution service, known as LMDS;
-multi-channel multipoint distribution service,
commonly known as MMDS; and
-direct broadcast satellite, commonly known as DBS.
In particular, because of the widespread reach of telephone
networks and the financial resources of telephone companies,
competition from telephone company-related solutions is
expected to be intense. Cable modem technology may not be able
to compete effectively against wireline or wireless
technologies.
In addition, one of our competitors has developed a
commercially available alternative modulation technology.
Significant market acceptance of alternative solutions for
high-speed data transmission could decrease the demand for our
products if these alternatives are viewed as providing faster
access, greater reliability, increased cost-effectiveness or
other advantages.
The market in which we operate is highly competitive and has
many more established competitors.
The market for our products is intensely competitive, rapidly
evolving and subject to rapid technological change.
Many of our current and potential competitors have been
operating longer, have better name recognition, better
established business relationships and significantly greater
financial, technical, marketing and distribution resources
than we do. These competitors may undertake more extensive
marketing campaigns, adopt more aggressive pricing policies
and devote substantially more resources to developing new or
enhanced products than we do. If we fail to achieve DOCSIS
certification in a timely manner, our customers may choose
another supplier for DOCSIS-certified cable modems, and our
business, operating results and financial condition could be
materially adversely affected.
We must reduce the cost of our cable modems to remain
competitive.
Certain of our competitors' cable modems are priced lower than
our cable modems. As headend equipment becomes more widely
deployed, the price of cable modems and related equipment will
continue to decline. In particular, the adoption of industry
standards, such as the DOCSIS standard, will cause increased
price competition for cable modems.
We may not be able to continually reduce the costs of
manufacturing our cable modems sufficiently to enable us to
lower our modem prices and compete effectively with other
cable modem suppliers. If we are unable to reduce the
manufacturing costs of our cable modems, our gross margin and
operating results would be harmed.
Our failure to adequately protect our proprietary rights may
adversely affect us.
We rely on a combination of patent, copyright and trademark
laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary
rights. These measures afford only limited protection. We
currently have five issued U.S. patents and several pending
patent applications. Our means of protecting our proprietary
rights in the U.S. or abroad may not be adequate and
competitors may independently develop similar technologies.
Our future success will depend in part on our ability to
protect our proprietary rights and the technologies used in
our principal products. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. In addition,
the laws of some foreign countries do not protect our
proprietary rights as fully as do the laws of the U.S. Issued
patents may not preserve our proprietary position. Even if
they do, competitors or others may develop technologies
similar to or superior to our own. If we do not enforce and
protect our intellectual property, our business will be
harmed.
From time to time, third parties, including our competitors,
have asserted patent, copyright and other intellectual
property rights to technologies that are important to us. We
expect that we will increasingly be subject to infringement
claims as the number of products and competitors in the cable
modem market grows and the functionality of products overlaps.
The results of any litigation matter are inherently uncertain.
In the event of an adverse result in any litigation with third
parties that could arise in the future, we could be required
to pay substantial damages, including treble damages if we are
held to have willfully infringed, to halt the manufacture, use
and sale of infringing products, to expend significant
resources to develop non- infringing technology, or to obtain
licenses to the infringing technology. Licenses may not be
available from any third party that asserts intellectual
property claims against us, on commercially reasonable terms,
or at all. In addition, litigation frequently involves
substantial expenditures and can require significant
management attention, even if we ultimately prevail. For
example, in January 1998, Hybrid Networks filed an action
against us, accusing us of infringing certain of their
patents. We settled this matter in the first quarter of 1999
through a patent cross-license agreement that will not
materially impact our business or results of operations.
However, there can be no assurance that we would be able to
successfully resolve similar incidents in the future.
Our failure to manage growth could adversely affect us.
We have rapidly and significantly expanded our operations and
anticipate that further significant expansion will be required
to address potential growth in our customer base and market
opportunities. To manage the anticipated growth of our
operations, we will be required to:
-improve existing and implement new operational, financial
and management information controls, reporting systems and procedures;
-hire, train and manage additional qualified personnel;
-expand and upgrade our core technologies; and
-effectively manage multiple relationships with our
customers, suppliers and other third parties.
We may not be able to install management information and
control systems in an efficient and timely manner, and our
current or planned personnel, systems, procedures and controls
may not be adequate to support our future operations.
In the future, we may experience difficulties meeting the
demand for our products and services. The installation and use
of our products requires training. If we are unable to provide
training and support for our products, the implementation
process will be longer and customer satisfaction may be lower.
In addition, our management team may not be able to achieve
the rapid execution necessary to fully exploit the market for
our products and services. We cannot assure you that our
systems, procedures or controls will be adequate to support
the anticipated growth in our operations. Any failure to
manage growth effectively could materially adversely affect
our business, operating results and financial condition.
We depend on strategic relationships.
Our business strategy relies to a significant extent on our
strategic relationships with other companies. These
relationships include:
-software license arrangements for our network management system;
-technology licensing agreements for certain products;
-marketing arrangements with Philips and Siemens; and
-DOCSIS-certified cable modem development in conjunction
with suppliers of routers and headend equipment to ensure
the interoperability of our cable modem.
These relationships may not be successful because we may not
be able to continue to maintain, develop or replace them in
the event any of these relationships are terminated. In
addition, any failure to renew or extend any licenses between
us and any third party may adversely affect our business.
We may not be able to produce sufficient quantities of our
products because we depend on third-party manufacturers and
have limited manufacturing experience.
We contract for the manufacture of cable modems and integrated
circuit boards on a turnkey basis. CMC Industries and Sanmina
build printed circuit assemblies for our headend products and
Celestica manufactures our cable modems. Our future success
will depend, in significant part, on our ability to have
others manufacture our products cost-effectively, in
sufficient volumes and to meet production and delivery
schedules. A number of risks are associated with our
dependence on third-party manufacturers including:
-reduced control over delivery schedules;
-quality assurance;
-manufacturing yields and costs;
-the potential lack of adequate capacity during periods of
excess demand;
-increases in prices and the potential misappropriation of
our intellectual property.
Any manufacturing disruption could impair our ability to
fulfill orders. We have no long-term contracts or arrangements
with any of our vendors that guarantee product availability,
the continuation of particular payment terms or the extension
of credit limits. We may experience manufacturing or supply
problems in the future. We are dependent on our manufacturers
to secure components at favorable prices, but we may not be
able to obtain additional volume purchase or manufacturing
arrangements on terms that we consider acceptable, if at all.
If we enter into a high-volume or long-term supply arrangement
and subsequently decide that we cannot use the products or
services provided for in the agreement, our business will be
harmed. Any such difficulties could harm our relationships
with customers.
We may not be able to produce sufficient quantities of our
products because we obtain certain components from, and depend
on, certain key sole suppliers.
Certain parts, components and equipment used in our products
are obtained from sole sources of supply. For example, our
headend equipment incorporates a radio frequency modulation
chip from one specific vendor, transmitter/receiver components
from another, and an Asynchronous Transfer Mode switch,
commonly known as an ATM in the telecommunications industry,
from yet another. Also, our cable modems include sole-sourced
chipsets, filters and other materials. Additional sole-
sourced components may be incorporated into our equipment in
the future.
We do not have any long term supply contracts to ensure
sources of supply. If we fail to obtain components in
sufficient quantities when required, our business could be
harmed. Our suppliers may enter into exclusive arrangements
with our competitors, stop selling their products or
components to us at commercially reasonable prices or refuse
to sell their products or components to us at any price. Our
inability to obtain sufficient quantities of sole-sourced
components, or to develop alternative sources for components
and/or products would materially adversely affect our
business. We rely on several companies including:
-Broadcom Corp. and Stanford Telecommunications, Inc.,
suppliers of modulation, demodulation and MAC components;
-Atmel Corporation, the fabricator of our semiconductor devices;
-Virata Limited, formerly Advanced Telecommunications
Modules Limited, a supplier of ATM switches;
-Hewlett-Packard Company, the supplier of HP Openview software;
-Wind River Systems, Inc., a supplier of embedded software; and
-Objectivity, Inc., a supplier of object-oriented database software.
If any of these manufacturers or other sole source suppliers
delay or halt production of any of their components, our
business, operating results and financial condition could be
materially adversely affected.
Our customer base is concentrated and the loss of one or more
of our customers could cause our business to suffer.
A relatively small number of customers have accounted for a
large part of our revenues to date, and we expect that this
trend will continue. We expect that our largest customers in
the future could be different from our largest customers today
due to a variety of factors, including customers' deployment
schedules and budget considerations. Because a limited number
of cable operators account for a majority of our prospective
customers, our future success will depend upon our ability to
establish and maintain relationships with these companies. We
may not be able to retain our current accounts or to obtain
additional accounts. Both in the U.S. and internationally, a
substantial majority of households passed are controlled by a
relatively small number of cable operators. The loss of one or
more of our customers or our inability to successfully develop
relationships with other significant cable operators could
cause our business to suffer.
We rely on indirect distribution channels for our products and
need to develop additional distribution channels.
Today, cable operators and systems integrators purchase cable
modems from vendors through direct and indirect sales
channels. In North America, if the DOCSIS standard achieves
widespread market acceptance, we anticipate that the North
American cable modem market will shift to a consumer purchase
model. If this occurs, we will sell more of our cable modems
directly through consumer sales channels. Consequently, we
have begun to establish new distribution channels for our
cable modems. We may not have the capital required or the
necessary personnel, or expertise to develop these
distribution channels, which could materially adversely affect
our business, operating results and financial condition. To
the extent that large consumer electronics companies enter the
cable modem market, their well-established retail distribution
capabilities would provide them with a significant competitive
advantage.
We are subject to risks associated with operating in
international markets.
We expect that a significant portion of our sales will
continue to be concentrated in international markets for the
foreseeable future. We intend to expand operations in our
existing international markets and to enter new international
markets, which will demand management attention and financial
commitment. In addition, a successful expansion of our
international operations and sales in certain markets will
require us to develop relationships with international systems
integrators and distributors. We may not be able to identify,
attract or retain suitable international systems integrators
or distributors. We may not be able to successfully expand our
international operations.
Furthermore, to increase revenues in international markets, we
will need to continue to establish foreign operations, to hire
additional personnel to run these operations and to maintain
good relations with our foreign systems integrators and
distributors. To the extent that we are unable to successfully
do so, our growth in international sales will be limited and
our operating results could be adversely affected.
Our international sales to date have been denominated in U.S.
dollars. We do not currently engage in any foreign currency
hedging transactions. A decrease in the value of foreign
currencies relative to the U.S. dollar could make our products
more expensive in international markets.
In addition to currency fluctuation risks, international
operations involve a number of risks not typically present in
domestic operations, including:
-changes in regulatory requirements;
-costs and risks of deploying systems in foreign countries;
-licenses, tariffs and other trade barriers;
-political and economic instability;
-difficulties in staffing and managing foreign operations;
-potentially adverse tax consequences;
-difficulties in obtaining governmental approvals for products;
-the burden of complying with a wide variety of complex
foreign laws and treaties; and
-the possibility of difficult accounts receivable collections.
We are also subject to the risks associated with the
imposition of legislation and regulations relating to the
import or export of high technology products. We cannot
predict whether charges or restrictions upon the importation
or exportation of our products will be implemented by the U.S.
or other countries. Future international activity may result
in sales dominated by foreign currencies. Gains and losses on
the conversion to U.S. dollars of accounts receivable,
accounts payable and other monetary assets and liabilities
arising from international operations may contribute to
fluctuations in our operating results. Any of these factors
could materially and adversely affect our business, operating
results and financial condition.
We may be subject to risks associated with acquisitions.
We continually evaluate strategic acquisitions of other
businesses and subscriber accounts. If we were to consummate
an acquisition, we would be subject to a number of risks,
including:
-difficulty in assimilating the acquired operations and personnel;
-limits on our ability to retain the acquired subscribers;
-disruption of our ongoing business; and
-limits on our ability to successfully incorporate
acquired technology and rights into our service offerings
and maintain uniform standards, controls, procedures, and policies.
We may not be able to successfully overcome problems
encountered in connection with potential acquisitions. In
addition, an acquisition could materially adversely affect our
operating results by diluting our stockholders' equity,
causing us to incur additional debt, or requiring us to
amortize acquisition expenses and acquired assets.
Our failure and the failure of our key suppliers and customers
to be year 2000 compliant would negatively impact our
business.
The Year 2000 issue is the result of computer programs written
using two digits rather than four to define the applicable
year. Computer programs that have this date-sensitive software
may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices or engage in similar normal
business activities.
We are heavily dependent upon the proper functioning of our
own computer or data-dependent systems. This includes, but is
not limited to, our systems in information, business, finance,
operations, manufacturing and service. Any failure or
malfunctioning on the part of these or other systems could
adversely affect our business in ways that are not currently
known, quantifiable or otherwise anticipated by us.
We currently have only limited information on the Year 2000
compliance of key suppliers and customers. The operations of
our key suppliers and customers could be adversely affected in
the event they do not successfully and timely achieve Year
2000 compliance. Our business and results of operations could
experience material adverse effects if our key suppliers were
to experience Year 2000 issues that caused them to delay
manufacturing or shipment of key components to us. In
addition, our results of operations could be materially
adversely affected if any of our key customers encounter Year
2000 issues that cause them to delay or cancel substantial
purchase orders or delivery of our products.
While we have developed a plan to address Year 2000 issues, we
may be unable to complete all phases of the plan in a timely
manner or to upgrade any or all of our major systems in
accordance with our plan. Even if we make upgrades, they may
not effectively address the Year 2000 issue. If required
upgrades are not completed in a timely manner or are not
successful, we may be unable to conduct our business or
manufacture our products. The systems of other companies on
which our systems rely may not be converted in a timely
manner. The failure to convert by another company, or the
occurrence of a conversion that is incompatible with our
systems would have a material adverse effect on our business.
We intend to establish, but have not yet established a
contingency plan detailing actions that will be taken in the
event that the assessment of the Year 2000 issue is not
successfully completed on a timely basis. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness."
We may be subject to product returns and product liability
claims due to defects in our products.
Our products are complex and may contain undetected defects,
errors or failures. These errors have occurred in our products
in the past and additional errors may be expected to occur in
our products in the future. The occurrence of any defects,
errors, or failures could result in delays in installation,
product returns and other losses to us or to our cable
operators or end-users. Any of these occurrences could also
result in the loss of or delay in market acceptance of our
products, which could have a material adverse effect on our
business, operating results and financial condition. We would
have limited experience with the problems that could arise
with any new products that we introduce.
Although we have not experienced any product liability claims
to date, the sale and support of our products entail the risk
of these claims. A successful product liability claim brought
against us could have a material adverse effect on our
business, operating results and financial condition.
Our stock price is highly volatile and broad market
fluctuations may adversely affect the market price of our
common stock.
The trading price of our common stock has fluctuated
significantly since our initial public offering in May 1998.
In addition, the trading price of our common stock could be
subject to wide fluctuations in response to quarterly
variations in operating results, announcements of
technological innovations or new products by us or our
competitors, announcements by certification and standards
bodies, developments with respect to patents or proprietary
rights, changes in financial estimates by securities analysts
and other events or factors. In addition, the stock market has
experienced volatility that has particularly affected the
market prices of equity securities of many high technology
companies and that often has been unrelated or
disproportionate to the operating performance of these
companies. These broad market fluctuations may adversely
affect the market price of our common stock.
This Form 10-Q contains forward-looking statements. These
statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict
and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements.
This Form 10-Q contains forward-looking statements that have
been made under the provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking
statements are not historical facts but rather are based on
current expectations, estimates and projections about our
industry, our beliefs, and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and variations of these words and similar
expressions are intended to identify forward-looking
statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-
looking statements. These risks and uncertainties include
those described in "Risk Factors" and elsewhere in this Form
10-Q as well as in the "Risk Factors" section of the Annual
Report on Form 10-K dated March 10, 1999. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the
date of this Form 10-Q. We undertake no obligation to update
these statements or publicly release the result of any
revisions to the forward-looking statements that we may make
to reflect events or circumstances after the date of this Form
10-Q or to reflect the occurrence of unanticipated events.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity. Com21 maintains a short-term
investment portfolio consisting mainly of government and
corporate bonds purchased with an average maturity of less
than one year. These available-for-sale securities are subject
to interest rate risk and will fall in value if market
interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels
at March 31, 1999, the fair value of the portfolio would
decline by an immaterial amount. We generally have the ability
to hold our fixed income investments until maturity and
therefore we would not expect our operating results or cash
flows to be affected to any significant degree by the effect
of a sudden change in market interest rates on our securities
portfolio.
Com21 has fixed rate long-term debt of approximately $800,000
as of March 31, 1999, and a hypothetical 10 percent decrease
in interest rates would not have a material impact on the fair
market value of this debt. We do not hedge any interest rate.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
In January 1998, Hybrid Networks, Inc. filed an action against
the Company, accusing the Company of infringing certain of
their patents. The Company settled this matter in January 1999
through a patent cross-license agreement that has no material
adverse effect on the Company's financial position, results of
operations or cash flows.
Item 2 Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities. On
February 23, 1999 the Company completed a public offering of
its Common Stock, $0.001 par value. The managing underwriters
in the Offering were Credit Suisse First Boston Corporation
and Dain Rauscher Wessels (the "Underwriters"). The shares of
Common Stock sold in the Offering were registered under the
Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Reg.
No. 333-79504) that was declared effective by the SEC on
February 23, 1999. The Offering commenced on February 23,
1999 after all 3,000,000 shares (of which 2,480,000 shares
were offered by the Company and 520,000 shares were offered by
certain selling shareholders) of Common Stock registered under
the Registration Statement were sold at a price of $23.50 per
share. The aggregate price of the Offering amount registered
was $70,500,000. In connection with the Offering, the Company
paid an aggregate of $3,690,000 in underwriting discounts and
commissions to the Underwriters. In addition, the following
table sets forth an estimate of all expenses incurred in
connection with the Offering, other than underwriting
discounts and commissions. All amounts shown are estimated
except for the registration fees of the SEC and the National
Association of Securities Dealers, Inc. ("NASD").
SEC Registration fee $ 27,038
NASD filing fee 10,226
Nasdaq National Market listing fee 17,500
Printing and engraving expenses 225,000
Legal fees and expenses 340,000
Accounting fees and expenses 160,000
Blue Sky fees and expenses 5,000
Transfer Agent and Registrar fees 10,000
Miscellaneous 105,236
----------
Total $ 900,000
==========
After deducting the underwriting discounts and commissions and
the estimated offering expenses described above, Com21
received net proceeds from the offering of approximately
$54,329,600 and the selling stockholders received $11,580,400.
As of March 31, 1999, Com21 has used the net proceeds from its
public offering of Common Stock to invest in short-term,
interest bearing, investment grade securities and has used its
existing cash balances to fund the general operations of the
Company. The proceeds will be used for general corporate
purposes, including working capital and product development.
A portion of the net proceeds may also be used to acquire or
invest in complementary business or products or to obtain the
right to use complementary technologies. Com21 has no
agreements or commitments with respect to any such acquisition
or investments and is not currently engaged in any material
negotiations with respect to any such transaction. None of
Com21's net proceeds of the offering were paid directly or
indirectly to any director, officer, general partner of Com21
or their associates, persons owning 10% or more of any class
of equity securities of the Com21, or an affiliate of Com21.
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number Description
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Com21, Inc.
Date: May 6, 1999 By: /s/ David L. Robertson
---------------------------
David L. Robertson
Chief Financial Officer
Vice President, Finance
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<NET-INCOME> (1,621)
<EPS-PRIMARY> (0.08)
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</TABLE>
