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 June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to
___________________
Commission File Number: 000-2409
Com21, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3201698
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
750 Tasman Drive
Milpitas, California 95035
(408) 953-9100
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 21,456,899 as of June 30, 1999.
<TABLE><CAPTION>
COM21, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
<S> <C>
Item 1 Financial Statements
Condensed Balance Sheets - June 30, 1999 and December 31, 1998 3
Condensed Statements of Operations and Comprehensive Loss -
Three and Six Month periods ended June 30, 1999 and 1998 4
Condensed Statements of Cash Flows - Six Months Ended June 30,
1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 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 25
</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)
June 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,937 $ 7,135
Short-term investments 66,760 58,609
Accounts receivable 13,021 4,834
Inventories 3,433 5,282
Prepaid expenses and other 2,446 586
--------- ---------
Total current assets 133,597 76,446
Property and equipment, net 6,486 6,247
Other assets 283 255
--------- ---------
Total Assets $140,366 $ 82,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,702 $ 4,033
Accrued compensation and related benefits 3,479 1,739
Deferred revenue 384 238
Other current liabilities 1,843 1,232
Current portion of capital lease and debt
obligations 819 1,120
--------- ---------
Total current liabilities 13,227 8,362
Deferred rent 298 284
Capital lease obligations 612 936
--------- ---------
Total liabilities 14,137 9,582
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 40,000,000 shares
authorized; 21,456,899 and 18,685,560 issued and
outstanding June 30, 1999 and December 31, 1998 21 19
Additional paid-in capital 177,730 122,131
Deferred stock compensation (65) (82)
Accumulated deficit (52,473) (48,699)
Accumulated other comprehensive income (loss) 1,016 (3)
--------- ---------
Total stockholders' equity 126,229 73,366
--------- ---------
Total Liabilities and Stockholders' Equity $140,366 $ 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 21,542 $ 8,711 $ 40,756 $ 15,731
Cost of revenues 13,115 5,778 23,861 10,454
--------- --------- --------- ---------
Gross profit 8,427 2,933 16,895 5,277
--------- --------- --------- ---------
Operating expenses:
Research and development 7,029 4,392 13,929 8,670
Sales and marketing 3,963 2,304 7,193 4,107
General and administrative 956 815 1,796 1,395
--------- --------- --------- ---------
Total operating expenses 11,948 7,511 22,918 14,172
--------- --------- --------- ---------
Loss from operations (3,521) (4,578) (6,023) (8,895)
Total other income, net 1,386 379 2,304 473
--------- --------- --------- ---------
Loss before income taxes (2,135) (4,199) (3,719) (8,422)
Provision for income taxes 18 - 55 9
--------- --------- --------- ---------
Net loss (2,153) (4,199) (3,774) (8,431)
Other comprehensive income,
net of tax:
Unrealized gain on available
for-sale investments 1,072 - 1,019 -
--------- --------- --------- ---------
Comprehensive loss $ (1,081) $ (4,199) $ (2,755) $ (8,431)
========= ========= ========= =========
Net loss per share,
basic and diluted $ (0.10) $ (0.45) $ (0.19) $ (1.43)
========= ========= ========= =========
Shares used in computation,
basic and diluted 21,299 9,299 20,386 5,898
========= ========= ========= =========
See notes to condensed financial statements
</TABLE>
COM21, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE><CAPTION>
Six Months Ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash used in operating activities:
Net loss $ (3,774) $ (8,431)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,988 1,623
Deferred rent 14 24
Gain on sales and maturities of investments (648) -
Changes in operating assets and liabilities:
Accounts receivable (8,187) (688)
Inventories 1,849 (246)
Prepaid expenses and other (1,860) (377)
Other assets (28) 1
Accounts payable 2,669 1,460
Accrued compensation and related benefits 1,740 77
Deferred revenue 146 137
Other current liabilities 611 790
--------- ---------
Net cash used in operating activities (5,480) (5,630)
--------- ---------
Cash used in investing activities:
Purchases of investments, net (6,484) (5,030)
Purchases of property and equipment (2,210) (1,001)
--------- ---------
Net cash used in investing activities (8,694) (6,031)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net 54,330 62,877
Proceeds from exercise of stock options, net 1,271 -
Repayments under capital lease obligations (515) (536)
Repayments on debt obligations (110) (247)
--------- ---------
Net cash provided by financing activities 54,976 62,094
--------- ---------
Net change in cash and cash equivalents 40,802 50,433
Cash and cash equivalents at beginning of period 7,135 17,950
--------- ---------
Cash and cash equivalents at end of period $ 47,937 $ 68,383
========= =========
Noncash investing and financing activities:
Property and equipment acquired under capital lease $ - $ 454
========= =========
Unrealized gain on available-for-sale investments $ (1,019) $ -
========= =========
Assets acquired through lease financing $ - $ 215
========= =========
See notes to condensed financial statements
</TABLE>
COM21, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these unaudited financial statements
include all adjustments necessary (consisting of normal, recurring
adjustments) for a fair presentation of Com21's financial position as
of June 30, 1999, the results of operations for the three and six
months ended June 30, 1999 and 1998 and cash flows for the six months
ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for
the fiscal year ending December 31, 1999. These financial statements
should be read in conjunction with the financial statements and the
accompanying notes included in the Company's Form 10-K dated March 10,
1999 as filed with the SEC.
2. Investments
The fair value and the amortized cost of available-for-sale securities
at June 30, 1999 and December 31, 1998 are presented in the tables
below (in thousands):
<TABLE>
Unrealized
Amortized Holding Gains Fair
Cost at (Losses) at Value at
6/30/99 6/30/99 6/30/99
--------- --------- ---------
<S> <C> <C> <C>
Corporate Bonds and Equity Securities $ 23,558 $ 1,103 $ 24,661
Government Bonds 42,186 (87) 42,099
--------- --------- ---------
Total $ 65,744 $ 1,016 $ 66,760
========= ========= =========
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>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Raw materials and sub-assemblies $ 483 $ 142
Work-in-process 1,239 1,361
Finished goods 1,711 3,779
--------- ---------
$ 3,433 $ 5,282
========= =========
</TABLE>
4. Stockholders' Equity
Net Loss Per Share - The following is a reconciliation of the
numerators and denominators of the basic and diluted net loss per
share computations (in thousands, except per share amounts):
<TABLE>
Three Months
Ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
Net Loss (Numerator):
Net loss, basic and diluted $ (2,153) $ (4,199)
--------- ---------
Shares (Denominator):
Weighted average common shares outstanding 21,380 9,542
Weighted average common shares outstanding
subject to repurchase (81) (243)
--------- ---------
Shares used in computation, basic and diluted 21,299 9,299
--------- ---------
Net Loss Per Share, Basic and Diluted $ (0.10) $ (0.45)
========= =========
Six Months
Ended June 30,
1999 1998
--------- ---------
Net Loss (Numerator):
Net loss, basic and diluted $ (3,774) $ (8,431)
--------- ---------
Shares (Denominator):
Weighted average common shares outstanding 20,484 6,169
Weighted average common shares outstanding
subject to repurchase (98) (271)
--------- ---------
Shares used in computation, basic and diluted 20,386 5,898
--------- ---------
Net Loss Per Share, Basic and Diluted $ (0.19) $ (1.43)
========= =========
</TABLE>
During the three months and six months ended June 30, 1999 and 1998,
the Company had securities outstanding which could potentially dilute
basic EPS in the future, but were excluded in the computation of
diluted EPS in such periods, as their effect would have been
antidilutive due to the net loss reported in such periods. Such
outstanding securities consist of the following at June 30, 1999:
warrants to purchase 31,814 shares of common stock; 68,423 outstanding
shares of common stock subject to repurchase; and options to purchase
2,756,775 shares of common stock.
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Com21's
unaudited condensed financial statements and notes thereto. The
results described below are not necessarily indicative of the results
to be expected in any future period. Certain statements in this
discussion and analysis, including statements regarding our strategy,
financial performance and revenue sources, are forward-looking
statements based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements. Readers are
referred to the "Risk Factors" section contained in Com21's Annual
Report on Form 10-K dated March 10, 1999, and to the "Risk Factors"
section contained herein which identify important risk factors that
could cause actual results to differ from those contained in the
forward looking statements.
Overview
Com21, Inc., is a leading global supplier of system solutions for the
broadband access market. Our DOCSIS and ATM-based products enable
cable operators and service providers to have the ability to deliver
high-speed, cost-effective Internet and telephony applications to
corporate telecommuters, small businesses, home offices and
residential users.
We were incorporated in June 1992 and shipped our first product in
April 1997. We have sold approximately 188,000 cable modems and 680
headends into over 180 locations worldwide.
Results of Operations
Total Revenues - Total revenues increased 147% from $8.7 million in
the second quarter of 1998 to $21.5 million in the second quarter of
1999, and increased 159% from $15.7 million for the first six months
of 1998 to $40.8 million for the first six months of 1999. We
experienced revenue growth in both cable modems and headend products
over the comparable quarter and six month period in the prior year.
Cable modem sales accounted for 78% of total revenue in the second
quarter of 1999 as compared to 50% of total revenue in the second
quarter of 1998 and 71% of total revenue for the first six months of
1999 as compared to 46% for the first six months of 1998.
The average sales price of cable modems declined 14% during the
second quarter of 1999 due to planned price reductions to meet price
pressures as competitors brought DOCSIS (standard compliant modems)
products to market. We anticipate that the average sales price of
cable modems will continue to decline during the remainder of 1999
but at a more moderate rate than we experienced in the second
quarter. The average sales price of headend equipment also declined
in the second quarter of 1999 due to planned price reductions and mix
of product sold. We anticipate that the average sales price of
headend equipment will be relatively stable during the remainder of
1999.
During the quarter ended June 30, 1999, international sales accounted
for 45% of total revenues, decreasing slightly from the 47%
experienced in the second quarter of 1998. During the six months
ended June 30, 1999, international sales accounted for 45% of total
revenues, decreasing slightly from the 48% experienced in the first
six months of 1998.
Gross Margins - Gross margins increased from 33.7% in the second
quarter of 1998 to 39.1% in the second quarter of 1999, and increased
from 33.5% during the first six months of 1998 to 41.5% during the
first six months of 1999. The increase in margins from the prior
periods is primarily a result of our ongoing cable modem cost
reduction programs.
Gross margins decreased from 44.1% in the first quarter of 1999 to
39.1% in the second quarter of 1999. The reasons for this decline
are threefold:
Product Mix - Our cable modem products went from being 63%
of total revenue in the first quarter of 1999 to 78% of
total revenue in the second quarter of 1999. Cable modems
have lower margins than our other products.
Modem Price Reduction - The average sales price of cable
modems declined by 14% in the quarter while our average
product cost decreased at a lower rate.
Headend Price Reduction - We lowered prices on our headend
equipment, and sold less of this higher margin product
family.
For the remainder of 1999 we anticipate margin pressure to continue
from:
Competitive pricing offered by an increasing number of
suppliers entering the market.
Increased sales of our DOCSIS cable modems. As these lower
margin modems become a higher percentage of our total cable
modem revenue, we anticipate our total margin percent will
decline later in the year. We do not anticipate making
significant cost reductions to our DOCSIS modems until the
first half of 2000.
We will continue our cost reduction programs on our proprietary cable
modems and anticipate obtaining benefits as a result, but the rate of
cost reduction will be less than in prior quarters. However, we also
anticipate the introduction of our office cable modem in the third
quarter of 1999 and anticipate more aggressively marketing our
headend products. Both our office cable modem and our headend
products carry a higher margin and we anticipate these will partially
offset the margin declines described above.
Research and Development - Research and development expenses
increased 60% from $4.4 million in the second quarter of 1998 to $7.0
million in the second quarter of 1999, and increased 61% from $8.7
million during the first six months of 1998 to $13.9 million during
the first six months of 1999. The increase was attributable to
higher costs related primarily to increased personnel and
contracting. We expect these expenses to increase in absolute
dollars in the future as we continue to invest in research and
development in our basic products and expand into wireless markets.
Sales and Marketing - Sales and marketing expenses increased 72%
from $2.3 million in the second quarter of 1998 to $4.0 million in
the second quarter of 1999, and increased 75% from $4.1 million
during the first six months of 1998 to $7.2 million during the first
six months 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 marketing programs and product channels for our DOCSIS
cable modems.
General and Administrative - General and administrative expenses
increased 17% from $815,000 in the second quarter of 1998 to $956,000
in the second quarter of 1999, and increased 29% from $1.4 million
during the first six months of 1998 to $1.8 million during the first
six months of 1999. We expect general and administrative expenses to
show a moderate increase in absolute dollars as we continue to add
personnel and incur additional costs related to the growth of our
business.
Total Other Income, Net - Total other income, net increased from
$379,000 in the second quarter of 1998 to $1,386,000 in the second
quarter of 1999, and increased from $473,000 during the first six
months of 1998 to $2,304,000 during the first six months of 1999. The
increase was attributable to earnings on higher cash balances
available during the second quarter and the first half 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 June 30, 1999, Our cash and cash equivalents and short-term
investments were $114.7 million, compared to $65.7 million at
December 31, 1998, an increase of $49.0 million. The increase is
primarily a result of cash generated from financing activities of
$55.0 and unrealized gains on available-for-sale securities of $1.0
million. The cash generated from financing activities is largely the
result of the $54.3 million in net proceeds received from the public
offering of common stock in February 1999 and $1.3 million in
proceeds from the exercise of stock options. These cash in-flows and
unrealized gains were partially offset by cash outflows from
operating activities of $4.8 million, excluding the gains on sales
and maturities and investments of $0.6 million, and cash used in
investing in property and equipment of $2.2 million. Our capital
requirements primarily relate to the working capital requirements and
investments in property and equipment. We have funded operations
primarily through public offerings of common stock and private sales
of common and preferred stock.
Other than capital lease commitments, we have no material commitments
for capital expenditures. However, we anticipate an increase in
capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. We
intend to establish sales offices and lease additional space, which
will require us to commit to additional lease obligations, purchase
equipment and install leasehold improvements. We also intend to
upgrade and invest in information technology which will increase
capital expenditures.
From time to time, we may make cash investments or exchange Com21
stock for investments in various companies to secure development
resources or access to various product lines. We may more
aggressively pursue market opportunities, such as wireless
technology, that leverage our technology platform. These activities
if pursued will result in a significant use of cash resources.
We believe our current cash and cash equivalents and short-term
investments will be sufficient to meet anticipated cash requirements
for the next twelve months, although we may seek to raise additional
capital during that time period.
Year 2000 Readiness
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and
cannot distinguish 21st century dates from 20th century dates. These
date code fields will need to distinguish 21st century dates from 20th
century dates to avoid system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements.
Our Year 2000 plan which is currently in progress will determine
whether our products, internal systems, computers and software, and
the products and systems of our critical vendors and suppliers are
Year 2000 compliant. This plan is being implemented in the following
four consecutive phases:
I. Inventory and Data Gathering Phase: cataloging of products and
systems and the products and systems of our critical vendors and
suppliers;
II. Testing Phase: determining whether cataloged products and systems
are Year 2000 compliant;
III. Replacement Phase: upgrading and replacement of non-compliant
products and systems; and
IV. Monitoring Phase: ongoing testing of our products and systems for
Year 2000 compliance.
Our Year 2000 plan has been implemented but not completed. To date,
results of our Year 2000 plan are the following:
Products. We have developed internal tests to ascertain whether our
products are Year 2000 compliant. Based on these tests, we believe our
current products are Year 2000 compliant and, to the extent necessary,
all previously shipped products can be upgraded to become Year 2000
compliant with currently available software upgrades. We have
finished the first three phases of our Year 2000 plan related to our
products and are continuing on the fourth phase, the monitoring phase,
on an on-going basis through the remainder of 1999.
Vendors. Based on a survey of material vendors and suppliers we have
ascertained our material vendors and suppliers appear to be Year 2000
compliant. We have received confirmations from material vendors
indicating their expectation that the Year 2000 will not materially
effect the supply of product to Com21. We continue to monitor our
material vendors and suppliers concerning Year 2000 compliance. We
have finished the first three phases of our Year 2000 plan related to
our material parts vendors and suppliers and are continuing on the
fourth phase, the monitoring phase, on an on-going basis through the
remainder of 1999.
Manufacturing and Infrastructure. We have cataloged and performed a
review of our assembly and test equipment. Based on this survey we do
not believe that there is a material financial impact related to the
replacement or upgrade of any manufacturing or infrastructure
equipment or software that is not Year 2000 compliant. We will
continue replacing and upgrading any non-compliant equipment and
software as well as monitoring of any new equipment or software added.
Completion of all four phases of the Year 2000 plan related to our
manufacturing equipment and software is expected to occur by late
1999.
IT Systems. We conducted a survey of our information technology
hardware and software and anticipate that any Year 2000 non-compliant
hardware and software will be upgraded or replaced prior to 2000. We
have finished the first two phases of our Year 2000 plan related to
our IT Systems and are continuing on the third and fourth phases, the
replacing or upgrading of software that is currently not Year 2000
compliant and the monitoring of any additional software being added.
We believe all four phases of the Year 2000 plan related to IT Systems
will be completed by late 1999.
Although we believe that our Year 2000 plan will identify all of our
material Year 2000 issues, we cannot assure you that we will be able
to identify, evaluate and resolve all these issues.
Costs. We do not currently expect that costs associated with Year 2000
compliance will materially affect our operations or financial
position. However, if we discover Year 2000 problems in the future, we
may not be able to develop, implement, or test remediation or
contingency plans in a timely or cost-effective manner.
Risks. We believe that the risks of noncompliance could accelerate or
delay purchases or replacement of our products and services. Failure
of third party products, such as a breakdown in telephone, electric
service or other utilities, e-mail, voicemail or the World Wide Web
could cause a disruption in cable operators' service to customers.
Disruptions in the services provided by banks, telephone companies and
the U.S. Postal Service could negatively impact our business. Although
our products are undergoing Year 2000 specific testing procedures,
they may not contain the date codes necessary to operate in the year
2000. Any failure of these products to perform could result in the
delay or cancellation of product orders and the diversion of
managerial and technical resources from product development and other
business activities to attend to Year 2000 issues. These events could
have a material adverse effect on our business, operating results and
financial condition.
Contingency Plans. Until the completion of our Year 2000 plan, we do
not believe that it is practical to develop comprehensive contingency
plans. Even if these plans are completed and implemented in a timely
manner they may be insufficient to address any third party failures.
We cannot assure you that undetected internal and external Year 2000
issues will not materially impact our business, financial condition,
results of operations and cash flows. See "Risk Factors - Our failure
and the failure of our key suppliers and customers to be year 2000
compliant could negatively impact our business."
Risk Factors
You should carefully consider the risks described below before making
a decision to invest in Com21. You may lose all or part of your
investment. The risks and uncertainties described below are not the
only ones facing our company. Readers are referred to additional
risks identified in the "Risk Factors" section contained in Com21's
Annual Report on Form 10-K dated on March 10, 1999 as filed with the
SEC.
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 are CableLabs certified as
meeting the 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;
- general economic conditions and economic conditions specific to
the cable and electronic data transmission industries;
- key component shortages or failures from our suppliers in
providing necessary materials
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 sales mix within a product group, proprietary vs. DOCSIS modems
- the average selling prices of our products;
- the effectiveness of our cost reduction efforts;
- the volume of products manufactured;
- component prices we secure from our vendors, and
- the distribution channel or customer mix.
In the past we have experienced declines in the average selling price
of our cable modems and headends. We expect average sales prices of
both our modems and headends will continue to show decreases to meet
competitive pressures, especially those pressures related to the
introduction of DOCSIS modems. In addition, the sales mix between our
headend equipment and modems also affects our gross margin. Sales of
our cable modems yield lower gross margins than do sales of our
headend equipment. We anticipate that our sales mix will continue to
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
office cable modems, our gross margin will be adversely affected.
Because of these factors, our operating results in one or more future
periods may not meet or exceed the expectations of securities analysts
or investors. In that event, the trading price of our common stock
would likely decline.
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. Conformance with the DOCSIS
standard is being determined through certification tests performed by
CableLabs. We have developed a cable modem that we are in the process
of getting CableLabs certified. 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 June 24, 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 cable modems will be CableLabs certified according to our
anticipated schedule, or that if certified, that it will meet with
market acceptance. Our failure to introduce a CableLabs certified
modem could have an adverse affect on revenues and operations. We are
in the next round of certification and results should be announced
during the first week of September 1999. The results of this
announcement could affect the trading price of our stock.
The emergence or evolution of industry standards, either through
adoption by official standards committees or widespread use by cable
operators or telephone companies could require us to redesign current
products. Our current products may not be in full compliance with the
following relevant standards or standards bodies:
- Data-Over-Cable Service Interface Specification (DOCSIS);
- Digital Video Broadcast (DVB);
- Institute of Electrical and Electronics Engineers (IEEE);
- Internet Engineering Task Force (IETF); and
- other relevant standards bodies.
Currently no generally accepted standard for data-over-cable exists
outside North America. However, there is a movement by some cable
operators in Europe towards a DVB standard. If any standards achieve
market acceptance including DVB or other standard 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, DVB or other standards outside
North America could 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 DOCSIS or DVB.
The technical innovations required for us to remain competitive are
inherently complex, require long development cycles, are dependent in
some cases on sole source suppliers and require us, in some cases, to
license technology from others. We must continue to invest in research
and development to attempt to maintain and enhance our existing
technologies and products, but we may not have the funds available to
do so. Even if we have sufficient funds, these investments may not
serve the needs of customers or be compatible with changing
technological requirements or standards. Most expenses must be
incurred before the technical feasibility or commercial viability can
be ascertained. Revenues from future products or product enhancements
may not be sufficient to recover the development costs associated with
the products or enhancements.
We depend on cable operators and cable systems integrators for
substantially all of our sales.
We depend on cable operators and cable systems integrators to purchase
our headend equipment and cable modems and to market data transmission
service to end-users. Cable operators may not have enough programming
channels over which they can offer these services. Even if a cable
operator chooses to provide data transmission services, it may not
choose our products to do so.
Because we rely on cable operators and cable systems integrators to
purchase and market our products, our sales may be unpredictable due
to the varying marketing and deployment efforts of our cable operators
and cable systems integrators.
The future success of services providing data-over-cable transmission
depends upon the ability of cable systems to support two-way
communications. Many cable operators are in the process of upgrading,
or have announced their intention to upgrade, their cable plants to
hybrid fiber coaxial cable, commonly known as HFC in the
telecommunications industry. The timing of this upgrade could affect
our sales.
Even after installation, we remain highly dependent on cable operators
to continue to maintain their cable plants so that our products will
operate at a consistently high performance level. Accordingly, the
success and future growth of our business will be subject to economic
and other factors affecting the cable television industry,
particularly the industry's ability to continue to finance the
substantial capital expenditures necessary to use our products
effectively.
We rely on indirect distribution channels for our products and need to
develop additional distribution channels.
Today, cable operators and systems integrators purchase cable modems
from vendors through direct and indirect sales channels. In North
America, if the DOCSIS standard achieves widespread market acceptance,
we anticipate that the North American cable modem market will shift to
a consumer purchase model. If this occurs, we will sell more of our
cable modems directly through consumer sales channels. Our success
will be dependent on our ability to market effectively to end users,
to establish brand awareness, to set up the required channels of
distribution and to have cable operator's reference sell our products.
Consequently, we have begun to establish new distribution channels for
our cable modems. We may not have the capital required or the
necessary personnel, or expertise to develop these distribution
channels, which could materially adversely affect our business,
operating results and financial condition. To the extent that large
consumer electronics companies enter the cable modem market, their
well-established retail distribution capabilities would provide them
with a significant competitive advantage.
The market in which we sell our products is characterized by many
competing technologies, and the technology on which our product is
based may not compete effectively against other technologies.
The market for high-speed data transmission services has several
competing technologies which offer alternative solutions. Technologies
which compete with our solution are:
- telephone company-related wireline technologies such as:
dial-up (analog modems);
digital subscriber line, known as DSL , ADSL, among others;
integrated services digital network, known as ISDN; and
- wireless technologies such as:
local multipoint distribution service, known as LMDS;
multi-channel multipoint distribution service, commonly known as
MMDS; and
direct broadcast satellite, commonly known as DBS.
Because of the widespread reach of telephone networks and the
financial resources of telephone companies, competition from telephone
company-related solutions is expected to be intense. Cable modem
technology may not be able to compete effectively against wireline or
wireless technologies.
In addition, one of our competitors has developed a commercially
available alternative modulation technology. Significant market
acceptance of alternative solutions for high-speed data transmission
could decrease the demand for our products if these alternatives are
viewed as providing faster access, greater reliability, increased
cost-effectiveness or other advantages.
Our market is highly competitive and has many more established
competitors.
The market for our products is intensely competitive, rapidly evolving
and subject to rapid technological change.
Many of our current and potential competitors have been operating
longer, have better name recognition, better established business
relationships and significantly greater financial, technical,
marketing and distribution resources than we do. These competitors may
undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and devote substantially more resources to developing
new or enhanced products than we do. If we fail to become CableLabs
certified in a timely manner, our customers may choose another
supplier for CableLabs certified cable modems, and our business,
operating results and financial condition could be materially
adversely affected.
We must reduce the cost of our cable modems to remain competitive.
Certain of our competitors' cable modems are priced lower than our
cable modems. As headend equipment becomes more widely deployed, the
price of cable modems and related equipment will continue to decline.
In particular, the adoption of industry standards, such as the DOCSIS
standard, will cause increased price competition for cable modems.
We may not be able to continually reduce the costs of manufacturing
our cable modems sufficiently to enable us to lower our modem prices
and compete effectively with other cable modem suppliers. If we are
unable to reduce the manufacturing costs of our cable modems, our
gross margin and operating results would be harmed.
Our failure to adequately protect our proprietary rights may adversely
affect us.
We rely on a combination of patent, copyright and trademark laws, and
on trade secrets and confidentiality provisions and other contractual
provisions to protect our proprietary rights. These measures afford
only limited protection. We currently have eight issued U.S. patents
and several pending patent applications. Our means of protecting our
proprietary rights in the U.S. or abroad may not be adequate and
competitors may independently develop similar technologies. Our future
success will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products. Despite
our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade
secrets or other information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect our
proprietary rights as fully as do the laws of the U.S. Issued patents
may not preserve our proprietary position. Even if they do,
competitors or others may develop technologies similar to or superior
to our own. If we do not enforce and protect our intellectual
property, our business will be harmed.
From time to time, third parties, including our competitors, have
asserted patent, copyright and other intellectual property rights to
technologies that are important to us. We expect that we will
increasingly be subject to infringement claims as the number of
products and competitors in the cable modem market grows and the
functionality of products overlaps.
The results of any litigation matter are inherently uncertain. In the
event of an adverse result in any litigation with third parties that
could arise in the future, we could be required to pay substantial
damages, including treble damages if we are held to have willfully
infringed, to halt the manufacture, use and sale of infringing
products, to expend significant resources to develop non-infringing
technology, or to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable
terms, or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management
attention, even if we ultimately prevail. For example, in January
1998, Hybrid Networks filed an action against us, accusing us of
infringing certain of their patents. We settled this matter in the
first quarter of 1999 through a patent cross-license agreement that
will not materially impact our business or results of operations.
However, there can be no assurance that we would be able to
successfully resolve similar incidents in the future.
Our failure to manage growth could adversely affect us.
We have rapidly and significantly expanded our operations and
anticipate that further significant expansion will be required to
address potential growth in our customer base and market
opportunities. To manage the anticipated growth of our operations, we
will be required to:
- improve existing and implement new operational, financial and
management information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our
customers, suppliers and other third parties.
We compete in for skilled personnel in a labor market where there is a
shortage of qualified personnel and salary demands are above the norm.
We must be able to continue to recruit and retain personnel, and
failure to do so would result in us not meeting our anticipated growth
goals.
In addition, our management team may not be able to achieve the rapid
execution necessary to fully exploit the market for our products and
services.
We may not be able to install management information and control
systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to
support our future operations.
In the future, we may experience difficulties meeting the demand for
our products and services. The installation and use of our products
requires training. If we are unable to provide training and support
for our products, the implementation process will be longer and
customer satisfaction may be lower. We cannot assure you that our
systems, procedures or controls will be adequate to support the
anticipated growth in our operations. Any failure to manage growth
effectively could materially adversely affect our business, operating
results and financial condition.
We depend on strategic relationships.
Our business strategy relies to a significant extent on our strategic
relationships with other companies. These relationships include:
- software license arrangements for our network management system;
- technology licensing agreements for certain products;
- development and OEM arrangements with certain suppliers for
advanced products
- marketing arrangements with Philips, Siemens, and others; and
- collaboration agreements with suppliers of routers and
headend equipment to ensure the interoperability of our cable
modems with these suppliers
These relationships may not be successful because we may not be able
to continue to maintain, develop or replace them in the event any of
these relationships are terminated. In addition, any failure to renew
or extend any licenses between us and any third party may adversely
affect our business.
We may not be able to produce sufficient quantities of our products
because we depend on third-party manufacturers their suppliers and
have limited manufacturing experience.
We contract for the manufacture of cable modems and integrated circuit
boards on a turnkey basis. CMC Industries and Sanmina build printed
circuit assemblies for our headend products and Celestica manufactures
our cable modems. Our future success will depend, in significant part,
on our ability to have others manufacture our products cost-
effectively, in sufficient volumes and to meet production and delivery
schedules. A number of risks are associated with our dependence on
third-party manufacturers including:
- failure to meet our delivery schedules;
- quality assurance;
- manufacturing yields and costs;
- the potential lack of adequate capacity during periods of
excess demand;
- increases in prices and the potential misappropriation of
our intellectual property.
Any manufacturing disruption could impair our ability to fulfill
orders. We have no long-term contracts or arrangements with any of our
vendors that guarantee product availability, the continuation of
particular payment terms or the extension of credit limits. We may
experience manufacturing or supply problems in the future. We are
dependent on our manufacturers to secure components at favorable
prices, but we may not be able to obtain additional volume purchase or
manufacturing arrangements on terms that we consider acceptable, if at
all. If we enter into a high-volume or long-term supply arrangement
and subsequently decide that we cannot use the products or services
provided for in the agreement, our business will be harmed. Any such
difficulties could harm our relationships with customers.
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 Newbridge Networks, Inc., suppliers of
modulation, demodulation and MAC components;
- Atmel Corporation, the fabricator of our semiconductor devices;
- Virata Limited, a supplier of ATM switches;
- Hewlett-Packard Company, the supplier of HP Openview software;
- Wind River Systems, Inc., a supplier of embedded software; and
- Objectivity, Inc., a supplier of object-oriented database software.
If any of these manufacturers or other sole source suppliers delay or
halt production of any of their components, our business, operating
results and financial condition could be materially adversely
affected.
Our customer base is concentrated and the loss of one or more of our
customers could cause our business to suffer.
A relatively small number of customers (which include system
integrators) have accounted for a large part of our revenues to date,
and we expect that this trend will continue. We expect that our
largest customers in the future could be different from our largest
customers today due to a variety of factors, including customers'
deployment schedules and budget considerations. In addition certain of
our system integrators could develop and manufacture products that
compete with us and therefore could no longer distribute our products.
Because a limited number of cable operators account for a majority of
our prospective customers, our future success will depend upon our
ability to establish and maintain relationships with these companies.
We may not be able to retain our current accounts or to obtain
additional accounts. Both in the U.S. and internationally, a
substantial majority of households passed are controlled by a
relatively small number of cable operators. The loss of one or more of
our customers or our inability to successfully develop relationships
with other significant cable operators could cause our business to
suffer.
We are subject to risks associated with operating in international
markets.
We expect that a significant portion of our sales will continue to be
in international markets for the foreseeable future. We intend to
expand operations in our existing international markets and to enter
new international markets, which will demand management attention and
financial commitment. In addition, a successful expansion of our
international operations and sales in certain markets will require us
to develop relationships with international systems integrators and
distributors. We may not be able to identify, attract or retain
suitable international systems integrators or distributors. We may not
be able to successfully expand our international operations.
Furthermore, to increase revenues in international markets, we will
need to continue to establish foreign operations, to hire additional
personnel to run these operations and to maintain good relations with
our foreign systems integrators and distributors. To the extent that
we are unable to successfully do so, our growth in international sales
will be limited and our operating results could be adversely affected.
Our international sales to date have been denominated in U.S. dollars.
We do not currently engage in any foreign currency hedging
transactions. A decrease in the value of foreign currencies relative
to the U.S. dollar could make our products more expensive in
international markets.
In addition to currency fluctuation risks, international operations
involve a number of risks not typically present in domestic
operations, including:
- changes in regulatory requirements;
- costs and risks of deploying systems in foreign countries;
- licenses, tariffs and other trade barriers;
- political and economic instability;
- difficulties in staffing and managing foreign operations;
- potentially adverse tax consequences;
- difficulties in obtaining governmental approvals for products;
- the burden of complying with a wide variety of complex
foreign laws and treaties; and
- the possibility of difficult accounts receivable collections.
We are also subject to the risks associated with the imposition of
legislation and regulations relating to the import or export of high
technology products. We cannot predict whether charges or restrictions
upon the importation or exportation of our products will be
implemented by the U.S. or other countries. Future international
activity may result in sales dominated by foreign currencies. Gains
and losses on the conversion to U.S. dollars of accounts receivable,
accounts payable and other monetary assets and liabilities arising
from international operations may contribute to fluctuations in our
operating results. Any of these factors could materially and adversely
affect our business, operating results and financial condition.
We may be subject to risks associated with acquisitions.
We continually evaluate strategic acquisitions of other businesses and
subscriber accounts. If we were to consummate an acquisition, we would
be subject to a number of risks, including:
- difficulty in assimilating the acquired operations and personnel;
- limits on our ability to retain the acquired subscribers;
- disruption of our ongoing business; and
- limits on our ability to successfully incorporate acquired
technology and rights into our service offerings and maintain
uniform standards, controls, procedures, and policies.
We may not be able to successfully overcome problems encountered with
potential acquisitions. In addition, an acquisition could materially
adversely affect our operating results by diluting our stockholders'
equity, causing us to incur additional debt, or requiring us to
amortize acquisition expenses and acquired assets.
Our failure and the failure of our key suppliers and customers to be
year 2000 compliant would negatively impact our business.
The Year 2000 issue is the result of computer programs written using
two digits rather than four to define the applicable year. Computer
programs that have this date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices or engage in similar normal
business activities.
We are heavily dependent upon the proper functioning of our own
computer or data-dependent systems. This includes, but is not limited
to, our systems in information, business, finance, operations,
manufacturing and service. Any failure or malfunctioning on the part
of these or other systems could adversely affect our business in ways
that are not currently known, quantifiable or otherwise anticipated by
us.
We currently have only limited information on the Year 2000 compliance
of key suppliers and customers. The operations of our key suppliers
and customers could be adversely affected in the event they do not
successfully and timely achieve Year 2000 compliance. Our business and
results of operations could experience material adverse effects if our
key suppliers were to experience Year 2000 issues that caused them to
delay manufacturing or shipment of key components to us. In addition,
our results of operations could be materially adversely affected if
any of our key customers encounter Year 2000 issues that cause them to
delay or cancel substantial purchase orders or delivery of our
products.
While we have developed a plan to address Year 2000 issues, we may be
unable to complete all phases of the plan in a timely manner or to
upgrade any or all of our major systems in accordance with our plan.
Even if we make upgrades, they may not effectively address the Year
2000 issue. If required upgrades are not completed in a timely manner
or are not successful, we may be unable to conduct our business or
manufacture our products. The systems of other companies on which our
systems rely may not be converted in a timely manner. The failure to
convert by another company, or the occurrence of a conversion that is
incompatible with our systems would have a material adverse effect on
our business. We intend to establish, but have not yet established a
contingency plan detailing actions that will be taken in the event
that the assessment of the Year 2000 issue is not successfully
completed on a timely basis. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000
Readiness."
We may be subject to product returns and product liability claims due
to defects in our products.
Our products are complex and may contain undetected defects, errors or
failures. These errors have occurred in our products in the past and
additional errors may be expected to occur in our products in the
future. The occurrence of any defects, errors, or failures could
result in delays in installation, product returns and other losses to
us or to our cable operators or end-users. Any of these occurrences
could also result in the loss of or delay in market acceptance of our
products, which could have a material adverse effect on our business,
operating results and financial condition. We would have limited
experience with the problems that could arise with any new products
that we introduce.
Although we have not experienced any product liability claims to date,
the sale and support of our products entail the risk of these claims.
A successful product liability claim brought against us could have a
material adverse effect on our business, operating results and
financial condition.
Our stock price is highly volatile and broad market fluctuations may
adversely affect the market price of our common stock.
The trading price of our common stock has fluctuated significantly
since our initial public offering in May 1998. In addition, the
trading price of our common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by us or
our competitors, announcements by certification and standards bodies,
developments with respect to patents or proprietary rights, changes in
financial estimates by securities analysts and other events or
factors. In addition, the stock market has experienced volatility that
has particularly affected the market prices of equity securities of
many high technology companies and that often has been unrelated or
disproportionate to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price
of our common stock.
This Form 10-Q contains forward-looking statements. These statements
are not guarantees of future performance and are subject to certain
risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-
looking statements.
This Form 10-Q contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are not historical facts but
rather are based on current expectations, estimates and projections
about our industry, our beliefs, and assumptions. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and variations of these words and similar expressions are
intended to identify forward-looking statements. These statements are
not guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in
"Risk Factors" and elsewhere in this Form 10-Q as well as in the
"Risk Factors" section of the Annual Report on Form 10-K dated March
10, 1999. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only
as of the date of this Form 10-Q. We undertake no obligation to update
these statements or publicly release the result of any revisions to
the forward-looking statements that we may make to reflect events or
circumstances after the date of this Form 10-Q or to reflect the
occurrence of unanticipated events.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity. Com21 maintains a short-term investment
portfolio consisting mainly of government and corporate bonds
purchased with an average maturity of less than one year. These
available-for-sale securities are subject to interest rate risk and
will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10
percent from levels at June 30, 1999, the fair value of the portfolio
would decline by an immaterial amount. We generally have the ability
to hold our fixed income investments until maturity and therefore we
would not expect our operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
Com21 has fixed rate long-term debt of approximately $612,000 as of
June 30, 1999, and a hypothetical 10 percent decrease in interest
rates would not have a material impact on the fair market value of
this debt. We do not hedge any interest rate exposures.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
(d) Use of Proceeds from Sales of Registered Securities. On February
23, 1999 the Company completed a public offering of its Common Stock,
$0.001 par value. The managing underwriters in the Offering were
Credit Suisse First Boston Corporation and Dain Rauscher Wessels (the
"Underwriters"). The shares of Common Stock sold in the Offering
were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-79504) that was declared effective by the SEC on
February 23, 1999. The Offering commenced on February 23, 1999 after
all 3,000,000 shares (of which 2,480,000 shares were offered by the
Company and 520,000 shares were offered by certain selling
shareholders) of Common Stock registered under the Registration
Statement were sold at a price of $23.50 per share. The aggregate
price of the Offering amount registered was $70,500,000. In connection
with the Offering, the Company paid an aggregate of $3,690,000 in
underwriting discounts and commissions to the Underwriters. In
addition, the following table sets forth an estimate of all expenses
incurred in connection with the Offering, other than underwriting
discounts and commissions. All amounts shown are estimated except for
the registration fees of the SEC and the National Association of
Securities Dealers, Inc. ("NASD").
<TABLE>
<S> <C>
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
========
</TABLE>
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 June 30, 1999, Com21
has used the net proceeds from its public offering of Common Stock to
invest in short-term, interest bearing, investment grade securities
and has used its existing cash balances to fund the general operations
of the Company. The proceeds will be used for general corporate
purposes, including working capital and product development. A
portion of the net proceeds may also be used to acquire or invest in
complementary business or products or to obtain the right to use
complementary technologies. Com21 has no agreements or commitments
with respect to any such acquisition or investments and is not
currently engaged in any material negotiations with respect to any
such transaction. None of Com21's net proceeds of the offering were
paid directly or indirectly to any director, officer, general partner
of Com21 or their associates, persons owning 10% or more of any class
of equity securities of the Com21, or an affiliate of Com21.
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
The following proposals were voted upon by the Company's stockholders
at the Annual Stockholders' Meeting held on May 12, 1999:
1. The following persons were elected as directors of the Company to
serve until the 2000 Annual Stockholders' Meeting and until their
successors are elected and qualified with the votes indicated beside
their respective names:
<TABLE>
Schedule of votes cast for each director:
Votes For Votes Withheld
---------- ----------
<S> <C> <C>
Peter D. Fenner 18,674,397 128,792
Paul Baran 18,674,257 128,932
C. Richard Kramlich 18,673,997 129,192
Jerald L. Kent 18,672,747 130,442
Robert C. Hawk 18,673,997 129,192
William R. Hearst III 18,673,297 129,892
Robert A. Hoff 18,675,347 127,842
Robert W. Wilmot 17,937,528 865,661
</TABLE>
2. A proposal to approve and amend the Company's 1998 Stock
Option/Stock Issuance Plan to increase the number of shares of common
stock authorized for issuance by 1,000,000 shares, from 3,483,446 to
4,483,446 shares was approved by the vote of 11,982,980 shares for;
6,748,604 shares withheld or voted against the proposal; and 71,605
shares abstained.
3. A proposal to ratify the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the fiscal year ending December
31, 1999 was approved by the vote of 18,771,186 shares for; 12,173
shares withheld or voted against the proposal; and 19,830 shares
abstained.
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: August 9, 1999 By: /s/ David L. Robertson
--------------------------
David L. Robertson
Chief Financial Officer
Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 47,937
<SECURITIES> 66,760
<RECEIVABLES> 13,021
<ALLOWANCES> 0
<INVENTORY> 3,433
<CURRENT-ASSETS> 133,597
<PP&E> 6,486
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,366
<CURRENT-LIABILITIES> (13,227)
<BONDS> 0
0
0
<COMMON> (21)
<OTHER-SE> (126,208)
<TOTAL-LIABILITY-AND-EQUITY> (140,366)
<SALES> 21,542
<TOTAL-REVENUES> 21,542
<CGS> 13,115
<TOTAL-COSTS> 13,115
<OTHER-EXPENSES> 11,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,135)
<INCOME-TAX> 18
<INCOME-CONTINUING> (2,153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,153)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
