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, 2000
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 21,871,242 as of March 31, 2000.
COM21, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive Loss
- Three Month periods ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999 5
Notes to Condensed Consolidated 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 21
PART II: OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signature 22
In addition to historical information, this Quarterly Report on
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." While this outlook represents
our current judgment 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 revision's
to forward-looking statements to reflect events or circumstances
arising after the date of this document. See "Risk Factors" below
as well as in the Annual Report on Form 10-K filed with the SEC on
March 24, 2000.
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
COM21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
March 31, December 31,
2000 1999
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents $ 50,840 $ 16,499
Short-term investments 44,230 89,524
Accounts receivable 26,216 19,207
Inventories 6,363 4,518
Prepaid expenses and other 5,759 2,924
------------ ------------
Total current assets 133,408 132,672
Investments 3,991 -
Property and equipment, net 8,793 8,198
Other assets 296 296
------------ ------------
Total Assets $ 146,488 $ 141,166
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,057 $ 12,870
Accrued compensation and related benefits 3,686 3,732
Deferred revenue 305 317
Other current liabilities 3,747 2,982
Current portion of capital lease 513 538
------------ ------------
Total current liabilities 26,308 20,439
Deferred rent 273 304
Capital lease obligations 211 345
------------ ------------
Total liabilities 26,792 21,088
Stockholders' equity: ------------ ------------
Common stock, $0.001 par value, 40,000,000 shares
authorized; 21,871,242 and 21,619,172 issued and
outstanding at March 31, 2000 and December 31, 1999 22 22
Additional paid-in capital 183,629 179,138
Deferred stock compensation (2,476) (230)
Accumulated deficit (61,439) (59,016)
Accumulated other comprehensive income (loss) (40) 164
------------ ------------
Total stockholders' equity 119,696 120,078
------------ ------------
Total Liabilities and Stockholders' Equity $ 146,488 $ 141,166
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
2000 1999
------------ ------------
Revenues $ 41,556 $ 19,214
Cost of product revenues 28,992 10,746
------------ ------------
Gross profit 12,564 8,468
------------ ------------
Operating expenses:
Research and development 8,483 6,900
Sales and marketing 6,121 3,230
General and administrative 1,800 840
------------ ------------
Total operating expenses 16,404 10,970
------------ ------------
Loss from operations (3,840) (2,502)
Other income, net 1,439 918
------------ ------------
Loss before income taxes (2,401) (1,584)
Income taxes 22 37
------------ ------------
Net loss (2,423) (1,621)
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale investments (204) (53)
------------ ------------
Comprehensive loss $ (2,627) $ (1,674)
============ ============
Net loss per share, basic and diluted $ (0.11) $ (0.08)
============ ============
Shares used in computation, basic and diluted 21,763 19,472
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
2000 1999
------------ ------------
Cash used in operating activities:
Net loss $ (2,423) $ (1,621)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,388 981
Deferred rent (3) 6
Gain on sales and maturities of investments (234) (319)
Changes in operating assets and liabilities:
Accounts receivable (7,009) (6,382)
Inventories (1,845) 2,887
Prepaid expenses and other (2,835) (400)
Other assets - (50)
Accounts payable 5,187 1,139
Accrued compensation and related benefits (46) 933
Deferred revenue (12) 49
Other current liabilities 712 288
------------ ------------
Net cash used in operating activities (7,120) (2,489)
------------ ------------
Cash from investing activities:
Purchases of investments (37,129) (63,968)
Proceeds from sale of investments 78,487 59,000
Purchases of property and equipment (1,585) (1,164)
------------ ------------
Net cash provided by (used in) investing
activities 39,773 (6,132)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock, net - 54,330
Proceeds from exercise of stock options, net 1,847 389
Repayments under capital lease obligations (159) (263)
Repayments on debt obligations - (52)
------------ ------------
Net cash provided by financing activities 1,688 54,404
------------ ------------
Net change in cash and cash equivalents 34,341 45,783
Cash and cash equivalents at beginning of period 16,499 7,135
------------ ------------
Cash and cash equivalents at end of period $ 50,840 $ 52,918
============ ============
Noncash investing and financing activities:
Deferred stock compensation $ 2,644 $ -
============ ============
Unrealized gain/(loss) on available-for-sale
investments $ (170) $ 53
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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 March 31, 2000,
the results of operations for the three months ended March 31, 2000
and 1999 and cash flows for the three months ended March 31, 2000
and 1999.
The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for
the fiscal year ending December 31, 2000. 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 24, 2000 as filed with the SEC.
2. Inventories
<TABLE>
Inventories consist of (in thousands):
<S> <C> <C>
March 31, December 31,
2000 1999
------------ ------------
Raw materials and sub-assemblies $ 787 $ 917
Work-in-process 1,810 326
Finished goods 3,766 3,275
------------ ------------
Total $ 6,363 $ 4,518
============ ============
</TABLE>
3. Stockholders' Equity
<TABLE>
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):
<S> <C> <C>
Three Months Ended March 31,
2000 1999
------------ ------------
Net Loss (Numerator):
Net loss, basic and diluted $ (2,423) $ (1,621)
------------ ------------
Shares (Denominator):
Weighted average common shares outstanding 21,790 19,587
Weighted average common shares outstanding
subject to repurchase (27) (115)
------------ ------------
Shares used in computation, basic and diluted 21,763 19,472
------------ ------------
Net Loss Per Share, Basic and Diluted $ (0.11) $ (0.08)
============ ============
</TABLE>
During the three months ended March 31, 2000 and 1999, 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, 2000: 26,057
outstanding shares of common stock subject to repurchase; and
options to purchase 3,886,477 shares of common stock.
4. Subsequent Event
On April 18, 2000, the Company entered into a definitive agreement
to acquire privately held GADline Ltd., a leading developer of
integrated end-to-end system solutions delivering telephone and
high-speed data over a hybrid fiber-coaxial (HFC) infrastructure.
The acquisition will be accounted for as a purchase. Pending
shareholder approval, the aggregate purchase price will consist of
approximately 2.8 million shares of Com21 stock in a stock-for-
stock share acquisition transaction.
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 consolidated 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 24, 2000, 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. Com21's products enable domestic and
international cable operators to provide high-speed, cost-effective
Internet access, reduce operating costs, and maximize revenue
opportunities in a variety of subscriber markets - including
corporate telecommuters, small businesses, and private homes. We
develop headend equipment, subscriber cable modems, network
management software, and noise containment technologies, all
designed to support the ATM, DOCSIS and Digital Video Broadcasting
(DVB) industry standards. Since inception, we have shipped
approximately 980 headend controllers and more than 524,000 cable
modems as of 3/31/2000. In the North American market, we sell
directly to cable operators and systems integrators.
Internationally, we sell primarily to systems integrators, who in
turn sell to cable operators.
Com21 was incorporated in Delaware in June 1992. Our principal
executive offices are located at 750 Tasman Drive, Milpitas,
California 95035 and our telephone number at that address is (408)
953-9100. We can also be reached at our Web site
http://www.Com21.com.
Results of Operations
Total Revenues - Total revenues increased by 116% to $41.6 million
in the first quarter of 2000 as compared to $19.2 million in the
first quarter of 1999. Our revenue growth was principally due to
growth in cable modem revenue over the prior year. Unit sales of
all our cable modem products increased 307% from the first quarter
of 1999, as we experienced strong demand for our ATM and DOCSIS
cable modems. Although we anticipate continued revenue growth
associated with our cable modems, we anticipate that this growth
will be constrained due to significant component shortages and the
inability of our OEM modem supplier to meet all of our shipping
requirements. Revenues associated with our ATM headend products
decreased from the first quarter of 1999 to the first quarter of
2000 as component shortages served to constrain shipments. We
anticipate revenue growth associated with our headend products;
however, we continue to be concerned about component shortages.
Revenues associated with our network management software increased
as we experienced an increase in software sales internationally.
Cable modem sales accounted for 86% of total revenue in the first
quarter of 2000 as compared to 63% of total revenue in the first
quarter of 1999. The average sales price of all cable modems
declined from the first quarter of 1999 to the first quarter of
2000 due to planned price reductions to meet competitive pricing
pressures and the increased revenue from our lower priced DOCSIS
modems. We anticipate that the average sales price of modems will
continue to decline moderately during 2000. The average sales
price of our headend equipment also declined from the first quarter
of 1999 to the first quarter of 2000 due to planned price
reductions and the configuration mix of product sold. We
anticipate continued pricing pressure on our headend equipment and
declines in our average sales price of headend products.
During the quarter ended March 31, 2000, international sales
accounted for 64% of total revenues, increasing from the 45%
experienced in the first quarter of 1999 as we continued to expand
our presence overseas with additional sales offices and personnel.
Gross Margins - Gross margins decreased from 44.1% in the first
quarter of 1999 to 30.2% in the first quarter of 2000. The
decrease in margins is primarily due to the mix of product sold.
As noted above cable modem sales accounted for 86% of total revenue
in the first quarter of 2000 as compared to 63% of total revenue in
the first quarter of 1999. Additionally, revenue from our DOCSIS
cable modems became a more significant portion of our total cable
modem revenue. Cable modems have lower margins than our other
products and our DOCSIS cable modems currently have lower margins
than our proprietary cable modems.
Sequentially gross margins remained consistent at 30.2%. An
increase in lower margin DOCSIS related revenue was offset by
decreased costs associated with flash memory during the first
quarter of 2000.
During the second quarter of 2000 we anticipate the gross margin
percent to decline from:
Increased sales of our DOCSIS cable modems. As these
lower margin modems continue to become a higher
percentage of our total revenue, we anticipate our total
margin percent will decline. We do not anticipate
receiving a substantial benefit from our cost reduction
efforts on our DOCSIS modems until late in 2000.
Research and Development - Research and development expenses
increased 23% from $6.9 million in the first quarter of 1999 to
$8.5 million in the first quarter of 2000. The increase was
attributable to higher costs related primarily to increased
personnel, consulting and project related costs. 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 continue to expand our Cork, Ireland facility.
Sales and Marketing - Sales and marketing expenses increased 90%
from $3.2 million in the first quarter of 1999 to $6.1 million in
the first quarter of 2000. The increase was primarily due to
higher costs associated with increased personnel in the sales and
marketing organizations and additional marketing programs. We
expect sales and marketing expenses to increase in absolute dollars
in the future as we develop additional marketing programs and
product channels for our DOCSIS and DVB products.
General and Administrative - General and administrative expenses
increased 114% from $0.8 million in the first quarter of 1999 to
$1.8 million in the first quarter of 2000. The increase from the
first quarter of 1999 to the first quarter of 2000 was related to
higher personnel related costs. 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
$0.9 million in the first quarter of 1999 to $1.4 million in the
first quarter of 2000. 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 $54.3 million from the
secondary offering of common stock in February 1999.
Liquidity and Capital Resources
At March 31, 2000, our cash, cash equivalents and investments were
$99.1 million, compared to $106.0 million at December 31, 1999, a
decrease of $6.9 million. The decrease is primarily a result of
cash used in operations of $7.1 million and cash used for purchases
of property and equipment of $1.6 million. Cash outflows from
operations is due primarily to an increase in accounts receivable,
inventory and prepaid expenses of $11.7 million and the net loss
$1.0 million after non-cash items offset by an increase to accounts
payable and other current liabilities of $5.9 million. The cash
outflow from operating activities and purchases of property was
offset by cash inflow from the proceeds of exercise of stock
options of $1.8 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 and operating lease commitments, we have no
material commitments for capital expenditures. However, we
anticipate an increase in cash used in operations and in capital
expenditures and lease commitments consistent with anticipated
growth in operations, pending acquisitions, infrastructure and
personnel. We intend to establish additional sales offices and
lease additional space, which will require us to commit to
additional lease obligations, purchase equipment and install
leasehold improvements. We are also upgrading and investing in
information technology that will increase capital and software
expenditures and consulting costs.
Going forward, we intend to make cash investments or exchange Com21
stock for investments in various companies to secure development
resources or access to various product lines. We may also more
aggressively pursue market opportunities 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.
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 24,
2000 as filed with the SEC.
We are currently experiencing significant delays in shipments from
our OEM modem supplier and shortages of certain key components.
We are currently experiencing delays in shipment from our OEM modem
supplier because of a market shortage of tuners, chipsets and ASIC
chips, and shortages of certain key components for our proprietary
modems and headend equipment. If we are unable to purchase OEM
modems or key components from our vendors at a high enough volume
to meet demand, or qualify and secure additional sources of supply,
we will be unable to meet our production and delivery schedules and
revenue will be adversely affected.
We do not have long term supply contracts to ensure sources of
supply for all components. 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. If we are
unable to obtain sufficient quantities of modems or components, or
to develop alternative sources for products and/or components our
revenue would be materially adversely affected.
If any manufacturer 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 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:
- - key component shortages or failures from our
suppliers in providing necessary materials and modems;
- - delays in introducing standards based products that
are certified as meeting the specifications of various
approval organizations;
- - 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;
- - 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.
Total revenues for any future quarter are difficult to predict.
Supply of components and OEM DOCSIS modems, manufacturing or
testing constraints could result in delays in the delivery of our
products. Delays 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 within a product group, especially
between proprietary vs. DOCSIS modems;
- - the effectiveness of our cost reduction efforts;
- - the average selling prices of our products;
- - component prices we secure from our vendors;
- - the sales mix between our headend equipment and cable modems;
- - the volume of products manufactured; and
- - the distribution channel or customer mix.
In the past we have experienced declines in the average selling
price of our cable modems and headend equipment. We expect average
sales prices of our modems and headend equipment will continue to
show decreases to meet competitive pressures, especially those
pressures related to DOCSIS and other standard based 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, and
sales of our DOCSIS cable modems currently yield substantially
lower margins than do sales of our proprietary cable modems. We
anticipate that our sales mix will continue to be weighted toward
cable modems during 2000 and increasingly toward our lower margin
DOCSIS cable modems. If the price declines are not offset by a
decline in the costs of manufacturing our cable modems due to
engineering delays in introducing our cost reduced modems or in
getting certified by various standards bodies 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.
Competition for qualified personnel in the cable networking
equipment and telecommunications industries is intense, and we may
not be successful in attracting and retaining these personnel.
Our future success will depend, to a significant extent, on the
ability of our management to operate effectively, both individually
and as a group. We are dependent on our ability to retain and
motivate high caliber personnel, in addition to attracting new
personnel. Competition for qualified personnel in the cable
networking equipment and telecommunications industries is extremely
intense, especially in the San Francisco Bay Area, and we may not
be successful in attracting and retaining such personnel. We expect
to add additional personnel in the near future. There may be only a
limited number of people with the requisite skills to serve in
those positions and it may become increasingly difficult to hire
these people. We are actively searching for research and
development engineers, who are in short supply. Our business will
suffer if we encounter delays in hiring additional engineers.
In response to the intense competition for qualified personnel in
the San Francisco Bay Area, we have opened up a research facility
in Ireland and a customer service center in The Netherlands and are
exploring setting up additional centers in other locations. If we
are unable to effectively manage and coordinate these development
and customer service activities in these widely dispersed areas,
our business may be adversely affected.
Competitors and others have in the past and may in the future
attempt to recruit our employees. We do not have employment
contracts with any of our key personnel. We are experiencing higher
turnover than in 1999 due to increased competition for qualified
personnel. We do not maintain key person life insurance on our key
personnel. The loss of the services of any of our key personnel,
the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly
engineers, could negatively affect our business.
We may be subject to risks associated with acquisitions.
We continually evaluate strategic acquisitions of other businesses.
We have entered into a definitive agreement to acquire GADline
Ltd., an Israeli developer of integrated end-to-end system
solutions delivering telephone and high-speed data over a hybrid
fiber-coaxial (HFC) infrastructure. If we are able to consummate
this or other acquisitions, 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 customers;
- - risks of entering markets in which we have no or
limited direct prior experience and where competitors in
such markets have stronger market positions;
- - disruption of our ongoing business; and
- - limits on our ability to successfully incorporate
acquired technology and rights into our service offerings
and sell the acquired products.
We may not be able to successfully overcome potential problems
encountered with the GADline acquisition or other potential
acquisitions. In addition, GADline or other acquisitions could
materially adversely affect our operating results by diluting our
stockholders' equity, causing us to incur additional debt,
incurring significant immediate expenses related to write-offs, or
incurring amortization of acquisition expenses and acquired assets.
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, industry standards, including the DOCSIS
standard in North America, has caused 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. In
addition we may not be able to get our DOCSIS modems certified in a
timely manner by various standards bodies including CableLabs. If
we are unable to reduce the manufacturing costs of our cable
modems, our gross margin and operating results would be harmed.
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 our prospects or us. We have incurred net losses since
inception and expect to continue to operate at a loss through at
least fiscal 2000. 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 and secure higher revenues and gross profit.
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:
- - cable operators' success and timeliness in the
installation of subscriber site equipment;
- - our ability to meet competitive pricing pressures;
- - 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; and
- - cable operators' success in setting prices for data
transmission installation service.
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 and buy our cable modems. Therefore, we may
not achieve, or be able to sustain, profitability.
We may not be able to produce sufficient quantities of our products
because we depend on third-party manufacturers, their suppliers and
OEM suppliers and have limited manufacturing experience.
We contract for the manufacture of cable modems and integrated
circuit boards on a turnkey basis. 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;
- - difficulty in planning mix of units to be produced
by manufacturer;
- - 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. Any such difficulties could harm
our relationships with customers.
Both our proprietary products and our standards based products 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.
The DOCSIS standard has achieved substantial market acceptance in
North America. Conformance with the DOCSIS standard is being
determined through certification tests performed by CableLabs. On
December 9, 1999 CableLabs certified two models of our DOXport
cable modem product line representing four modems for use with
DOCSIS cable networks. On March 9, 2000 CableLabs certified a
DOCSIS modem supplied by our OEM supplier. As we continue to
enhance current DOCSIS products and develop new products and as the
evolution of the DOCSIS standard continues we may incur additional
costs associated with making our cable modems compliant with
various versions of the DOCSIS standard. Additionally, we cannot
assure you that future enhancements or new DOCSIS product offerings
will be CableLabs certified according to our anticipated schedule,
or that if certified, will meet with market acceptance.
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.
There is movement by some cable operators in Europe towards either
a DVB or EuroDOCSIS standard. We currently have DVB products that
we OEM from a third party supplier, but we cannot assure you that
our DVB products will meet the evolving DVB specifications.
Additionally, we cannot assure you that if a EuroDOCSIS standard
obtains widespread acceptance we will be able to design and produce
a EuroDOCSIS modem that meets EuroDOCSIS specifications.
The widespread adoption of DOCSIS, DVB, EuroDOCSIS or other
standards outside North America could cause aggressive competition
in the cable modem market and result in lower sales of our
proprietary 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 evolving and emerging industry standards.
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 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. Due
to the DOCSIS standard achieving 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 include the following:
- - telephone company-related wireline technologies such as:
- dial-up (analog modems);
- digital subscriber line, known as DSL , ADSL,
among others; and
- integrated services digital network, known as ISDN.
- - wireless technologies such as:
- local multipoint distribution service, known as LMDS;
- multi-channel multipoint distribution service,
commonly known as MMDS;
- direct satellite.
- - fiber optic technologies such as:
- fiber to a residence; and
- fiber to a multi-dwelling unit.
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, more 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.
The sales cycle for our products is lengthy.
The sales cycle associated with our products is typically lengthy,
generally lasting from three to six months. Our customers,
typically, conduct significant technical evaluations of competing
technologies prior to the commitment of capital and other
resources. In addition, purchasing decisions may be delayed because
of our customers' internal budget approval procedures. Sales are
generally subject to customer trials, which typically last three
months. Because of the lengthy sales cycle and the large size of
customers' orders, if orders forecasted for a specific customer for
a particular quarter do not occur in that quarter, our operating
results for that quarter could suffer.
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. 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. There can be
no assurance that we would be able to successfully resolve legal
disputes 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 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 system integrators, 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 any third party and us may
adversely affect our business.
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. These risks may be heightened if the acquisition of
GADline Ltd., an Israeli company, is consummated. These risks
include the following:
- - 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 denominated in
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 face risks from the uncertainties of the Internet.
There are currently few laws or regulations that apply directly to
access or commerce on the Internet. We could be materially
adversely affected by regulation in any country where we operate,
on such technology as voice over the Internet, encryption
technology and access charges for Internet service providers. The
adoption of such measures could decrease demand for our products,
and at the same time increase our cost of selling our products.
Changes in laws or regulations governing the Internet and Internet
commerce could have a material adverse effect on our business,
operating results and financial condition.
The industry in which we compete is subject to consolidation.
There has been a trend toward industry consolidation for several
years, which has continued through the first quarter of 2000. We
expect this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in
an evolving industry. We believe that industry consolidation may
provide increasingly stronger competitors that are better able to
compete as sole-source vendors for customers. This could lead to
more variability in operating results as we compete to be a single
vendor solution and could have a material adverse effect on our
business, operating results and financial condition. Additionally
we believe that industry consolidation may lead to fewer larger
possible customers. If we are unable to maintain our current
customers or secure additional customers our business could be
adversely affected.
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.
The location of our facilities subjects us to the risk of
earthquakes and or other natural disasters.
Our corporate headquarters, including most of our research and
development operations and our in-house manufacturing facilities,
are located in the Silicon Valley area of Northern California, a
region known for seismic activity. A significant natural disaster
in the Silicon Valley, such as an earthquake, could have a material
adverse impact on our business, financial condition and operating
results.
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.
Additionally, we may choose to structure acquisitions or other
transactions by issuing additional Com21 common stock or warrants
or options to purchase Com21 stock that would have a dilutive
affect on the common stock currently outstanding. Although we
anticipate these types of transactions will increase the overall
value of Com21, Inc., they may have an adverse affect on 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. 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 an investment portfolio
consisting mainly of government and corporate debt obligations
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, 2000, 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 is also exposed to market price risk on an investment in a
marketable equity security held as an available-for-sale
investment. This investment is in a publicly traded company in the
volatile high-technology industry sector. A 50% adverse change in
the equity price would result in an approximate $434,000 decrease
in the fair value of the investment in the marketable equity
security as of March 31, 2000.
Com21 also has fixed rate debt obligations of approximately
$724,000 at March 31, 2000, that have no interest rate risk. The
fixed rates on such obligations was 13% during the first quarter of
2000.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
Not applicable
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
The Company filed a report on Form 8-K to announce
the signing of a definitive acquisition agreement with
GADline, Ltd.
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 15, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 50,840
<SECURITIES> 44,230
<RECEIVABLES> 26,216
<ALLOWANCES> 0
<INVENTORY> 6,363
<CURRENT-ASSETS> 133,408
<PP&E> 8,793
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,488
<CURRENT-LIABILITIES> (26,308)
<BONDS> 0
0
0
<COMMON> (22)
<OTHER-SE> (119,674)
<TOTAL-LIABILITY-AND-EQUITY> (146,488)
<SALES> 41,556
<TOTAL-REVENUES> 41,556
<CGS> 28,992
<TOTAL-COSTS> 28,992
<OTHER-EXPENSES> 16,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,840)
<INCOME-TAX> 22
<INCOME-CONTINUING> (2,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,423)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
