UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 24,626,437 as of September 30, 2000.
COM21, INC.
INDEX
PART I: FINANCIAL INFORMATION Page
_____________________________ ____
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss - Three and Nine Months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 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 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
PART II: OTHER INFORMATION
__________________________
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signature 26
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". 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 24, 2000 as filed
with the SEC.
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
COM21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
<TABLE>
September 30, December 31,
ASSETS 2000 1999
__________ __________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,621 $ 16,499
Short-term investments 34,952 89,524
Accounts receivable 46,982 19,207
Inventories 18,831 4,518
Prepaid expenses and other 10,342 2,924
__________ __________
Total current assets 129,728 132,672
Investments 15,041 -
Property and equipment, net 14,838 8,198
Acquired intangibles, net 17,663 -
Goodwill, net 46,149 -
Other assets 2,574 296
__________ __________
Total Assets $ 225,993 $ 141,166
__________ __________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,188 $ 12,870
Accrued compensation and related benefits 5,906 3,732
Deferred revenue 438 317
Other current liabilities 7,837 2,982
Current portion of capital lease and debt obligations 1,033 538
__________ __________
Total current liabilities 57,402 20,439
Deferred rent 292 304
Capital lease and debt obligations 42 345
__________ __________
Total Liabilities 57,736 21,088
__________ __________
Stockholders' equity:
Common stock, $0.001 par value, 40,000,000 shares
authorized; 24,626,437 and 21,619,172 issued
and outstanding at September 30, 2000 and
December 31, 1999 25 22
Additional paid-in capital 262,676 179,138
Deferred stock compensation (6,614) (230)
Accumulated deficit (89,992) (59,016)
Accumulated other comprehensive income (loss) 2,162 164
__________ __________
Total Stockholders' Equity 168,257 120,078
__________ __________
Total Liabilities and Stockholders' Equity $ 225,993 $ 141,166
__________ __________
See notes to condensed consolidated financial statements.
</TABLE>
COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
______________________ ______________________
2000 1999 2000 1999
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Revenues $ 60,636 $ 25,269 $ 153,550 $ 66,025
Cost of revenues 50,940 16,316 117,254 40,177
__________ __________ __________ __________
Gross profit 9,696 8,953 36,296 25,848
__________ __________ __________ __________
Operating expenses:
Research and development 13,858 7,728 32,740 21,657
Sales and marketing 7,416 4,126 20,089 11,319
General and administrative 5,242 1,060 9,224 2,856
In-process research and
development 8,823 - 8,823 -
__________ __________ __________ __________
Total operating expenses 35,339 12,914 70,876 35,832
__________ __________ __________ __________
Loss from operations (25,643) (3,961) (34,580) (9,984)
Total other income, net 831 1,420 3,626 3,724
__________ __________ __________ __________
Loss before income taxes (24,812) (2,541) (30,954) (6,260)
Provision for income taxes - - 22 55
__________ __________ __________ __________
Net loss (24,812) (2,541) (30,976) (6,315)
Other comprehensive loss,
net of tax-
Unrealized gain (loss) on
available-for-sale investments 2,594 (310) 1,998 709
__________ __________ __________ __________
Comprehensive loss $ (22,218) $ (2,851) $ (28,978) $ (5,606)
__________ __________ __________ __________
Net loss per share, basic
and diluted $ (1.02) $ (0.12) $ (1.37) $ (0.30)
__________ __________ __________ __________
Shares used in computation,
basic and diluted 24,242 21,426 22,645 20,732
__________ __________ __________ __________
See notes to condensed consolidated financial statements
</TABLE>
COM21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
Nine Months Ended
September 30,
______________________
2000 1999
__________ __________
<S> <C> <C>
Cash used in operating activities:
Net loss $ (30,976) $ (6,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,551 2,897
In-process research and development 8,823 -
Deferred rent (12) 19
Gain on sales and maturities of investments (423) (1,038)
Changes in operating assets and liabilities:
Accounts receivable (27,103) (9,696)
Inventories (9,470) 2,219
Prepaid expenses and other (6,785) (1,388)
Other assets (2,049) (1)
Accounts payable 27,457 3,173
Accrued compensation and related benefits 1,742 1,744
Deferred revenue 121 131
Other current liabilities (954) 733
__________ __________
Net cash used in operating activities (31,078) (7,522)
__________ __________
Cash flows from investing activities:
Proceeds from sale of investments 99,398 109,697
Purchases of investments (56,004) (125,220)
Purchases of property and equipment (8,549) (3,772)
Acquisition of companies net of cash acquired (783) -
__________ __________
Net cash provided by (used in) investing activities 34,062 (19,295)
__________ __________
Cash flows from financing activities:
Proceeds from issuance of stock, net - 54,330
Proceeds from exercise of stock options, net 3,651 1,524
Repayments under capital lease obligations (457) (739)
Repayments on debt obligations (4,056) (198)
__________ __________
Net cash provided by financing activities (862) 54,917
__________ __________
Net increase in cash and cash equivalents 2,122 28,100
Cash and cash equivalents at beginning of period 16,499 7,135
__________ __________
Cash and cash equivalents at end of period $ 18,621 $ 35,235
__________ __________
Noncash investing and financing activities:
Deferred stock compensation $ 1,088 $ -
__________ __________
Unrealized (gain) loss on available-for-sale
investments, net $ (1,998) $ (709)
__________ __________
See notes to condensed consolidated financial statements
</TABLE>
COM21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated 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 condensed consolidated financial
statements include all adjustments necessary (consisting of normal,
recurring adjustments) for a fair presentation of Com21's financial
position as of September 30, 2000, the results of operations for the
three and nine months ended September 30, 2000 and 1999 and cash
flows for the nine months ended September 30, 2000 and 1999.
The results of operations for the three and nine months ended
September 30, 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
consolidated financial statements and the accompanying notes
included in the Company's Form 10-K dated March 24, 2000 as filed
with the SEC.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements," which provides the SEC staff's views on
selected revenue recognition issues. The guidance in SAB 101 must
be adopted during the fourth quarter of fiscal 2000 and the effects,
if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year,
with a restatement of all prior interim quarters in the year. Our
management has not completed its evaluation of the effects, if any,
that SAB 101 will have on the Company's income statement
presentation, operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No.
133 will be effective for the Company beginning in the first quarter
of fiscal year 2001. Based on management's preliminary review of
contracts, agreements and investments we believe that this statement
will not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
2. Inventories
<TABLE>
Inventories consist of (in thousands):
September 30, December 31,
2000 1999
__________ __________
<S> <C> <C>
Raw materials and sub-assemblies $ 8,282 $ 917
Work-in-process 6,132 326
Finished goods 4,417 3,275
__________ __________
$ 18,831 $ 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):
Three Months Ended
September 30,
2000 1999
__________ __________
<S> <C> <C>
Net Loss (Numerator):
Net loss, basic and diluted $ (24,812) $ (2,541)
__________ __________
Shares (Denominator):
Weighted average common shares outstanding 24,479 21,477
Weighted average common shares outstanding
subject to repurchase (237) (51)
__________ __________
Shares used in computation, basic and diluted 24,242 21,426
__________ __________
Net Loss Per Share, Basic and Diluted $ (1.02) $ (0.12)
__________ __________
Nine Months Ended
September 30,
2000 1999
__________ __________
Net Loss (Numerator):
Net loss, basic and diluted $ (30,976) $ (6,315)
__________ __________
Shares (Denominator):
Weighted average common shares outstanding 22,740 20,814
Weighted average common shares outstanding
subject to repurchase (95) (82)
__________ __________
Shares used in computation, basic and diluted 22,645 20,732
__________ __________
Net Loss Per Share, Basic and Diluted $ (1.37) $ (0.30)
__________ __________
</TABLE>
During the three months and nine months ended September 30, 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 September 30,
2000: warrants to purchase 75,000 shares of common stock; 5,665
outstanding shares of common stock subject to repurchase; 245,000
shares of common stock subject to forfeiture; and options to
purchase 5,571,266 shares of common stock.
4. Acquisitions
GADline Ltd.,
On July 3, 2000, pursuant to a Share Purchase Agreement dated April
18, 2000 by Com21, Inc. and GADline, Ltd. (GADline), an Israeli
company, GADline was merged with and into Com21. GADline develops,
manufactures and markets innovative, fully managed networking
solutions that deliver high-speed data and telephony services over a
hybrid fiber coaxial infrastructure.
Pursuant to the GADline Agreement, the shareholders of GADline
received an aggregate of 2,281,750 shares of Com21 common stock, all
outstanding GADline options converted into options to purchase
approximately 232,000 shares of Com21 common stock. An additional
350,000 shares of Com21 common stock may be issued to GADline
shareholders upon completion of predefined milestones through
December 31, 2000. The fair value of the contingent shares will be
measured upon achievement of the predefined milestones and will be
accounted for as additional purchase price. Com21 also assumed
certain operating assets and liabilities of GADline. The
acquisition was treated as a purchase for accounting purposes. The
purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair values. The approximate
purchase price was determined to be $73,607,000. The consolidation
of the assets and liabilities affected the Company's balance sheet
at September 30, 2000, as depicted in the following tables (in
thousands):
<TABLE>
<S> <C>
Total purchase price:
Common Stock $ 67,340
Options assumed 3,207
Acquisition expenses 3,060
__________
$ 73,607
__________
Purchase price allocation:
Fair market value of net tangible assets
acquired of GADline at June 30, 2000 $ 3,240
Intangible assets acquired:
Customer base 239
Workforce-in-place 1,564
Tradename 1,111
Core technology 9,114
Current technology 6,038
In-process research & development 8,823
Goodwill 43,478
__________
$ 73,607
__________
</TABLE>
Purchased technology, other intangibles and goodwill are amortized
over their estimated useful lives, generally three to five years.
Com21 recorded a one-time charge of $8.8 million in the third
quarter of 2000 for purchased in-process technology related to a
development project that had not reached technological feasibility,
had no alternative future use, and for which successful development
was uncertain. Management believes that the in-process research and
development has no alternative future use.
The in-process development project is an integrated network solution
for data and voice over Internet protocol. At the time of
acquisition, estimated costs to complete the development were
approximately $9.0 million. Management expects that product being
developed will become available for sale in fiscal 2001; however, no
assurances can be given. Cost incurred on the project to date is
approximately $9.3 million. Failure to reach successful completion
of this project could result in impairment of the associated
capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being
amortized, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
Significant assumptions used to determine the value of in-process
technology included several factors, including the following. First,
an income approach that focuses on the income producing capability
of the acquired technology, and best represents the present value of
the future economic benefits expected to derive from them. Second,
a forecast of net cash flows that were expected to result from the
development effort, using projections prepared by Com21's
management. Third, a discount rate of approximately 25% was
computed after analysis of the risk of an investment in GADline and
considered the implied rate of the transaction and the weighted
average cost of capital.
BitCom, Inc.,
On July 6, 2000, pursuant to a Share Purchase Agreement dated June
22, 2000 by Com21, Inc., a Delaware corporation, and BitCom, Inc.
(BitCom), a Delaware company, with facilities in Maryland was merged
with and into Com21. BitCom is an engineering consulting and
development team specializing in the fields of wired and wireless
telecommunications, satellite, and networking engineering.
Com21 acquired all of the outstanding shares of BitCom for an
aggregate purchase price of $4,000,000 in cash. Additionally, Com21
assumed 100,000 options to purchase BitCom stock that will become
options to purchase 100,000 shares of Com21 common stock. Com21 also
issued 245,000 shares of common stock to former BitCom employees who
have executed Employment Agreements with Com21 that will be
restricted with regard to transfer and may be forfeited if such
employees do not reach certain milestones. An additional 50,000
shares of Com21's common stock may be issued to former BitCom
employees upon completion of predefined milestones through December
31, 2000. The fair value of the contingent milestones will be
measured upon achievement of the predefined milestones and will be
accounted for as stock compensation. Com21 also assumed certain
operating assets and liabilities of BitCom. The acquisition was
treated as a purchase for accounting purposes. The purchase price
was allocated to the assets acquired and liabilities assumed based
on their respective fair values. The approximate purchase price was
determined to be $5,678,000. The consolidation of the assets and
liabilities affected the Company's balance sheet at September 30,
2000, as depicted in the following tables (amounts in thousands):
<TABLE>
<S> <C>
Total purchase price:
Cash $ 4,000
Options assumed 1,478
Acquisition expenses 200
__________
$ 5,678
__________
Purchase price allocation:
Fair market value of net tangible assets
acquired of BitCom at June 30, 2000 $ 256
Intangible assets acquired:
Workforce-in-place 536
Goodwill 4,886
__________
$ 5,678
__________
</TABLE>
Com21 recorded the related amortization for the workforce-in-place
and goodwill during the quarter ended September 30, 2000.
Workforce-in-place and goodwill are amortized over their estimated
useful lives, generally five years.
Pro Forma Financial Results
The following selected unaudited pro forma combined results of
operations for the nine months ended September 30, 2000 and 1999 of
Com21, GADline and BitCom have been prepared assuming that the
acquisitions occurred at the beginning of the periods presented.
The following pro forma financial information is not necessarily
indicative of the results that would have occurred had the
acquisitions been completed at the beginning of the period indicated
nor is it indicative of future operating results (in thousands,
except per share data):
<TABLE>
Nine Months Ended
September 30,
2000 1999
__________ __________
<S> <C> <C>
Revenue $ 63,457 $ 28,199
Net loss (30,714) (4,736)
Net loss per share (1.25) (0.20)
Shares used in calculation of net loss per share 24,513 23,953
The pro forma results of operations give effect to certain
adjustments, including amortization of purchased intangibles,
goodwill and deferred stock compensation associated with the
acquisition. The $8.8 million charge for purchased in-process
research and development has been excluded from the pro forma
results, as it is a material non-recurring charge.
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
We are a leading global supplier of system solutions for the
broadband access market. Our 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, Euro-DOCSIS and Digital Video
Broadcasting (DVB) industry standards. 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.
Acquisitions
GADline
On July 3, 2000 we completed an acquisition to acquire GADline, Ltd.
(GADline), an Israeli company. GADline develops, manufactures and
markets innovative, fully managed networking solutions that deliver
high-speed data and telephony services over a hybrid fiber coaxial
infrastructure. In exchange for all outstanding shares of GADline's
capital stock we issued 2,281,750 shares of Com21 common stock and
assumed all outstanding GADline options by issuing options to
purchase approximately 232,000 shares of Com21 common stock. The
transaction was accounted for as a purchase. Of the approximate
$74.0 million in purchase price, $8.8 million was allocated to in-
process research and development, and expensed during the quarter
ended September 30, 2000 and the remaining $65.2 million was
allocated to goodwill and other intangibles and will be amortized
over the respective useful lives of 3 to 5 years. In addition,
350,000 shares of Com21 common stock may be issued to GADline
shareholders upon completion of predefined milestones if such
milestones are reached during the next two quarters. The fair value
of the contingent shares will be measured upon achievement of the
predefined milestones and will be accounted for as additional
purchase price. See Note 4 to the Financial Statements.
BitCom
On July 6, 2000 we completed an acquisition to acquire BitCom, Inc.
(BitCom), a Delaware company. BitCom is an engineering consulting
and development team specializing in the fields of wired and
wireless telecommunications, satellite, and networking engineering.
In exchange for all outstanding shares of BitCom's capital stock, we
paid $4 million in cash and assumed all outstanding BitCom options
by issuing options to purchase approximately 100,000 shares of Com21
common stock. This transaction was accounted for as a purchase.
The purchase price of approximately $5.7 million was allocated to
goodwill and workforce-in-place and will be amortized over the
useful lives of 5 years. In addition, we issued 245,000 shares of
common stock to former BitCom employees that may be forfeited if
such employees do not reach certain milestones, and may issue an
additional 50,000 shares of Com21's common stock to BitCom employees
upon completion of predefined milestones through December 31, 2000.
The fair value of the contingent milestone shares will be measured
upon achievement of the predefined milestones and will be accounted
for as stock compensation. See Note 4 to the Financial Statements.
Results of Operations
Total Revenues - Total revenues increased 140% from $25.3 million in
the third quarter of 1999 to $60.6 million in the third quarter of
2000, and increased 133% from $66.0 million for the first nine
months of 1999 to $153.6 million for the first nine months of 2000.
We experienced revenue growth in both cable modems and headend
products over the comparable quarter and nine month period in the
prior year. Unit sales of all our cable modem products increased
223% from the third quarter of 1999, as we experienced strong demand
for our DOCSIS and ATM cable modems. We anticipate continued growth
in demand associated with our cable modems, but revenue may be
constrained due to industry wide component shortages. We anticipate
these component shortages to ease somewhat during the remainder of
2000. Revenues associated with our headend products increased from
$4.3 million in the third quarter of 1999 to $5.2 million in the
third quarter of 2000 due to strong demand in the European markets.
Cable modem sales accounted for 89% of total revenue in the third
quarter of 2000 as compared to 82% of total revenue in the third
quarter of 1999. Cable modem sales accounted for 84% of total
revenue for the first nine months of 2000 as compared to 75% for the
first nine months of 1999. The average sales price of all cable
modems declined from the third quarter of 1999 to the third quarter
of 2000 due to planned price reductions to meet competitive pricing
pressures and product mix as we are selling more of our lower priced
DOCSIS modems. We anticipate that the average sales price of cable
modems will continue to decline moderately during the remainder of
2000. The average sales price of headend equipment also declined
from the third quarter of 1999 to the third quarter of 2000 due to
planned price reductions. We anticipate continued pricing pressure
on our headend equipment and declines in our average sales price of
headend products.
During the quarter ended September 30, 2000, international sales
accounted for 56% of total revenues, increasing from the 48%
experienced in the third quarter of 1999. During the nine months
ended September 30, 2000, international sales accounted for 62% of
total revenues, increasing from the 46% experienced in the first
nine months of 1999. The increase is due to strong demand in Europe
and Asia for both of our proprietary and DOCSIS cable modems.
Gross Margins - Gross margins decreased from 35% in the third
quarter of 1999 to 16% in the third quarter of 2000, and decreased
from 39% during the first nine months of 1999 to 24% during the
first nine months of 2000. The decrease in margins is primarily due
to the mix of product sold and the inclusion in cost of sales of
$3.5 million of amortization of intangibles and increased inventory
reserves associated with the acquisitions during the quarter.
Excluding the $3.5 million of amortization and reserves gross margin
would have been 22% in the third quarter of 2000. As noted above
cable modem sales accounted for 84% of total revenue during the
first nine months of 2000 as compared to 75% of total revenue during
the first nine months of 1999. Additionally, revenue from our
DOCSIS cable modems has become a more significant portion of our
total cable modem revenue. Cable modems have lower margins than our
headend products and our DOCSIS cable modems currently have lower
margins than our proprietary cable modems.
During the third quarter of 2000 we commenced shipments for revenue
of our CableLabs certified 1.0 DOCSIS modem which has been
significantly cost reduced. As this product becomes a greater
percent of total revenue we anticipate improvement in our gross
margins over time. During the fourth quarter of 2000 we anticipate
margin pressure to continue from increasing sales of our DOCSIS
cable modems.
Research and Development - Research and development expenses
increased 79% from $7.7 million in the third quarter of 1999 to
$13.9 million in the third quarter of 2000, and increased 51% from
$21.7 million during the first nine months of 1999 to $32.7 million
during the first nine months of 2000. The increase was attributable
to higher costs related primarily to increased personnel and project
related costs as well as the inclusion of approximately $678,000 of
amortization of intangibles associated with the acquisitions during
the quarter. The increase in personnel costs were a result of
expansion in our employee base through the expansion of our Ireland
research center, our acquisitions of GADLine and BitCom and the
increases in our Milpitas facility. The Ireland research center was
opened during the fourth quarter of 1999 and expanded significantly
during 2000 resulting in $1.3 million of research and development
expenses during the third quarter of 2000 and $4.0 million of
research and development expenses for the nine months ended
September 30, 2000. The acquisitions of GADLine and BitCom resulted
in $1.2 million of third quarter research and development expenses.
The increases in our personnel and project costs in Milpitas
resulted in a $3.0 million increase from the third quarter of 1999
to the third quarter of 2000 and a $5.1 million increase from the
first nine months of 1999 to the first nine months of 2000. We
expect these expenses to modestly increase in absolute dollars in
the future as we continue to invest in research and development in
our basic products and expand our product lines.
Sales and Marketing - Sales and marketing expenses increased 80%
from $4.1 million in the third quarter of 1999 to $7.4 million in
the third quarter of 2000, and increased 78% from $11.3 million
during the first nine months of 1999 to $20.1 million during the
first nine months of 2000. The increase was primarily due to higher
costs associated with increased personnel in sales and marketing
organizations necessary to support the expansion of our sales force
in both domestic and international areas. We increased personnel
through the acquisition of GADLine which resulted in an increase of
$0.8 million for third quarter. We also increased headcount in
Milpitas and experienced increased expenses due to higher
commissions and additional marketing programs resulting in a total
increase of $2.5 million from the third quarter of 1999 to the third
quarter of 2000 and a total increase of $8.0 million increase from
the first nine months of 1999 to the first nine months of 2000. 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 395% from $1.1 million in the third quarter of 1999 to
$5.2 million in the third quarter of 2000, and increased 223% from
$2.9 million during the first nine months of 1999 to $9.2 million
during the first nine months of 2000. The increase in both the
three and nine month periods is primarily due to the inclusion of
$2.5 million of amortization of intangibles associated with the
acquisitions during the quarter. Excluding the $2.5 million of
amortization general and administrative expenses would have
increased 157% from the third quarter of 1999 to the third quarter
of 2000 and 135% from the nine months ended September 30, 1999 to
the nine months ended September 30, 2000. The remaining increase is
due to increased headcount primarily related to the acquisitions as
well as increases at our headquarters to accommodate our growth. 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 and to
build out our infrastructure.
Total Other Income, Net - Total other income decreased 42% from $1.4
million in the third quarter of 1999 to $0.8 million in the third
quarter of 2000, and decreased from $3.7 million during the first
nine months of 1999 to $3.6 million during the first nine months of
2000. The decrease in the three month period was attributable to
earnings on lower cash balances available during the third quarter
of 2000. The decrease in the nine month period was attributable to
earnings on lower cash balances available partially offset by higher
interest rates during the period.
Liquidity and Capital Resources
At September 30, 2000, our cash and cash equivalents and total
investments were $68.6 million, compared to $106.0 million at
December 31, 1999, a decrease of $37.4 million. The decrease is
primarily a result of cash used in operations of $31.1 million, cash
used for purchases of property and equipment of $8.5 million and net
cash used in the acquisition of GADline and BitCom of $0.8 million.
Cash outflows from operations is due primarily to an increase in
accounts receivable, inventory, prepaid expenses and other assets of
$45.4 million and the net loss of $14.0 million after non-cash items
offset by an increase to accounts payable and accrued compensation
of $29.2 million. The net increase in inventory of $14.3 million
from December 31, 1999 to September 30, 2000 is due to inventory
acquired from GADline of $5.5 million as well as increased
investment in inventory for our cost reduced modem. The cash
outflow from financing activities of $0.9 million is primarily a
result of repayments of debt and lease obligations of $4.5 million
offset by proceeds from the exercise of stock options of $3.7
million. The cash outflow from operating activities, purchases of
property, and financing activities was offset by the gross
appreciation of investments of $3.4 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 and current debt obligations of
approximately $1,075,000, 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 associated with the acquisitions of GADline,
Inc. and BitCom, Inc., infrastructure and personnel. We intend to
establish sales offices and lease additional space, which will
require us to commit to additional lease obligations, purchase or
lease equipment and install leasehold improvements. We are
continuing to upgrade and invest in information technology which
will increase capital and software expenditures and consulting
costs.
Going forward, we may make cash investments or exchange Com21 stock
for investments in various companies to secure development resources
and/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 investments are
sufficient to meet anticipated cash requirements for the next twelve
months. However, any projections of future cash flows are subject to
substantial uncertainty. To provide additional working capital
liquidity, we have entered into discussions with various banks to
establish a working capital line of credit secured by receivables.
If current cash, marketable securities and cash that may be
generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt
securities. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders
and additional interest expense.
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.
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 of our control. Supply of
components, delays in getting new products, particularly our new
DOCSIS cost reduced modem, into high volume manufacturing,
manufacturing or testing constraints could result in delays in the
delivery of products and impact margins and revenues. Factors that
could cause our revenues to fluctuate include the following:
- competitive pricing pressures
- variations in the timing of orders and shipments of
our products;
- key component shortages or failures from our
suppliers in providing necessary materials and modems;
- variations in the size of orders by our customers;
- new product introductions by us or by our
competitors;
- delays in introducing standards based products that
are certified as meeting the specifications of various
approval organizations;
- general economic conditions and economic conditions
specific to the cable and electronic data transmission
industries.
- variations in capital spending budgets of cable
operators;
- delays in obtaining regulatory approval for
commercial deployment of cable modem systems; and
- the timing of upgrades of cable plants;
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 based on decisions to develop new products or the
deployment of resources on completed projects.
Total revenues for any future quarter are difficult to predict.
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:
- our ability to ramp up manufacturing for our cost
reduced DOCSIS modem
- the sales mix within a product group, especially
between proprietary and DOCSIS modems;
- the sales mix between our headend equipment and cable
modems;
- component prices we secure from our vendors;
- the average selling prices of our products;
- our continuing cost reduction efforts; and
- the volume of products manufactured.
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.
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.
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 technological 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.
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 development facilities
in Ireland and New York, and a customer service center in The
Netherlands as well completing the acquisitions of GADline in Israel
and BitCom in Maryland and are exploring setting up additional
centers in other locations.
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.
On July 3 and July 7, 2000, we acquired GADline and BitCom. The
process of integrating any acquired business into our business and
operations is risky and may create unforeseen operating difficulties
and expenditures. The areas in which we may face difficulties
include:
- 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;
- limits on our ability to successfully incorporate
acquired technology and rights into our service offerings
and sell the acquired products; and
- implementation of controls, procedures and policies
appropriate for a larger public group of companies that
prior to acquisition had been smaller, private companies.
We have very limited experience in managing the integration process.
Moreover, we may not be able to successfully overcome potential
problems encountered with these acquisitions or other potential
acquisitions. In addition, future 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.
In the past, we have experienced delays in shipments from our OEM
modem supplier and shortages of certain components.
Previously we have experienced delays in shipments from our OEM
modem supplier, a problem which appears to have been abated.
However, 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.
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 continue to reduce the costs of 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 continue to get our DOCSIS modems certified in a
timely manner by various standards bodies including CableLabs. If we
are unable to continue 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 the first
half of fiscal year 2001. To achieve and subsequently maintain
profitable operations, we must successfully design, develop, test,
manufacture, introduce, market and distribute our products on a
broad commercial basis and secure higher revenues, gross profits and
contain our operating expenses.
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.
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. 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 introduced a DVB
products, 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 produce our EuroDOCSIS modem to meet the 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.
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 may at some
point 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 then 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. We have started 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.
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 enhanced 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. 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 have
expanded operations in our existing international markets and intend
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 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.
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 third 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.
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%
from levels at September 30, 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 investments in a
marketable equity securities held as available-for-sale investments.
These investments are in the volatile high-technology industry
sector. A 50% adverse change in the equity price would result in an
approximate $2.8 million decrease in the fair value of the
investments in the marketable equity securities as of September 30,
2000.
Com21 has fixed rate debt of approximately $1.1 million as of
September 30, 2000, that have no interest rate risk. The fixed rate
on such obligations was approximately 11% during the third quarter
of 2000.
PART II: OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
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 with the SEC on Form 8-K/A on
September 18, 2000 to provide the details of the
acquisition of 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: November 2, 2000 By: /s/ David L. Robertson
________________________________
David L. Robertson
Chief Financial Officer
Vice President, Finance
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