Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
_ TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] for the transition period from ________ to _________
Commission file No. ________
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)
Securities registered under Section 12(b) of the Exchange Act
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by a checkmark whether the registrant (1) has filed all reports
required to be filed 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. Yes X No ____
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ____
At February 29, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $1,379,087,290,
based on the last trade price as reported by The Nasdaq National Market.
For purposes of this calculation, shares owned by officers, directors, and
10% stockholders known to the registrant have been excluded. Such
exclusion is not intended, nor shall it be deemed, to be an admission that
such persons are affiliates of the registrant.
At February 29, 2000, there were 21,816,460 shares of the registrant's
Common Stock, $0.001 par value, issued and outstanding.
Information required by Part III of this Form 10-K is incorporated therein
by reference from the Company's definitive Proxy Statement with respect to
its 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A within 120 days after December 31, 1999.
COM21, INC.
INDEX
PART I: Page
Item 1 Business 3
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6 Selected Consolidated Financial Data. 17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk 21
Item 8 Consolidated Financial Statements and Supplementary Data 22
Item 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 38
PART III:
Item 10 Directors and Executive Officers of the Registrant 38
Item 11 Executive Compensation 38
Item 12 Security Ownership of Certain Beneficial Owners
and Management 38
Item 13 Certain Relationships and Related Transactions 38
PART IV:
Item 14 Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K 38
Exhibit Index 39
Signatures 40
In addition to historical information, this Annual Report on Form 10-K 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 Annual Report. 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."
PART I
Item 1. BUSINESS
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. In 1999, we shipped approximately 360 headend controllers and more
than 280,000 cable modems for use in 271 locations worldwide. In the North
American market, we sell directly to cable operators such as AT&T BIS, Charter
Communications, Cox Communications, Prime Cable, and systems integrators such
as HSAnet. 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.
INDUSTRY BACKGROUND
Internet access devices are expected to continue their rapid growth. The
Internet has become a valuable communications tool for businesses and
consumers as it facilitates global, real-time interactions, and frees users
from the limitations of proprietary standards. The volume of data traffic
across communications networks has significantly increased in recent years,
due to the proliferation of network-based communications and electronic
commerce.
The amount of available content, and the number of users, on the Internet
is rapidly increasing. The International Data Corporation (IDC) estimates that
the number of World Wide Web pages grew from 18 million in 1995 to 829 million
in 1998, and is expected to increase to 7.7 billion by 2002. The number of Web
users in the U.S. is expected to increase from approximately 39 million in
1997 to 136 million in 2002. A substantial percentage of worldwide growth is
expected to come from Western Europe and Asia, forecasted to grow to
approximately 119 million users in 2002. Additionally, IDC estimates that the
number of devices accessing the Internet grew from 120 million 1998 to in
excess of 515 million by 2002.
In addition to the substantial increase in the sheer volume of Internet
users, business and consumer users are intensifying demand for higher-caliber
connections that can carry bandwidth-intensive information, such as data,
voice, and video. With the increasing importance of communications networks,
the demand for bandwidth-intensive information is also rising, so that
existing transmission speeds have become less tolerable and can negatively
affect business productivity.
Typically, the limiting factor in overall data transmission performance
is the last mile of the communications infrastructure between a service
provider and a subscriber, known as the "last mile" problem. Cable provides a
solution to this "last mile" problem, as cable is widely available, and cable
infrastructure currently provides the highest available transmission speed,
with peak data transmission speeds of 30 megabits per second and "always-on"
availability providing instant access. This has led to the rapid growth in the
deployment of Internet access over cable.
In addition to cable operators' data-over-cable services, cable operators
are now permitted to add telephony-over-cable to their body of services, due
to recent domestic and international regulatory changes. These changes will
allow cable operators to compete in the local telephone market.
THE COM21 STRATEGY
As part of its business strategy, Com21's objectives are to:
Leverage the Cable Modem Platform. We intend to offer a suite of
products that will extend our central cable modem platform. These products
will support a variety of service offerings, which will enable cable operators
to market service packages to different customer segments. Our products will
include a basic cable modem for Internet access, and modems that will offer a
combination of features, such as voice support, a range of security levels,
Web content filtering, and virtual private network (VPN) support. Future
products may include a cable modem that will service multi-dwelling units, and
residential gateways that will support information appliances, wired and
wireless, that will transport voice, data and video.
Provide Broadband Infrastructure Products and an Integrated, End-to-End
Solution. In time, cable operators will require an integrated software and
hardware platform, a solution that we currently provide. In addition, we will
provide solutions that can support the growing popularity of small node sizes,
demonstrated by the increasing deployment of optical fiber in residential
areas. We also want to fulfill the demand for broadband solutions that can
manage data, voice and video. At the Western Cable Show in December 1999, we
introduced headend equipment that can manage both voice and data traffic,
designed to meet the DOCSIS 1.1 standard. With our partner TdSoft, we are
introducing a voice gateway to the public switched telephone network, allowing
cable operators to use our ComUNITY access system to offer voice services.
Enhance Value to Cable Operators. Another core strategy is to provide product
features that enhance the value of cable operators' cable modem deployments
over the life of those investments. Cable operators assess the success of
investing in a cable modem system by considering not only the initial cost of
investing in cable modem equipment, but the service reliability, the overall
operating and maintenance expenses, and the service revenues that can be
generated. Com21's ComUNITY Access system is designed to enable cable
operators to increase revenues by offering up to 16 different cable operator-
defined transmission rates, at varying price points, to multiple markets.
Com21's DOXport 1010 CableLabs-certified DOCSIS cable modem allows an
operator to offer basic subscriber service while the DOXport 5020 Office
Cable Modem has additional networking capabilities to offer value-added
services to residential, telecommuting, and small office subscribers.
Leverage Technology Leadership. One of the factors of Com21's success has
been our ability to supply end-to-end broadband communications system with
features that support new, revenue generating opportunities for cable
operators, and networking advantages. Technological developments in
multi-service scheduling optimization, protocol simulation, and application
specific integrated circuit (commonly referred to as an ASIC) integration,
enable us to offer a scalable system to deliver tiered service levels, VPNs,
and low-latency voice and video applications. Moreover, Com21's internal
development of a network management system, and high performance,
cost-effective radio frequency transmitters/receivers and fast radio frequency
switching systems, lowers cable operators' cost of deploying and operating
Com21's equipment. Com21 focuses on the development of value-added features
for its products, such as its recently announced DOXcontroller DOCSIS 1.1 CMTS,
which has been built to provide scalable, high-throughput, low-latency
performance for the emerging DOCSIS 1.1 specification, enabling toll-quality
telephony-over-cable.
Offer Standards-Based Cable Modems and Solutions. As the North American
cable industry has embraced DOCSIS-compliant products, we have designed our
cable modems to meet these specifications. In December 1999, four Com21 cable
modems received DOCSIS 1.0 certification from CableLabs. Cable operators want
to benefit from the interoperability, and lower product costs, associated with
standardized parts. Com21 intends to retain its integral position in the
DOCSIS standard development.
Our strategy is to implement these standards and maintain our product
differentiation while decreasing costs. We have maintained our product
differentiation by providing a robust RF solution, a power-monitoring
capability that enables operators to identify problems with signals coming
from subscribers' cable modems to a cable plant, and an ASIC that improves
filtering and forwarding of downstream data. We are also using the standards-
based platform to offer higher value features such as our ComPORTr 5000 Series
of Office Cable Modems.
In Europe, the DVB standards are evolving. We currently distribute a
third party DVB product, and plan to enter this market in early 2001 with
additional DVB products. Additionally, as the EuroDOCSIS standard evolves, we
believe we are well positioned to leverage our North American DOCSIS
technology to the unique standards of the European market.
Be a Global Competitor. Our strategy is to be a worldwide supplier
because the market for cable modem systems is global. We have distribution
agreements with system integrators to service the markets in Europe, Japan,
Latin America, South America and the Far East. Our business was approximately
47% international in 1999, 52% in 1998 and 64% in 1997. In 1999, Com21
shipped approximately 360 headend controllers and more than 280,000 modems.
Com21 has shipped its systems for use in 122 locations in North America and
149 locations abroad. We have sales and support personnel in Japan, Hong Kong,
Latin America, Europe, Canada, and five domestic locations.
Integrate Toll-Quality Voice. An important market opportunity is the ability
to offer products that can carry voice traffic over cable. Com21 intends to
integrate toll-quality voice capability into its ComUNITY Access system and
its DOCSIS product line. We actively participate, and have been selected as a
vendor author, in CableLabs' PacketCable cable telephony initiative. Com21's
existing products have been designed with quality of service (QoS) capability
to support toll-quality voice transmission over a cable plant.
Increase Cost Efficiencies. While we intend to continue to seek premium
prices for our products, the cable modem market will be characterized by
declining prices. As a result, we seek to reduce product costs, particularly
with respect to end-user cable modems, with more efficient design, use of
standardized components, and our continuous search for better solutions.
PRODUCTS
Com21's current product offerings include the ComUNITY Access system, DOCSIS
standards-based cable modems, and the DVB standards-based cable data network
solution.
The ComUNITY Access system
The ATM-based ComUNITY Access system consists of the following:
ComCONTROLLER Headend Switches. The ComCONTROLLER controls the flow of
data communications between the ComPORT modems at a subscriber's site and
an external network, such as the Internet or a corporate network. The
ComCONTROLLER 2100 Main Chassis is designed with 11 slots and can
accommodate interface modules, such as ATM/OC-3, multiple Ethernet, or
Fast Ethernet module. The ComCONTROLLER 2000 is designed with 6 slots.
ComPORT Cable Modems. The ComPORT cable modem family sends and
receives data from subscriber's site over coaxial cable. The ComPORT
modem uses an Ethernet interface and connects to the PC's Ethernet card
or Ethernet hub. The ComPORT 2000 cable modem is a low-profile cable
modem that provides high-speed connectivity cost-effectively. The
ComPORT 1000 cable modem is equipped with an expansion slot. It allows
adding modules to enable applications such as virtual private networks
(VPN) and cable telephony. The ComPORT 5000 Series Office Cable Modem
is for the small office/home office market. The ComPORT 5000 is a multi-
functional, broadband access solution that integrates the cable modem, a
built-in firewall, hub, proxy server, as well as other features.
Network Management and Provisioning System (NMAPS). The Network
Management and Provisioning System is a network management software
package that facilitates subscriber provisioning, fault isolation,
network configuration, field inventory, auto-discovery and performance
for the ComUNITY Access system. The Network Management and Provisioning
System provides remote monitoring, remote modem software upgrade, and
graphical user interface.
Return Path Multiplexer (RPM). Com21's Return Path Multiplexer is a
high-speed, multiport analog switching device which allows up to eight
upstream paths to be connected to a single ComCONTROLLER radio frequency
receiver without electrically combining the accumulated noise from the
return paths.
Ingress Noise Blocker (INB). The Ingress Noise Blocker is an external
noise filter that is designed to eliminate excessive ingress noise from
entering to the headend system. The INB works with two-way, hybrid fiber
coax, and coaxial-only cable plants, and attaches to the cable tap
outside the subscriber's site.
DOCSIS Standards-Based Cable Modems
Com21 offers two DOCSIS standards-based cable modems:
DOXport 101. The DOXport 101 cable modem sends and receives data from
the subscriber's home or office over coaxial cable at 40Mbps downstream
and 5Mbps upstream. It is CableLabs-Certified to be interoperable with
any CableLabs-qualified CMTS (headend system). The DOXport 101 connects
to the PC through an Ethernet interface and provides 56-bit DES
encryption and supports 16 PCs.
DOXport 1010. The DOXport 1010 cable modem sends and receives data from
the subscriber's home or office over coaxial cable at up to 43Mbps
downstream and 10Mbps upstream. It is CableLabs-Certified to be
interoperable with any CableLabs-certified CMTS (headend system). The
DOXport 1010 connects to the PC through an Ethernet interface and
integrates a proprietary wire-speed packet filtering and forwarding ASIC.
The DOXport 1010 uses a proprietary noise-tolerant radio frequency
tuner. It provides power-level monitoring MIBs and a 56-bit DES
encryption and supports 16 PCs.
DVB Standards-Based Cable Data Network Solution
Com21's DVB solution includes the following products:
Interactive Network Adaptor (INA). The INA controls the flow of data
communications between the Broadband Cable Router located at a
subscriber's site and an external network, such as the Internet or a
corporate network. The INA complies with the DVB standards, and supports
EuroModem and Eurobox specifications. The INA is designed with multiple
expansion slots that can accommodate multiple Ethernet or Fast Ethernet
interfaces. The INA headend system supports both in-band and out-of-band
devices to enable cable modem and set-top-box services from the same
system.
Broadband Cable Router. The Broadband Cable Router sends and receives
data from the subscriber's home or office over the coaxial cable at up to
42Mbps downstream and 3Mbps upstream. The Broadband Cable Router EP1027
is compliant with DVB, EuroModem, Eurobox standards and supports QoS. It
is additionally equipped with IP routing capability.
Products Under Development
Com21 has announced and will be offering the following products in 2000:
ComUNITY VoX Telephony Solution. The ComUNITY VoX Telephony Solution is
a suite of products designed to enable cable telephony for cable
operators. This solution allows the ComUNITY Access System to provide
voice service through a European VSTN switch.
DOXcontroller Headend Switch. The DOXcontroller headend switch controls
the flow of data communications between the DOCSIS-compliant cable modems
at a subscriber's site and an external network, such as the Internet or a
corporate network. The DOXcontroller is designed to meet the DOCSIS 1.1
specifications.
CUSTOMERS
In 1997, revenues attributable to Philips, 3Com and Siemens accounted for
21%, 16% and 12% of total revenues, respectively. In 1998, revenues
attributable to TCI, Philips and Siemens accounted for 24%, 15% and 14% of
total revenues, respectively. In 1999, revenues attributable to AT&T BIS/TCI,
Philips and Siemens accounted for 20%, 18% and 12% of total revenues,
respectively.
MARKETS
Com21's products enable cable operators to serve three primary end-user
markets, each of which have widely varying speed, service and pricing
requirements.
Corporate Telecommuter and Remote Office Users. Corporate telecommuters
and remote office business users need highly available, high-speed access to
corporate intranets and corporate local area networks. These users also must
interconnect the local area networks among their various offices. Such offices
may be collocated, in a large campus, for example, or widely dispersed, in the
case of sales offices and telecommuters. Connections to a central telephone
PBX, rapid two-way transfer of large data files, desktop video conferencing,
security, and reliability exemplify the services that business users may
require. Users in this segment of subscribers are generally willing to pay a
premium for highly reliable, high-speed service with advanced features.
Small Office/Home Office (SOHO) Users. Small offices and home office
businesses increasingly find the Internet an efficient and cost-effective
means of communicating and processing transactions with customers and
suppliers. Com21 believes these businesses require medium-to-high speed
Internet access that is reliable and always available. SOHO users may have a
local area network to connect to cable modem services, and may require routing
in order to connect multiple terminals. These businesses may also require
desktop video conferencing capability, and connectivity with other businesses.
Because these requirements may be critical to running their business, there is
population of SOHO users who are willing to pay more for higher-quality,
secure, reliable service than are residential consumer Internet users.
Residential Consumer Internet Users. Residential consumer Internet users
generally only require a connection to their Internet service provider (ISP),
without the same level of security and reliability required by business and
SOHO users. Frequent users desire medium-to-high speed access to the Internet
for Web browsing and downloading of multimedia applications and files.
Occasional users require low-to-medium speed Internet access on a limited
basis for Web browsing, e-mail and on-line services. Frequent users are
generally willing to pay a slight premium for higher speed.
MANUFACTURING
Com21 tests and assembles its headend controller equipment in its
Milpitas, California facility. We outsource printed circuit board assemblies
on a turnkey basis and perform final integration and burn-in on-site. Com21
configures the headend equipment and the network management and provisioning
software prior to customer shipment.
Com21 outsources turnkey manufacturing of our cable modems to a contract
manufacturer in Monterrey, Mexico. With this contract manufacturer, Com21 has
developed and implemented a series of product test methodologies, quality
standards and process control parameters. During 2000, Com21 set up production
with a second contract manufacturer located in Malaysia. This move has enabled
us to ensure a continuous supply of modems, reducing susceptibility to plant
disruption problems. We believe that employing turnkey manufacturers enables
us to meet anticipated manufacturing needs and reduce the cost of product
procurement. Additionally, we employ an OEM manufacturer in Taiwan to supply
one of our cable modem products.
We believe our current manufacturing capabilities can accommodate our
requirements through the end of 2000. Warranty and repair support is performed
at our Milpitas facility. Com21 received ISO 9001 certification in December
1998.
MARKETING AND SALES
Marketing. Domestically, we have targeted our marketing efforts primarily
at cable operators. There is a limited number of cable operators in the
domestic cable industry. A cable operator's internal technical experts
typically influence purchasing decisions. The objective of our direct
marketing activities is to reach these technical experts, raise product
awareness and gain credibility for Com21's systems within the cable operator
community. Activities with local cable operators are jointly managed to
accelerate cable modem service penetration. We anticipate that some portion
of the DOCSIS cable modem market will begin to shift into consumer purchasing
channels in 2000, and have expanded marketing resources to build consumer
channels and build Com21 brand awareness.
Internationally, we have focused our marketing efforts on supporting our
systems integration partners' marketing programs. We plan to increase our
international marketing efforts in new markets in Asia, South America, and
Europe, as certain markets become deregulated and the Internet usage grows in
those regions.
Sales. We have a sales force of 23 people in 5 North American locations
and 7 locations abroad. Currently, Com21 sells its products in North America
primarily through direct sales channels to cable operators. Overseas, we sell
our products primarily to systems integrators, who resell our products to
cable operators. Com21's two largest systems integrators are Philips and
Siemens, both of whom have a strong presence in many markets. Com21's systems
integrators have established customer bases and relationships with cable
operators. These relationships allow Com21 to market and create brand
awareness within each region by selling locally into their respective markets,
and the local presence of the systems integrators bridges cultural and
communication gaps.
RESEARCH AND DEVELOPMENT
Com21 has focused its research and development efforts on increasing the
scalability and performance of its current products, reducing the cable
operator's cost of ownership, enhancing value-added services for subscribers,
reducing costs, and supporting emerging cable modem standards.
Our research and development expenditures were $13.5 million in 1997,
$19.9 million in 1998 and $29.8 million in 1999. Research and development
expenses primarily consist of salaries and related costs of employees and
consultants engaged in ongoing research, design and development of our
products and technology. As of December 31, 1999, Com21 had a team of 87
engineers with expertise in ASIC design and electronics, encryption, radio
frequency modulation and demodulation, digital electronics design, networking,
embedded software, and network management. During 1999, Com21 opened a
research center in Cork, Ireland. This team of engineers will be focused
primarily on research and development of products for the European market.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Com21 believes that successful long-term relationships with its customers
require a service organization committed to customer satisfaction. As of
December 31, 1999, Com21 had 32 technical support employees. Com21 makes
available to all new customers a five-day training course prior to receiving
and installing a system. Customer personnel are trained in the installation,
maintenance and operation of Com21 products.
In North America, Com21 provides direct support by telephone and at the
customers' locations. Com21 supplies support 24 hours a day, seven days a
week. Internationally, systems integrators provide first level support, and
Com21 provides second level support. Com21 maintains a customer call tracking
system that captures and monitors service activities. Com21 is able to
identify problems with a customer's ComUNITY Access system through a dialup
analog modem connection and a Web-based management interface.
During 1999, Com21 opened a customer service center in The Netherlands.
Through this facility we are able respond to and service our European customer
base in a timely manner.
COMPETITION
The markets for Com21's products are intensely competitive, rapidly
evolving, and subject to rapid technological change. The principal competitive
factors in these markets are likely to include product performance and
features, reliability, technical support and service, relationships with cable
operators and systems integrators, compliance with industry standards,
interoperability with the products of other suppliers, sales and distribution
capabilities, strength of brand name, price, long-term cost of ownership to
cable operators and general industry and economic conditions. Com21's current
and potential competitors include 3Com, Cisco Systems, Motorola, Nortel
Networks, RCA/Thompson, Samsung Electronics Company, Terayon Communication
Systems and Toshiba.
BACKLOG
Our backlog on February 29, 2000 was approximately $23.5 million compared
with an approximate backlog of $12.2 million at February 28, 1999. We only
include in our backlog orders that have been confirmed with a purchase order
for products to be shipped to customers with approved credit status. Because
delivery schedules are always subject to change, and orders are subject to
being cancelled, we do not believe that our backlog, as of any particular
date, is necessarily indicative of actual net sales for any future period.
INETELLECTUAL PROPERTY
Com21 relies on a combination of patent, copyright and trademark laws,
and on trade secrets, confidentiality provisions and other contractual
provisions to protect its proprietary rights. These measures afford only
limited protection. Com21 currently has eleven issued U.S. patents and several
pending patent applications.
EMPLOYEES
As of December 31, 1999, Com21 had a total of 223 full-time employees. Of
the total number of employees, 87 were in research and development, 54 in
marketing and technical support, 28 in operations, 23 in sales and 31 in
administration. Com21's employees are not represented by any collective
bargaining agreement with respect to their employment by Com21, and Com21 has
never experienced an organized work stoppage.
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 you investment. The
risks and uncertainties described below are not the only ones facing our
company.
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;
- - 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.
We have a limited backlog of orders, and total revenues for any future quarter
are difficult to predict. Supply, manufacturing or testing constraints could
result in delays in the delivery of our products. Any delay in the product
deployment schedule of one or more of our cable operator customers would
likely materially adversely affect our operating results for a particular
period.
A variety of factors affect our gross margin, including the following:
- - the sales mix within a product group, e.g. proprietary vs. DOCSIS modems;
- - component prices we secure from our vendors;
- - the average selling prices of our products;
- - the effectiveness of our cost reduction efforts;
- - 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 the introduction
of 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 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 DOCSIS cable modems. If the price declines are not offset by a decline
in the costs of manufacturing our cable modems or an increase in sales of
higher margin telephone and office cable modems, our gross margin will be
adversely affected.
Because of these factors, our operating results in one or more future periods
may not meet or exceed the expectations of securities analysts or investors.
In that event, the trading price of our common stock would likely decline.
WE MAY NOT BE ABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
OBTAIN CERTAIN COMPONENTS FROM, AND DEPEND ON, CERTAIN KEY SOLE SUPPLIERS.
Certain parts, components and equipment used in our products are obtained from
sole sources of supply. Our cable modems include sole-sourced chipsets,
filters and other materials. Additional sole-sourced components may be
incorporated into our equipment in the future.
We are currently experiencing shortages of certain key components for are
modems and headend equipment. In order to fulfill demand for our products we
have made purchases of these components on the spot market at a price that is
higher than we have experienced in the past. If we are unable to purchase
these key components at a high enough volume to meet demand, we will be unable
to produce enough cable modems and headend equipment to meet our production
and delivery schedules.
We do not have any long term supply contracts to ensure sources of supply. If
we fail to obtain components in sufficient quantities when required, our
business could be harmed. Our suppliers may enter into exclusive arrangements
with our competitors, stop selling their products or components to us at
commercially reasonable prices or refuse to sell their products or components
to us at any price. Our inability to obtain sufficient quantities of sole-
sourced components, or to develop alternative sources for components and/or
products would materially adversely affect our business. Additionally, we
currently have relationships with third parties to OEM certain cable modem
products. If these relationships are not maintained or are terminated and the
supply of these OEM products is halted, our business may be adversely
affected.
If any manufacturers or other sole source suppliers delay or halt production
of any of their components, our business, operating results and financial
condition could be materially adversely affected.
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 may set up additional centers
in remote 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 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 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.
Our ability to generate future revenues will depend on a number of factors,
many of which are beyond our control. These factors include the following:
- - the rate at which cable operators upgrade their cable plants;
- - our ability and the ability of cable operators to coordinate timely and
effective marketing campaigns with the availability of upgrades;
- - cable operators' success in marketing data-over-cable services and our
modems to subscribers;
- - cable operators' success in setting prices for data transmission
installation service; and
- - cable operators' success and timeliness in the installation of subscriber
site equipment.
Due to these factors, we cannot forecast with any degree of accuracy what our
revenues will be or how quickly cable operators will adopt our systems.
Therefore, we may not achieve, or be able to sustain, profitability.
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. 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. In North America, 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 are:
- - 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.
WE MUST REDUCE THE COST OF OUR CABLE MODEMS TO REMAIN COMPETITIVE.
Certain of our competitors' cable modems are priced lower than our cable
modems. As headend equipment becomes more widely deployed, the price of cable
modems and related equipment will continue to decline. In particular, the
adoption of industry standards, such as the DOCSIS standard 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. If we are unable to reduce the
manufacturing costs of our cable modems, our gross margin and operating
results would be harmed.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.
We rely on a combination of patent, copyright and trademark laws, and on trade
secrets and confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
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, including:
- - changes in regulatory requirements;
- - costs and risks of deploying systems in foreign countries;
- - licenses, tariffs and other trade barriers;
- - political and economic instability;
- - difficulties in staffing and managing foreign operations;
- - potentially adverse tax consequences;
- - difficulties in obtaining governmental approvals for products;
- - the burden of complying with a wide variety of complex foreign laws
and treaties; and
- - the possibility of difficult accounts receivable collections.
We are also subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products.
We cannot predict whether charges or restrictions upon the importation or
exportation of our products will be implemented by the U.S. or other
countries.
Future international activity may result in sales 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 MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS.
We continually evaluate strategic acquisitions of other businesses. If we were
to consummate an acquisition, we would be subject to a number of risks,
including:
- - difficulty in assimilating the acquired operations and personnel;
- - limits on our ability to retain the acquired subscribers;
- - 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 maintain uniform standards, controls,
procedures, and policies.
We may not be able to successfully overcome problems encountered with
potential acquisitions. In addition, an acquisition could materially adversely
affect our operating results by diluting our stockholders' equity, causing us
to incur additional debt, or requiring us to amortize acquisition expenses and
acquired assets.
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 fiscal 1999. 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 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-K 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-K 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-K. 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-K. 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-K or to reflect the occurrence of unanticipated
events.
Item 2. PROPERTIES
Com21 leases approximately 71,000 square feet of administrative, research
and development, and manufacturing facilities in Milpitas, California and is
currently evaluating the need for additional space as we expect to see
continued headcount growth in 2000. We believe that future growth can be
accommodated by obtaining the necessary additional space. Com21 also leases
three sales offices, in Denver, Colorado, Atlanta, Georgia, and Rotterdam, The
Netherlands.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "CMTO".
The following table sets forth the high and low bid quotations of the
Company's common stock for the periods indicated as reported by The Nasdaq
National Market or NASD electronic bulletin board. Prices shown in the table
represent inter-dealer quotations, without adjustment for retail markup,
markdown, or commission, and do not necessarily represent actual transactions.
1999 High Low
-------------- --------- ---------
First quarter $29.94 $20.50
Second quarter $35.50 $15.13
Third quarter $20.25 $12.38
Fourth quarter $29.00 $11.69
1998 High Low
-------------- --------- ---------
Second quarter
(Beginning May 22, 1998) $23.75 $12.87
Third quarter $24.87 $ 8.37
Fourth quarter $22.75 $11.50
Com21 has never declared, or paid, any cash dividends on its Common Stock.
Item 6. CONSOLIDATED SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes to
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Annual Report
on Form 10-K. The consolidated statement of operations data for each of the
years in the three-year period ended December 31, 1999, and the consolidated
balance sheet data at December 31, 1998 and 1999, are derived from
consolidated financial statements which are included in this Form 10-K. The
historical results are not necessarily indicative of the operating results to
be expected in the future. (Amounts in thousands)
Years Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Consolidated Statement of
Operations Data:
Total revenues $ - $ 1,000 $ 15,649 $ 48,114 $ 95,743
Cost of total revenues - - 8,372 29,573 60,918
-------- -------- -------- -------- --------
Gross profit - 1,000 7,277 18,541 34,825
-------- -------- -------- -------- --------
Operating expenses:
Research and development 5,233 12,395 13,481 19,936 29,821
Sales and marketing 770 1,970 5,277 10,273 16,250
General and administrative 919 1,548 1,782 3,871 4,120
-------- -------- -------- -------- --------
Total operating expenses 6,922 15,913 20,540 34,080 50,191
Loss from operations (6,922) (14,913) (13,263) (15,539) (15,366)
Total other income, net 257 447 229 2,190 5,104
-------- -------- -------- -------- --------
Loss before income taxes (6,665) (14,466) (13,034) (13,349) (10,262)
Income taxes 1 5 21 14 55
-------- -------- -------- -------- --------
Net loss $ (6,666) $(14,471) $(13,055) $(13,363) $(10,317)
======== ======== ======== ======== ========
Net loss per share, basic
and diluted $ (3.53) $ (7.64) $ (6.15) $ (1.10) $ (0.49)
======== ======== ======== ======== ========
Shares used in computation,
basic and diluted 1,887 1,894 2,124 12,150 20,932
======== ======== ======== ======== ========
December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents
and short-term investments $ 3,273 $ 12,427 $ 17,950 $ 65,744 $106,023
Working capital 2,328 9,097 19,523 68,084 112,233
Total assets 4,606 17,036 31,573 82,948 141,166
Long-term obligations 275 1,292 1,508 936 345
Total stockholders' equity 3,288 12,056 23,283 73,366 120,078
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Com21's
consolidated financial statements and notes to consolidated financial
statements. 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, including those described in "Risk Factors" and
elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Total Revenues. Total revenues increased by 99% to $95.7 million in 1999
as compared to $48.1 million in 1998. 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 262% from 1998, as we experienced strong
demand for our ATM and DOCSIS cable modems. Revenues associated with our
headend products and network management software remained consistent with the
prior year as we continued to expand our presence in North America, Europe,
Asia and Latin America. Cable modem sales accounted for 78% of total revenue
in 1999 as compared to 56% of total revenue in 1998. The average sales price
of all cable modems declined during 1999 as expected. Our prices decreased
due to planned price reductions to meet pricing pressures from competitors
and the introduction of our lower priced DOCSIS products. We anticipate that
the average sales price of modems will continue to decline during 2000. The
average sales price of our headend equipment also declined during 1999 due to
planned price reductions and mix of product sold. We anticipate continued
pricing pressure on our headend equipment and declines in our average sales
price of headend products.
Total revenues increased by 207% to $48.1 million in 1998 as compared to
$15.6 million in 1997. Our 1998 revenue growth was principally due to growth
in cable modem and headend equipment revenue. We began product shipments
during April 1997 and the volume of cable modems and headend product
shipments increased significantly during 1998, our first full year of product
revenue. Cable modem sales accounted for 56% of total revenue in 1998 as
compared to 32% of total revenue in 1997. The average sales price of our
cable modems declined during 1998 as expected. Our prices decreased
primarily due to increased price competition. The average sales price of our
headend equipment increased moderately during 1998 primarily due to the mix
of product sold.
Gross Margins. Gross margins decreased to 36% in 1999 from 39% in 1998. The
decrease in margins is due primarily to the following:
During the fourth quarter of 1998, we recognized $1.0
million from a one-time recognition of deferred revenue
resulting from the expiration of a licensing agreement
which led to a corresponding increase of $1.0 million to
our gross margin for the period. During 1999, we had no
such one-time increases to our revenues or gross margin.
As noted above, the product mix shifted from 1998 to 1999,
becoming more heavily weighted toward cable modems. Cable
modems have lower margins than our other products. This
shift toward cable modems was partially offset by an
increase to our cable modem margins from 1998 to 1999, as
our cost reduction programs outpaced the declines in our
average sales prices.
Gross margins decreased to 39% in 1998 from 47% in 1997. The decrease in gross
margin in 1998 was primarily attributable to an increase in sales of cable
modems as a percentage of total product sales and a shift away from our higher
margin software products, offset in part by the non-recurring revenue of $1.0
million of deferred revenue resulting from the expiration of a licensing
agreement at December 31, 1998.
During 2000 we anticipate continued margin pressure from the following:
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
percentage will decline. We do not anticipate making
significant cost reductions to our DOCSIS modems until the
second half of 2000.
Competitive pricing offered by an increasing number of
cable modem suppliers entering the market. As the
industry continues to move toward standardization of
technology we anticipate increased pricing pressure.
Research and Development. Research and development expenses increased 50%
to $29.8 million in 1999 from $19.9 million in 1998. The increase in 1999 is
primarily due to increased consulting and personnel related expenses related
to product development. During 2000 we anticipate that research and
development expenses will increase in absolute dollars as we continue
investing in our product development activities.
Research and development expenses increased 48% to $19.9 million in 1998 from
$13.5 million in 1997 as a result of increased personnel in our research and
development organization associated with product development.
Sales and Marketing. Sales and marketing expenses increased 58% to $16.3
million in 1999 from $10.3 million in 1998. The increase in 1999 is primarily
due to higher costs associated with increased personnel in sales and marketing
organizations. We increased sales personnel internationally strengthening our
sales presence in Europe, Asia and Latin America, as well as domestically. We
also increased our customer service personnel to support the growth of our
installed base of equipment and help manage our growing number of customers.
We added personnel to our marketing department as we expanded our marketing
programs both domestically and internationally. During 2000, we expect sales
and marketing expenses to increase in absolute dollars as we continue to
increase our international sales presence and develop additional marketing
programs and product channels for our DOCSIS and DVB products.
Sales and marketing expenses increased 95% to $10.3 million in 1998 from $5.3
million in 1997. The increase in 1998 is primarily due to higher costs
associated with increased personnel in sales and marketing organizations. As
1998 was the first full year of product sales, we experienced increased
selling efforts including travel expenses, trade shows, print advertising,
public relations and promotional costs.
General and Administrative. General and administrative expenses increased
6% to $4.1 million in 1999 from $3.9 million in 1998. The increase is
primarily attributable to increased personnel in our finance and
administrative organization. This was offset by a decline in our legal fees
associated with patent litigation which was settled in January 1999. We
expect that our general and administrative expenses will continue to increase
in absolute dollars to support the activities of our growing company.
General and administrative expenses increased 117% to $3.9 million in 1998
from $1.8 million in 1997. The increase is primarily attributable to
increased personnel in our finance and administrative organization as well as
increased legal fees associated with patent litigation which was settled in
January 1999 and increased professional fees associated with operation as a
public company.
Total Other Income, Net. Total other income, net increased to $5.1
million in 1999 from $2.2 million in 1998. The increase was attributable to
earnings on higher average cash and investment balances during 1999 resulting
from the net cash received of $62.8 million from the initial public offering
of common stock in May 1998 and the net cash received of $54.3 million from
the secondary offering of common stock in February 1999.
Total other income, net increased to $2.2 million in 1998 from $229,000 in
1997. The increase was attributable to earnings on higher average cash and
investment balances available during 1998, resulting from the net cash
received of $62.8 million from the initial public offering of common stock in
May 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our cash, cash equivalents and short-term
investments were $106.0 million, compared to $65.7 million at December 31,
1998, an increase of $40.3 million. The increase is primarily a result of
cash generated from financing activities of $55.6 million largely resulting
from $56.8 million in net proceeds received from the public offering of
common stock in February 1999 and the exercise of stock options. These cash
inflows were partially offset by cash outflows from operating activities of
$11.2 million and cash used for investing in property and equipment of $5.7
million as well as net investment purchases of $29.2 million. The cash
outflows from operating activities were primarily due to an increase in
accounts receivable of $14.4 million and the $10.3 million net loss for the
year offset by an increase to accounts payable of $8.8 million and an
increase to accrued compensation and other current liabilities of $3.6
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.
Net cash used in operating activities in 1998 was $11.1 million and resulted
primarily from a net loss of $13.4 million and the increase of $2.6 million in
inventories, offset in part by a total increase of $2.7 million in accounts
payable, accrued compensation and other current liabilities and $3.5 million
in depreciation and amortization expenses. Cash used in investing activities
in 1998 of $61.6 million consisted of $3.7 million in capital expenditures
primarily to support product development and manufacturing activities and net
purchases of investments of $57.9 million. Cash flows from financing
activities in 1998 consisted primarily of net proceeds of $62.8 million from
the issuance of common stock in our initial public offering and $648,000 from
the sale of common stock under our 1998 Employee Stock Purchase Plan and upon
exercise of stock options.
Net cash used in operating activities in 1997 was $16.1 million and resulted
primarily from a net loss of $13.1 million and the increase of $5.0 million
and $2.6 million in total accounts receivable and inventories, respectively,
offset in part by a total increase of $2.4 million in accounts payable,
accrued compensation and other current liabilities and $2.2 million in
depreciation and amortization expenses. Cash used in investing activities in
1997 consisted of $2.1 million in capital expenditures primarily to support
product development and manufacturing activities. Cash flows from financing
activities in 1997 consisted primarily of net proceeds of $23.7 million from
the issuance of Series E Preferred Stock and Series G Preferred Stock and
$530,000 from the sale of common stock upon exercise of stock options.
Other than capital and operating lease commitments, we have no material
commitments for capital expenditures. However, we anticipate an increase in
capital expenditures and lease commitments consistent with anticipated growth
in operations, infrastructure and personnel. We intend to establish
additional sales, customer service and research offices and lease additional
space, which will require us to commit to additional lease obligations,
purchase equipment and install leasehold improvements. We also intend to
upgrade and invest in information technology that will increase capital
expenditures.
In future periods, Com21 anticipates significant increases in working capital
on a period-to-period basis primarily as a result of planned increased
product sales resulting in higher levels of inventory. We contract for the
manufacture of cable modems and integrated circuit boards on a turnkey basis.
We have a manufacturing agreement with Celestica for the manufacture of
certain of our products. Unless terminated by the parties, the agreement will
extend for one year periods on December 31 of each year. We have no long-term
contracts or arrangements with any of our manufacturers that guarantee the
availability of product, the continuation of particular payment terms or the
extension of credit limits. Our future success will depend, in significant
part, on our ability to manufacture, or have others manufacture, our products
successfully, cost- effectively and in volumes sufficient to meet customer
demand. Our dependence upon third party manufacturers involves a number of
risks. See "Risk Factors -- 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".
Going forward, we may make cash investments or exchange Com21 stock for
investments in various companies to secure development resources or access to
various product lines. We may 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.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, (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
beginning in the first quarter of fiscal 2001. Management believes that this
statement will not have a significant impact on our financial position,
results of operations or cash flows.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Com21 maintains a short-term 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 December 31, 1998 and
1999, the fair value of the portfolio would decline by an immaterial amount.
We generally have the ability to hold our fixed income investments until
maturity and therefore we would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our securities portfolio.
Com21 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
$586,000 decrease in the fair value of the investment in the marketable equity
security as of December 31, 1999 (no such marketable equity security was held
as of December 31, 1998).
Com21 also has fixed rate debt obligations of approximately $2.1 million
and $883,000 at December 31, 1998 and 1999, respectively, that have no
interest rate risk. The fixed rates on such obligations ranged from 7% to 17%
in 1998 and was 13% in 1999 and mature on various dates through 2002.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Consolidated Financial Statements
Page
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 1998 and 1999 24
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 1997, 1998 and 1999 25
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1998 and 1999 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 27
Notes to Consolidated Financial Statements 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Com21, Inc.:
We have audited the accompanying consolidated balance sheets of Com21, Inc. as
of December 31, 1998 and 1999, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Com21, Inc. as of December 31,
1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 21, 2000
Com21, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
December 31,
------------------
1998 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,135 $ 16,499
Short-term investments 58,609 89,524
Accounts receivable:
Trade (net of allowances of $908 and $1,161 in 1998
and 1999, respectively) 3,190 14,423
Related parties 1,644 4,784
Inventories 5,282 4,518
Prepaid expenses and other 586 2,924
-------- --------
Total current assets 76,446 132,672
Property and Equipment - Net 6,247 8,198
Other Assets 255 296
-------- --------
Total Assets $ 82,948 $141,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,033 $ 12,870
Accrued compensation and related benefits 1,739 3,732
Deferred revenue 238 317
Other current liabilities 1,232 2,982
Current capital lease and debt obligations 1,120 538
-------- --------
Total current liabilities 8,362 20,439
Deferred Rent 284 304
Capital Lease Obligations 936 345
-------- --------
Total liabilities 9,582 21,088
Commitments and Contingencies (Note 6) -------- --------
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized and undesignated; none issued and outstanding - -
Common stock, $0.001 par value; 40,000,000 shares
authorized; shares issued and outstanding: 1998,
18,685,560; 1999, 21,619,172 19 22
Additional paid-in capital 122,131 179,138
Deferred stock compensation (82) (230)
Accumulated deficit (48,699) (59,016)
Accumulated other comprehensive income (loss) (3) 164
-------- --------
Total Stockholders' Equity 73,366 120,078
-------- --------
Total Liabilities and Stockholders' Equity $ 82,948 $141,166
======== ========
See Notes to Consolidated Financial Statements.
Com21, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Product ($4,014, $6,637 and $19,402 in 1997, 1998
and 1999, respectively, from related parties) $ 15,142 $ 47,121 $ 95,743
License fees - related party (Note 10) 507 993 -
-------- -------- --------
Total revenues 15,649 48,114 95,743
Cost of Product Revenues ($2,024, $4,113 and
$11,767 in 1997, 1998 and 1999, respectively,
for related parties) 8,372 29,573 60,918
-------- -------- --------
Gross Profit 7,277 18,541 34,825
-------- -------- --------
Operating Expenses:
Research and development 13,481 19,936 29,821
Sales and marketing 5,277 10,273 16,250
General and administrative 1,782 3,871 4,120
-------- -------- --------
Total operating expenses 20,540 34,080 50,191
-------- -------- --------
Loss From Operations (13,263) (15,539) (15,366)
-------- -------- --------
Other Income (Expense):
Interest income 679 2,535 5,261
Interest expense (396) (318) (164)
Other income (expense) - net (54) (27) 7
-------- -------- --------
Total other income, net 229 2,190 5,104
-------- -------- --------
Loss Before Income Taxes (13,034) (13,349) (10,262)
Income Taxes 21 14 55
-------- -------- --------
Net Loss (13,055) (13,363) (10,317)
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on
available-for-sale investments - (3) 167
-------- -------- --------
Comprehensive Loss $(13,055) $(13,366) $(10,150)
======== ======== ========
Net Loss Per Share, Basic and Diluted $ (6.15) $ (1.10) $ (0.49)
======== ======== ========
Shares Used in Computation, Basic and Diluted 2,124 12,150 20,932
======== ======== ========
See Notes to Consolidated Financial Statements.
Com21, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated
Convertible Deferred Other Comp- Total
Preferred Stock Common Stock Additional Stock Accumu- rehensive Stock-
---------------- ----------------- Paid-in Compen- lated Income holders'
Shares Amount Shares Amount Capital sation Deficit (Loss) Equity
--------- ------ ---------- ------ -------- -------- --------- --------- ---------
Balances, January 1, 1997 6,940,571 $ 7 1,998,097 $ 2 $ 34,328 $ - $(22,281) $ - $ 12,056
Exercise of stock options - - 774,042 1 529 - - - 530
Exercise of Series E preferred warrants 361,908 - - - 1,629 - - - 1,629
Issuance of Series F preferred warrants - - - - 72 - - - 72
Sale of Series G convertible preferred
stock (net of issuance costs of $1,069) 2,655,125 3 - - 22,028 - - - 22,031
Deferred stock compensation - - - - 136 (136) - - -
Amortization of deferred stock compensation - - - - - 20 - - 20
Net loss - - - - - - (13,055) - (13,055)
--------- ------ ---------- ------ -------- -------- --------- --------- ---------
Balances, December 31, 1997 9,957,604 10 2,772,139 3 58,722 (116) (35,336) - 23,283
Exercise of stock options - - 222,187 - 236 - - - 236
Issuance of common stock (net of issuance
costs of $6,209) - - 5,750,000 6 62,785 - - - 62,791
Sale of stock under employee stock
purchase plan - - 40,403 - 412 - - - 412
Conversion of preferred stock (9,957,604) (10) 9,957,604 10 - - - - -
Repurchase of shares - - (56,773) - (24) - - - (24)
Amortization of deferred stock compensation - - - - - 34 - - 34
Unrealized loss on available-for-sale
investments - - - - - - - (3) (3)
Net loss - - - - - - (13,363) - (13,363)
--------- ------ ---------- ------ -------- -------- --------- --------- ---------
Balances, December 31, 1998 - - 18,685,560 19 122,131 (82) (48,699) (3) 73,366
Exercise of stock options - - 356,793 - 1,365 - - - 1,365
Exercise of common stock warrants - - 32,844 - 54 - - - 54
Issuance of common stock (net of issuance
costs of $3,950) - - 2,480,000 3 54,327 - - - 54,330
Sale of stock under employee stock
purchase plan - - 97,908 - 1,025 - - - 1,025
Repurchase of shares - - (33,933) - (31) - - - (31)
Deferred stock compensation - - - - 193 (193) - - -
Issuance of nonemployee stock options
for services - - - - 74 - - - 74
Amortization of deferred stock compensation - - - - - 45 - - 45
Unrealized gain on available-for-sale
investments - - - - - - - 167 167
Net loss - - - - - - (10,317) - (10,317)
--------- ------ ---------- ------ -------- -------- --------- --------- ---------
Balances, December 31, 1999 - $ - 21,619,172 $ 22 $179,138 $ (230) $(59,016) $ 164 $120,078
========= ====== ========== ====== ======== ======== ========= ========= =========
See Notes to Consolidated Financial Statements
Com21, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
Cash Flows From Operating Activities:
Net loss $(13,055) $(13,363) $(10,317)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash interest expense 72 - -
Nonemployee stock options issued for services - - 74
Depreciation and amortization 2,163 3,517 3,829
Deferred rent 169 38 20
Gain on sales and maturities of investments - (755) (1,408)
Changes in operating assets and liabilities:
Accounts receivable - trade (3,984) 794 (11,233)
Accounts receivable - related parties (1,052) (592) (3,140)
Inventories (2,643) (2,639) 764
Prepaid expenses and other (149) 59 (2,338)
Other assets (98) (52) (41)
Accounts payable 1,612 1,201 8,837
Accrued compensation and related benefits 428 730 1,993
Deferred revenue 4 (766) 79
Other current liabilities 388 751 1,641
-------- -------- --------
Net Cash Used in Operating Activities (16,145) (11,077) (11,240)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (2,085) (3,744) (5,735)
Purchases of investments - (101,886) (160,996)
Proceeds from sales and maturities of investments - 44,029 131,765
-------- -------- --------
Net Cash Used in Investing Activities (2,085) (61,601) (34,966)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 530 63,415 56,774
Repurchases of common stock - - (31)
Proceeds from issuance of preferred stock 23,660 - -
Proceeds from issuance of debt obligations 2,440 - -
Repayments under capital lease obligations (607) (1,033) (937)
Repayments on debt obligations (2,270) (519) (236)
-------- -------- --------
Net Cash Provided by Financing Activities 23,753 61,863 55,570
-------- -------- --------
Net Change in Cash and Cash Equivalents 5,523 (10,815) 9,364
Cash and Cash Equivalents, Beginning of year 12,427 17,950 7,135
-------- -------- --------
Cash and Cash Equivalents, End of year $ 17,950 $ 7,135 $ 16,499
======== ======== ========
Noncash Investing and Financing Activities:
Property and equipment acquired under
capital leases $ 1,146 $ 675 $ -
======== ======== ========
Deferred stock compensation $ 136 $ - $ 193
======== ======== ========
Issuance of preferred stock warrants in
connection with debt obligations $ 72 $ - $ -
======== ======== ========
Conversion of preferred stock to common stock $ - $ 10 $ -
======== ======== ========
Unrealized gain/(loss) on available-for-sale
investments $ - $ (3) $ 276
======== ======== ========
Issuance of debt obligation for other current
assets $ - $ 215 $ -
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 14 $ 14 $ 55
======== ======== ========
Cash paid for interest $ 324 $ 335 $ 155
======== ======== ========
See Notes to Consolidated Financial Statements.
Com21, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1998 and 1999
1. Business and Significant Accounting Policies
Business - Com21, Inc. (the Company) was incorporated in Delaware in June 1992.
The Company is a global supplier of system solutions for the broadband access
market. The Company's DOCSIS and ATM-based products enable cable operators and
service providers to have the ability to deliver high-speed, cost-effective
Internet applications to corporate telecommuters, small businesses, home offices
and residential users. During 1997, the Company exited the development stage
for financial reporting purposes as it completed its initial product development
activities and commenced shipping product.
Basis of Presentation - The consolidated financial statements include the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Financial Statements Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to, the
accounting for potentially uncollectable accounts receivable, lower of cost or
market inventory valuation reserves, warranty reserves, sales return reserves
and a valuation allowance for deferred tax assets. Actual results could differ
from those estimates.
Cash Equivalents - The Company considers all highly liquid debt instruments
with maturities at the date of purchase of three months or less to be cash
equivalents.
Short-Term Investments - Short-term investments are stated at fair value based
on quoted market prices obtained from an independent broker. Short-term
investments are classified as available-for-sale based on the Company's
intended use. The difference between amortized cost and fair value representing
unrealized holding gains or losses are recorded as a component of stockholders'
equity as accumulated other comprehensive income (loss). Gains and losses on
sales of investments are determined on a specific identification basis.
Inventories - Inventories consist of networking equipment, modems and
sub-assemblies stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally three to seven years. Amortization of leasehold
improvements and assets recorded under capital lease agreements are computed
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the related assets.
Long-Lived Assets - The Company evaluates long-lived assets for impairment using
a discounted cash flows method whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Income Taxes - The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes,
and operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely than not to be realized.
Certain Significant Risks and Uncertainties - Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, short-term investments and accounts
receivable. Cash and cash equivalents are held primarily with three financial
institutions and consist primarily of commercial paper and cash in bank
accounts. The Company's investment policy is to invest in instruments with
minimum credit ratings of A-1/P-1 (Short-Term) or AA (Long-Term). The Company
sells its products primarily to cable operators in North America and primarily
to systems integrators in Europe, Asia and South/Central America, and generally
does not require its customers to provide collateral or other security to
support accounts receivable. To reduce credit risk, management performs ongoing
credit evaluations of its customers' financial condition. The Company maintains
allowances for estimated potential bad debt losses. The recorded carrying amount
of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and debt obligations approximate fair value.
The Company's customer base is highly concentrated. A relatively small number
of customers have accounted for a significant portion of the Company's revenues
and the Company expects that this trend will continue for the forseeable future.
For the years ended December 31, 1997, 1998 and 1999, the top five customers
comprised 65%, 66% and 64%, respectively, of the Company's total revenues.
The Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company's future financial position, results of operations or cash flows:
advances and trends in new technologies and industry standards; competitive
pressures in the form of new products or price reductions on current products;
changes in product mix; changes in the overall demand for products offered by
the Company; changes in third-party manufacturers; changes in key suppliers;
changes in certain strategic relationships or customer relationships;
litigation or claims against the Company based on intellectual property, patent,
product, regulatory or other factors; risk associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components; and the Company's ability to attract and
retain employees necessary to support its growth.
Revenue Recognition - The Company recognizes revenue when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed and determinable and collectability is reasonably assured.
For product revenue, this generally occurs at the time of shipment. Estimated
sales returns and warranty costs, based on historical experience by product, are
recorded at the time the product revenue is recognized.
The Company accounts for revenue on software transactions under the principles
of Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended,
which requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
the elements. Revenue for software licenses is recognized upon delivery provided
that collection is probable. Software support and maintenance revenue are
deferred and amortized over the maintenance period on a straight-line basis.
Software Development Costs - Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and accordingly, no costs have been capitalized.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." The Company accounts for stock-based awards to non-employees in
accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation".
Comprehensive Loss - In accordance with SFAS No. 130, "Reporting Comprehensive
Income," the Company reports by major components and as a single total, the
change in net assets during the period from nonowner sources in a consolidated
statement of comprehensive loss which has been included with the consolidated
statements of operations.
Net Loss Per Share - Basic earnings per share (EPS) excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants to
purchase convertible preferred stock and common stock options and warrants
using the treasury stock method) were exercised or converted into common stock.
Potential common shares in the diluted EPS computation are excluded in net loss
periods as their effect would be antidilutive.
New Accounting Standard - 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. Management believes that this statement will
not have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.
2. Short-Term Investments
The amortized cost and the fair value of available-for-sale securities are
presented in the tables below:
December 31, 1998
-------------------------------------
(in thousands)
Unrealized
Amortized Holding Gains Fair
Cost and (Losses) Value
----------- ----------- -----------
Corporate obligations $ 30,803 $ 7 $ 30,810
U.S. Government obligations 27,809 (10) 27,799
----------- ----------- -----------
Total $ 58,612 $ (3) $ 58,609
=========== =========== ===========
December 31, 1999
-------------------------------------
(in thousands)
Unrealized
Amortized Holding Gains Fair
Cost and (Losses) Value
----------- ----------- -----------
Corporate obligations $ 30,466 $ (51) $ 30,415
U.S. Government obligations 52,955 (37) 52,918
Municipal obligations 5,024 (5) 5,019
Corporate equity securities 803 369 1,172
----------- ----------- -----------
Total $ 89,248 $ 276 $ 89,524
=========== =========== ===========
The contractual maturities of the Company's investments in debt securities at
December 31, 1999 was as follows:
Within One One to Five
Year Years
----------- -----------
(In thousands)
Corporate obligations $ 29,374 $ 1,041
U.S. Government obligations 52,918 -
Municipal obligations 5,019 -
----------- -----------
Total $ 87,311 $ 1,041
=========== ===========
3. Inventories
Inventories consist of:
December 31,
------------------------
1998 1999
----------- -----------
(In thousands)
Raw materials and sub-assemblies $ 142 $ 917
Work-in-process 1,361 326
Finished goods 3,779 3,275
----------- -----------
Total $ 5,282 $ 4,518
=========== ===========
4. Property and Equipment
Property and equipment consists of:
December 31,
------------------------
1998 1999
----------- -----------
(In thousands)
Equipment under capital lease $ 3,711 $ 3,711
Computer equipment and software 4,604 6,855
Production equipment 3,905 6,515
Leasehold improvements 393 671
Furniture and fixtures 302 815
----------- -----------
12,915 18,567
Accumulated depreciation and amortization (6,668) (10,369)
----------- -----------
$ 6,247 $ 8,198
=========== ===========
Accumulated amortization on capital leases as of December 31, 1998 and 1999 was
approximately $2,265,000 and $3,031,000, respectively.
5. Debt Obligations
Debt obligations consist of the following:
December 31,
------------------------
1998 1999
----------- -----------
(In thousands)
Unsecured borrowings due August 1, 1999 $ 168 -
Unsecured borrowings due November 1, 1999 45 -
Note payable due February 4, 1999 24 -
----------- -----------
Current debt obligations $ 237 $ -
=========== ===========
Notes Payable
The unsecured borrowings were obtained from notes payable issued to a financing
company for the purchase of computer software and equipment and were paid in
their entirety in 1999.
In consideration for certain of the unsecured borrowings, the Company issued
the financing company warrants to purchase 4,688 and 2,125 shares of Series F
convertible preferred stock, respectively, at a price of $8.00 per share. The
fair values of the warrants were insignificant (Note 7).
In June 1998, the Company issued a note payable for $215,000 to a financing
company for the payment of its directors' and officers' insurance premiums for
which the Company is the beneficiary. The borrowings on the note were paid in
their entirety in 1999.
Revolving Line of Credit
In May 1997, the Company entered into a revolving line of credit arrangement
for working capital purposes which allowed the Company to borrow up to the
lesser of $5,000,000 or 80% of the Company's eligible domestic and foreign
accounts receivable. The Company terminated the line of credit during 1999.
In consideration for these financing arrangements, the Company issued warrants
to purchase 25,000 shares of Series F convertible preferred stock at a price of
$8.00 per share (Note 7). As described in Note 7, the fair value of such
warrants was $72,000 which was recorded as additional interest expense in the
accompanying consolidated statement of operations and comprehensive loss for
1997.
6. Commitments and Contingencies
The Company leases its facilities and certain equipment under noncancelable
capital and operating leases. Future minimum lease payments under such capital
and operating leases and the present value of minimum lease payments under
capital leases as of December 31, 1999 are as follows:
Year Ending
December 31, Capital Operating
------------ ----------- -----------
(In thousands)
2000 $ 655 $ 1,453
2001 349 853
2002 9 866
2003 - 892
2004 - 303
----------- -----------
Future minimum lease payments 1,013 $ 4,367
Amounts representing interest (13%) (130) ===========
-----------
Present value of future minimum lease
payments $ 883
===========
Rent expense incurred under the operating leases was approximately $843,000,
$867,000 and $1,438,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. Rent expense under the facilities lease is recognized on a
straight-line basis over the term of the lease. The difference between the
amounts paid and the amounts expensed is classified as deferred rent in the
accompanying balance sheets.
The high technology industry in which the Company operates is characterized by
frequent claims and related litigation regarding patent and other intellectual
property rights. The Company is not a party to such litigation; however any
such litigation in the future could have a material adverse affect on the
Company's consolidated financial position, results of operation and cash flows.
7. Stockholders' Equity
Public Offerings
In May 1998, the Company completed its initial public offering of 5,750,000
shares (which includes the full exercise of the underwriters' overallotment
of 750,000 shares) which generated net proceeds to the Company of $62,791,000.
In February 1999, the Company completed a follow on offering of 2,480,000
shares which generated net proceeds to the Company of $54,330,000.
Convertible Preferred Stock
On April 22, 1998, holders of more than 50% of the Series D, E, F and G
convertible preferred stock, voting as a single class, consented to the
automatic conversion of all outstanding shares of Series D, E, F and G
convertible preferred stock into common stock upon the completion of the
initial public offering regardless of the offering price per share. Upon
completion of the Company's initial public offering in May 1998, all shares of
Series A, B, and C convertible preferred stock were converted to common stock
in accordance with their existing terms and all shares of Series D, E, F and G
convertible preferred stock were converted to common stock in accordance with
the stockholders'consent. All shares were converted on a one-to-one basis.
Common Stock Warrants
Prior to the Company's initial public offering in May 1998, the Company issued
warrants to purchase shares of various series of convertible preferred stock.
Upon completion of the Company's initial public offering, the outstanding
warrants to purchase 46,286 shares of convertible preferred stock were
automatically converted into warrants to purchase 46,286 shares of common stock
at the same exercise prices. All such warrants were outstanding at December 31,
1998 and were exercised in full during 1999. The warrants were comprised of
the following:
- During 1995, in consideration of capital lease financing provided by a
financing company, the Company issued warrants to purchase 5,154 shares
of Series D convertible preferred stock at a price of $5.82 per share.
All 5,154 warrants were exercised in 1999. The net value of the warrants
(total market value of the exercised warrants less the total price paid
to exercise the warrants) was divided by the market price of the
Company's common stock on the date of exercise to calculate the net
shares issued. This "net issuance" method resulted in a total of 3,900
shares of common stock issued to the warrant holder.
- During 1996, in consideration of debt and capital lease financing provided
by two financing companies, the Company issued warrants to purchase 14,007
shares of Series F convertible preferred stock at a price of $8.00 per
share. All 14,007 warrants were exercised in 1999. 7,193 warrants were
exercised using a "net issuance" method resulting in a total of 4,781
shares of common stock issued. The remaining 6,814 warrants were exercised
at the exercise price.
- During 1997, in consideration of financing arrangements provided, the
Company issued warrants to purchase 27,125 shares of Series F convertible
preferred stock at a price of $8.00 per share. All 27,125 warrants were
exercised in 1999 using a "net issuance" method resulting in a total of
17,349 shares of common stock issued to the warrant holders.
The fair value of the warrants issued in 1997, in connection with debt
financing, was approximately $72,000. Accordingly, the fair value was recognized
as additional interest expense in the accompanying consolidated statement of
operations and comprehensive loss for 1997.
Common Stock
At December 31, 1998 and 1999, the Company had the right to repurchase 139,640
and 22,055 shares of common stock outstanding, respectively. The number of
shares subject to repurchase is reduced over a two to four year vesting period.
The Company has the right to repurchase these shares at the original issuance
price.
Net Loss Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (in thousands, except per
share amounts):
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
Net Loss (Numerator):
Net loss, basic and diluted $ (13,055) $ (13,363) $ (10,317)
----------- ----------- -----------
Shares (Denominator):
Weighted average common shares
outstanding 2,244 12,377 21,001
Weighted average common shares
outstanding subject to repurchase (120) (227) (69)
Shares used in computation, ----------- ----------- -----------
basic and diluted 2,124 12,150 20,932
----------- ----------- -----------
Net Loss Per Share, Basic and Diluted $ (6.15) $ (1.10) $ (0.49)
=========== =========== ===========
During 1997, 1998 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 December 31, 1999: 22,055 outstanding shares of common stock
subject to repurchase; and options to purchase 3,903,129 shares of common stock.
Equity Plans
Under the Company's 1995 Stock Option Plan (the 1995 Plan), as restated and
amended in January 1998, the Company may grant options to purchase up to
3,000,000 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at the date of grant for incentive
stock options and not less than 85% of fair market value at the date of grant
for nonstatutory stock options. These options generally expire ten years from
the date of grant and are immediately exercisable. The Company has a right of
repurchase (at the option exercise price) of common stock issued from option
exercises for unvested shares. The right of repurchase generally expires 25%
after the first 12 months from the date of grant and then ratably over a
36-month period.
In 1998, the Company adopted the 1998 Stock Incentive Plan (the 1998 Stock
Plan) and the 1998 Employee Stock Purchase Plan (the 1998 Purchase Plan).
The 1998 Stock Plan serves as the successor equity incentive program to the
Company's 1995 Plan. Options outstanding under the 1995 Plan on April 1, 1998
(2,023,510 shares) were incorporated into the 1998 Stock Plan. Such
incorporated options continue to be governed by their existing terms. In
addition, the share reserve was increased by 500,000 shares and could be
increased up to an additional 271,570 shares for repurchases of unvested
common shares issued under the 1995 Plan. Under the 1998 Stock Plan, the
Company is authorized to issue shares of common stock to employees, directors
and consultants under five separate programs: Discretionary Option, Stock
Issuance, Salary Investment Option Grant, Automatic Option Grant and Director
Fee Option Grant. The number of shares reserved for issuance under the 1998
Stock Plan automatically increases at the beginning of each calendar year,
beginning in 1999, by an amount equal to 5% of the total number of shares of
common stock outstanding at the end of the preceding year (1,080,959 shares on
January 3, 2000). The Discretionary Option Program of the 1998 Stock Plan
provides for the grant of options under terms comparable to those provided on
options granted under the 1995 Plan except that all options are to be granted
at a price not less than fair market value on the date of grant.
Stock option activity under the Plans was as follows:
Outstanding Options
Shares --------------------------------
Available Number Weighted Average
for Grant of Shares Exercise Price
----------- --------------- ---------------
Balances, January 1, 1997 (205,706 shares vested
at a weighted average price of $0.44 per share) 32,133 1,590,229 $ 0.52
Reserved 500,000 - -
Granted (weighted average fair value of $1.29 per share) (587,990) 587,990 3.66
Canceled 75,266 (75,266) 0.64
Exercised - (774,042) 0.68
----------- ---------------
Balances, December 31, 1997 (286,130 shares vested at a
weighted average price of $0.57 per share) 19,409 1,328,911 1.80
Reserved 1,266,732 - -
Granted (weighted average fair value of $5.45 per share) (1,368,615) 1,368,615 11.59
Canceled 105,998 (105,998) 4.05
Exercised - (222,187) 1.06
----------- ---------------
Balances, December 31, 1998 (464,507 shares vested at a
weighted average price of $1.42 per share) 23,524 2,369,341 7.42
Reserved 1,934,278 - -
Granted (weighted average fair value of $11.24 per share) (2,544,450) 2,544,450 18.36
Canceled 653,869 (653,869) 13.59
Repurchased 33,933 - -
Exercised - (356,793) 3.83
----------- ---------------
Balances, December 31, 1999 101,154 3,903,129 13.85
=========== ===============
Additional information regarding options outstanding at December 31, 1999 is as
follows:
Options Outstanding Vested Options
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Outstanding Life (years) Price Vested Price
----------- ----------- ----------- ----------- ----------
$ 0.40 - $ 0.88 542,924 6.3 $ 0.55 542,924 $ 0.55
$ 3.30 - $ 6.60 102,175 6.9 5.32 102,175 5.32
$ 6.90 - $10.38 562,028 8.2 8.37 342,337 7.97
$11.88 - $17.25 1,347,067 8.7 13.78 128,969 14.75
$18.00 - $27.00 1,248,743 9.4 21.54 8,048 21.84
$28.00 - $31.38 100,192 8.6 30.42 - -
----------- -----------
$ 0.40 - $31.38 3,903,129 8.7 13.85 1,124,453 5.03
=========== ===========
Under the 1998 Purchase Plan, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. The initial purchase
period commenced upon the initial public offering of the Company's common stock
in May 1998. Shares issued under the Plan were 40,403 and 97,908 in 1998 and
1999 at weighted average prices of $10.20 per share and $10.47 per share,
respectively. At December 31, 1999, $235,000 had been contributed by employees
that will be used to purchase shares in 2000 at a price determined under the
terms of the 1998 Purchase Plan. At December 31, 1999, the Company had 111,689
shares of its common stock reserved for future issuance under this plan.
Deferred Stock Compensation
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25.
Accordingly, in 1997 the Company recorded deferred compensation expense equal
to the difference between the grant price and deemed fair value of the
Company's common stock for options granted prior to December 31, 1997. Such
deferred compensation expense aggregated $136,000 and is being amortized to
expense over the four-year vesting period of the options.
During 1999, the Company issued nonstatutory options to nonemployees for the
purchase of 21,000 shares of common stock at a weighted average exercise price
of $23.79 per share. Such options vest over a period of two to five years. In
accordance with SFAS No. 123, and its related interpretations, the Company
accounted for these awards under the fair value method and as variable awards.
Accordingly, the Company recorded deferred compensation expense at the grant
date equal to the fair value of the options (using the Black-Scholes option
pricing model) on the grant date and adjusted the deferred compensation expense
at the end of each period. The related amortization of deferred compensation
expense, which is being recognized over the vesting period, has also been
adjusted accordingly. At December 31, 1999, such deferred compensation expense
aggregated $193,000.
Nonemployee Stock Options Issued for Services
During 1999, the Company issued nonstatutory options to nonemployees for the
purchase of 47,500 shares of common stock at a weighted average exercise price
of $24.82 per share. Such options were issued for services provided and were
immediately vested and exercisable. Accordingly, the Company recorded the
$74,000 fair value of such awards (using the Black-Scholes option pricing
model) as an expense in the accompanying consolidated statement of operations
and comprehensive loss for 1999.
Additional Stock Plan Information
Since the Company continues to account for its stock-based awards to employees
using the intrinsic value method in accordance with APB No. 25, SFAS No. 123,
"Accounting for Stock-Based Compensation," requires the disclosure of pro forma
net income (loss) and earnings (loss) per share had the Company adopted the
fair value method for employee awards as of the beginning of 1995. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's fair value
calculations on stock-based awards to employees under the 1995 and 1998 Stock
Plans were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 5 years from the date of grant in
1997 and 4.5 years from the date of grant in 1998 and 1999; stock volatility,
0% in 1997, 50% in 1998 and 75% in 1999; risk-free interest rate, 6.75% in
1997, 5.0% in 1998 and 6.0% in 1999; and no dividends during the expected term.
The Company's calculations are based on a single option award valuation
approach, and forfeitures are recognized as they occur. The Company's fair
value calculations on stock-based awards under the 1998 Purchase Plan were also
made using the Black-Scholes option pricing model with the following weighted
average assumptions: expected life, six months in 1998 and 1999; stock
volatility of 50% in 1998 and 75% in 1999; risk free interest rate of 5.0% in
1998 and 5.5% in 1999; and no dividends during the expected term. If the
computed fair values of the employee awards granted after 1994 had been
amortized to expense over the vesting period of the awards, pro forma net
loss would have been approximately $(13,153,000) ($(6.19) per share, basic
and diluted) in 1997, $(14,454,000) ($(1.19) per share, basic and diluted) in
1998 and $(16,158,000) ($(0.77) per share, basic and diluted) in 1999.
8. Income Taxes
Income tax expense for the years ended December 31, 1997, 1998 and 1999
consisted solely of state franchise taxes.
The components of deferred income tax assets are as follows:
December 31,
------------------------
1998 1999
----------- -----------
(In thousands)
Deferred tax assets:
Accruals and reserves not currently
deductible $ 1,868 $ 2,508
Capitalized start-up costs 472 143
Capitalized research and development costs 1,864 1,884
Net operating loss carryforwards 14,325 15,783
Tax credit carryforwards 4,437 7,549
Depreciation 1,206 1,853
----------- -----------
Total gross deferred tax assets 24,172 29,720
Valuation allowance (24,172) (29,720)
----------- -----------
Total deferred tax assets $ - $ -
=========== ===========
The increase of $5,548,000 in the valuation allowance during the year ended
December 31, 1999 was primarily a result of increased net operating loss and
tax credit carryforwards generated in 1999. The Company provided a full
valuation allowance against the deferred tax assets based on the Company's
evaluation of the likelihood of realization of future tax benefits resulting
from the deferred tax assets.
As of December 31, 1999, the Company had approximately $109,000 of deferred
tax liabilities resulting from unrealized gains on available-for-sale
investments. The deferred tax liabilities have been included in other current
liabilities in the accompanying consolidated balance sheet. There were no
deferred tax liabilities at December 31, 1998.
As of December 31, 1999, the Company had available for carryforward net
operating losses for federal and state income tax purposes of approximately
$41,623,000 and $13,738,000, respectively. Federal net operating loss
carryforwards will expire if not utilized beginning in the years 2009 through
2019. State net operating loss carryforwards will expire if not utilized
beginning in the years 2000 through 2004.
As of December 31, 1999, the Company had available for carryforward research
and experimental tax credits for federal and state income tax purposes of
approximately $4,496,000 and $2,540,000, respectively. Federal research and
experimentation tax credit carryforwards expire from 2009 through 2019. The
Company also had approximately $513,000 in California manufacturers investment
credits.
Current Federal and California tax laws include substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such "ownership change". Such a limitation could result in the
expiration of carryforwards before they are utilized.
9. Major Customers
One unaffiliated customer and two preferred stockholders represented 21%, 16%
and 12% of total 1997 revenues, respectively.
As of December 31, 1998, three unaffiliated customers represented 15%, 10%, and
10% of total accounts receivable, and one stockholder represented 34% of total
accounts receivable. Sales to this stockholder represented 14% of total 1998
revenues. In addition, sales to two other unaffiliated customers represented
24% and 15% of total 1998 revenues.
As of December 31, 1999, two unaffiliated customers and one common stockholder
represented 29%, 18%, and 15% of total accounts receivable, respectively. In
addition, sales to these two unaffiliated customers and one common stockholder
represented 18%, 20% and 12% of total 1999 revenues, respectively.
10. Related Party Transactions
In March 1996, a preferred stockholder entered into a five-year licensing
agreement with the Company to license certain technology on a nonexclusive
basis. Under the terms of this agreement: (i) the Company received a
nonrefundable license fee of $1,000,000 in 1996, and (ii) if the Company met
certain conditions in 1997, it would be entitled to an additional $500,000 of
nonrefundable license fees. In March 1997, the Company met such conditions and
received additional nonrefundable license fees of $500,000 from this preferred
stockholder. Such license fees were recognized as revenue in 1997. In addition,
the Company also received prepaid royalties pursuant to the licensing agreement
of $1,000,000 in 1997. Upon shipment of product incorporating the Company's
technology, $7,000 was recognized as license fee revenue in 1997; and the
remaining $993,000 was recognized in 1998 as license fee revenue at the
expiration of the royalty period on December 31, 1998. In April 1998, this
preferred stockholder sold its entire interest in the Company to three other
existing preferred stockholders.
For the year ended December 31, 1997, total revenues included sales to three
preferred stockholders of approximately $2,509,000, $1,889,000 and $123,000
(with related cost of revenues of approximately $999,000, $951,000 and $74,000,
respectively).
For the year ended December 31, 1998, total revenues included sales to two
stockholders of approximately $6,600,000 and $1,030,000 (with related cost of
revenues of approximately $4,098,000 and $15,000 respectively). As of December
31, 1998, accounts receivable included amounts due from one stockholder of
approximately $1,644,000.
For the year ended December 31, 1999, total revenues included sales to a
customer of approximately $8,289,000 (with related cost of revenues of
approximately $4,825,000) that the Company has an equity investment in during
1999, and sales to a stockholder of approximately $11,113,000 (with related
cost of revenues of approximately $6,942,000). As of December 31, 1999,
accounts receivable included amounts from the customer that the Company is an
investor in of approximately $1,845,000 and amounts from the stockholder of
approximately $2,939,000.
11. Employee Benefit Plan
The Company has a defined contribution retirement plan (the "Retirement Plan"),
which has been determined by the Internal Revenue Service to be qualified under
Section 401(k) of the Internal Revenue Code of 1986. The Retirement Plan covers
essentially all full-time employees. Eligible employees may make voluntary
contributions to the Retirement Plan up to 15% of their annual compensation.
The Company has not made any employer contributions to the Retirement Plan.
12. Segment Information
As defined by the requirements of SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," the Company operates in one reportable
segment: the design, development, marketing, and sales of system solutions for
the broadband access market.
For the years ended December 31, 1997, 1998 and 1999, the Company recorded
revenue from customers throughout the United States and Canada; The
Netherlands; Switzerland, Germany, the U.K., France, Spain, Denmark, Norway,
Sweden, Finland, Belgium, Czech Republic, Hungary, Iceland, (collectively
referred to as Other Europe); Japan, China, Korea, Taiwan, Singapore, Indonesia
(collectively referred to as Asia); Mexico, Argentina, Chile, Panama, Brazil,
(collectively referred to as South/Central America); and Australia/New Zealand.
The following presents total revenues for the years ended December 31, 1997,
1998 and 1999 and long-lived assets as of December 31, 1998 and 1999 attributed
to significant countries (in thousands):
1997 1998 1999
----------- ----------------------- -----------------------
Long- Long-
Total Total Lived Total Lived
Revenues* Revenues* Assets Revenues* Assets
----------- ----------- ----------- ----------- -----------
United States $ 5,589 $ 23,032 $ 6,188 $ 50,385 $ 8,342
Canada 161 1,332 314 3,273 138
The Netherlands 682 3,925 - 15,900 -
Other Europe 3,990 8,596 - 14,039 -
Asia 1,727 1,879 - 7,041 14
South/Central America 671 2,027 - 1,688 -
Australia/New Zealand 2,829 7,323 - 3,417 -
----------- ----------- ----------- ----------- -----------
Total $ 15,649 $ 48,114 $ 6,502 $ 95,743 $ 8,494
=========== =========== =========== =========== ===========
__________
* Net revenues are attributed to countries based on invoicing location of
customer.
The Company's product lines differ primarily based on product functions.
Headend equipment controls the flow of data communications between cable modems
and an external network, such as the Internet or a corporate network. Cable
modems send and receive data over coaxial cable. Network management software
facilitates provisioning, fault isolation, network configuration, field
inventory, auto-discovery and performance for the headend equipment. For the
years ended December 31, 1997, 1998 and 1999, the Company recorded product
revenue from sales of headend equipment, cable modems and network management
software as follows:
1997 1998 1999
----------- ----------- -----------
Headend Equipment $ 8,323 $ 19,578 $ 19,970
Cable Modems 5,060 26,935 74,738
Network Management Software 1,759 608 1,035
----------- ----------- -----------
Product Revenues $ 15,142 $ 47,121 $ 95,743
=========== =========== ===========
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Pursuant to General Instruction G. to Form 10-K, the information required by
Items 10, 11, 12, and 13 of Part III is incorporated by reference from the
Company's definitive Proxy Statement with respect to its 2000 annual meeting
of stockholders, to be filed pursuant to Regulation 14A within 120 days after
December 31, 1999.
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this annual report:
1. Consolidated Financial Statements. The following Consolidated Financial
Statements of Com21, Inc. and related Independent Auditors' Report are filed
as part of this annual report:
Independent Auditor's Report
Consolidated Balance Sheets, as of December 31, 1998 and 1999
For the years ended December 31, 1997, 1998, and 1999:
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules. The following consolidated
financial statement schedules of Com21, Inc. are filed as part of this annual
report and should be read in conjunction with the Consolidated Financial
Statements of Com21, Inc.:
Financial Statement Schedules for the years ended December 31, 1997, 1998, 1999:
Schedule Page
II - Valuation & Qualifying Accounts 42
Schedules not filed herein are omitted because of the absence of conditions
under which they are required or because the information called for is shown
in the consolidated financial statements or notes thereto.
3. Exhibits.
The Exhibits listed on the accompanying Index to Exhibits are filed or
incorporated by reference as part of this annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 1999.
(c) Exhibits
The following exhibit list states, in the case of certain exhibits, a prior
SEC filing which contains the exhibit and from which it is incorporated by
reference.
Index to Exhibits
Number Exhibit Title
_______ ___________________________________________________________________
3.1(1) Registrant's Amended and Restated Certificate of Incorporation.
3.2(1) Registrant's Amended and Restated Bylaws.
4.1(1) Form of Registrant's Specimen Common Stock Certificate.
4.2(1) Amended and Restated Information and Registration Rights Agreement,
among the Registrant and the investors and founders named therein,
dated July 22, 1997.
10.1(1) Lease Agreement between the Company, John Arrillaga and Richard T.
Peery, dated May 10, 1996.
10.2+(1) Technology License and Reseller Agreement between the Company and
3Com Corporation, dated March 22, 1996.
10.3+(1) Reseller Agreement between the Company and 3Com Corporation, dated
July 30, 1997.
10.4+(1) Hardware and Software Technology License Agreement between the
Company, Advanced Telecommunications Modules, Limited and Advanced
Telecommunications Modules, Inc., dated February 1, 1996.
10.5(1) Registrant's 1995 Stock Option Plan.
10.6(1) Registrant's 1998 Stock Incentive Plan.
10.7(1) Registrant's 1998 Employee Stock Purchase Plan.
10.8(1) Form of Indemnity Agreement entered into by Registrant with each
of its executive officers and directors.
10.9(1) Loan and Security Agreement between Registrant and Greyrock Business
Credit, dated May 30, 1997.
10.10+(1) International OEM Agreement between the Company, Advanced
Telecommunications Modules, Inc. and Advanced Telecommunications
Modules, Limited, dated March 7, 1996.
10.11+(1) Agreement for Manufacturing Services between the Company and
Celestica, Inc., dated October 25, 1996.
10.12+(1) Wind River Systems, Inc. VxWorks License Agreement.
10.13+(1) Purchase and License Agreement by and between the Company and
Siemens AG, dated December 2, 1997.
10.14+(1) Distribution Agreement by and between the Company and Philips
Public Telecommunication Systems, dated November 26, 1997.
21.1 Com21 International, Inc. a Delaware corporation
23.1 Independent Auditors' Consent.
23.2 Independent Auditors' Report on Schedule
27.1 Financial Data Schedule.
_______
+ Confidential treatment has been granted as to a portion of this
Agreement.
(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 333-48107) declared effective on
May 18, 1998.
(2) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 333-70945) declared effective
on February 23, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 24, 2000
______________________
COM21, INC.
By: /s/ Peter D. Fenner
__________________________
Peter D. Fenner
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appear
below hereby constitutes and appoints, jointly and severally, Peter Fenner and
David L. Robertson, and each of them acting individual, as his attorney-in-fact,
each with full power of substitution and resubstitution, for him or her in any
and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K (including post-effective amendments), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In pursuant to the requirements of
the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ Peter D. Fenner President and Chief March 24, 2000
_________________________ Executive Officer ________________
Peter D. Fenner Principal Executive Officer
/s/ David L. Robertson Vice President, Finance, Chief March 24, 2000
_________________________ Financial Officer, (Pricipal ________________
David L. Robertson Financial and Accounting Officer)
and Secretary
/s/ Paul Baran March 24, 2000
_________________________ Director ________________
Paul Baran
/s/ Robert C. Hawk March 24, 2000
_________________________ Director ________________
Robert C. Hawk
/s/ Jerald L. Kent March 24, 2000
_________________________ Director ________________
Jerald L. Kent
/s/ C. Richard Kramlich March 24, 2000
_________________________ Director ________________
C. Richard Kramlich
/s/ Daniel J. Pike March 24, 2000
_________________________ Director ________________
Daniel J. Pike
/s/ James Spilker, Jr. March 24, 2000
_________________________ Director ________________
James Spilker, Jr.
/s/ Robert W. Wilmot March 24, 2000
_________________________ Director ________________
Robert W. Wilmot
COM21, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Additions
Balance At Charged To Balance At
Beginning Costs And End Of
Of Period Expenses Deductions Period
----------- ----------- ----------- -----------
1997
Accounts Receivable Allowances $ - $ 121 $ - $ 121
Warranty Reserve $ - $ 56 $ (12) $ 44
1998
Accounts Receivable Allowances $ 121 $ 787 $ - $ 908
Warranty Reserve $ 44 $ 321 $ (66) $ 299
1999
Accounts Receivable Allowances $ 908 $ 392 $ (139) $ 1,161
Warranty Reserve $ 299 $ 743 $ (90) $ 952
Exhibit 23.1 - Independent Auditors' Consent
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-57441 of Com21, Inc. on Form S-8 of our report dated January 21, 2000
appearing in the Annual Report on Form 10-K of Com21, Inc. for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
March 21, 2000
Exhibit 23.2 - Independent Auditors' Report on Schedule
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Our audits of the consolidated financial statements of Com21, Inc. for the
three years in the period ended December 31, 1999 also included the
consolidated financial statement schedule of the Company, listed in Item
14.(a)(2). The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 21, 2000