SECURITIES EXCHANGE AND COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 1
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: July 3, 2000
Com21, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 94-3201698
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
750 Tasman Drive
Milpitas, CA 95035
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 953-9100
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 3, 2000 (the "GADline Closing Date"), the
registrant, Com21, Inc. ("Com21" or "the Registrant"), acquired
GADline Ltd. ("GADline"), pursuant to a certain Share Purchase
Agreement (the "GADline Agreement") between and among Com21, the
shareholders of GADline and GADline dated April 18, 2000 (the "GADline
Acquisition"). GADline, an Israeli company that develops, manufactures
and markets innovative, fully managed networking solutions that
deliver high-speed data and telephony services over a hybrid fiber
coaxial infrastructure.
Pursuant to the GADline Agreement, Com21 acquired all
outstanding shares of capital stock of GADline, and GADline became a
wholly-owned subsidiary of Com21 on July 3, 2000. As consideration
for the GADline Acquisition, the former shareholders of GADline
received an aggregate of two million four hundred and fifty thousand
(2,450,000) shares of Com21 common stock, all outstanding GADline
options converted into options to purchase of approximately 232,000
shares of the Registrant's common stock, and an additional 350,000
shares of the Registrant's common stock and options to purchase common
stock may be issued to GADline shareholders upon completion of
predefined milestone through December 31, 2000 as described in the
GADline Agreement attached hereto as Exhibit 2.1. The Registrant also
assumed certain operating assets and liabilities of GADline. The
GADline Acquisition is intended to be accounted for as a "purchase"
under the requirements of Opinion 16 of the Accounting Principles
Board of the American Institute of Certified Public Accountants
("AICPA") and the related published interpretations of the AICPA, the
Financial Accounting Standards Board and the rules and regulations of
the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS, PRO FROMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial Statements of Business Acquired.
Audited consolidated financial statements of GADline Ltd. as
of December 31, 1999 and 1998 and for the three years in the period
ended December 31, 1999 as well as unaudited condensed consolidated
financial statements as of June 30, 2000 and for the six months ended
June 30, 2000 and 1999 are attached hereto and filed herewith.
(b) Pro Forma Financial Information.
The attached unaudited pro forma condensed combining financial
statements for the year ended December 31, 1999 and as of and for the
six months ended June 30, 2000 give effect to the purchase of GADline
as of the beginning of the earliest period presented, whereby Com21
exchanged approximately $71.4 million of common stock, converted all
outstanding GADline options into options to purchase approximately
232,000 shares of the Registrant's common stock, and assumed certain
operating assets and liabilities of GADline. Accordingly, the
acquired assets and liabilities were recorded at their estimated fair
market value at the date of acquisition. The pro forma condensed
combining statements of operations assume that the acquisition took
place at the beginning of the earliest period presented and combine
Com21's and GADline's results of operations for the year ended
December 31, 1999 and the six months ended June 30, 2000. The
unaudited pro forma condensed combining balance sheet combines Com21's
balance sheet as of June 30, 2000 with the GADline balance sheet as of
June 30, 2000, giving effect to the acquisition as if it had occurred
on June 30, 2000.
The pro forma condensed combining financial information is presented
for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred
had the acquisition been consummated at the beginning of the periods
presented, nor is it necessarily indicative of future operating
results or financial position.
The pro forma condensed combining financial information should be read
in conjunction with the audited historical consolidated financial
statements and the related notes thereto of Com21 previously filed and
the historical financial statements and related notes thereto of
GADline included herein.
(c) Exhibits
2.1 Agreement and Plan of Merger dated April 18, 2000,
among the Registrant, Com21, Inc., a Delaware
corporation, and GADline, Inc., an Israeli company
(previously filed).
20.2 Press release of the Company dated April 18, 2000 (previously filed).
23.1 Independent Auditors' Consent.
INDEX TO FINANCIAL STATEMENTS
GADline, Inc. Page
______________
Report of Independent Public Accountants 4
Audited Consolidated Balance Sheets as of December 31, 1999 and 1998 5 - 6
Audited Consolidated Statements of Operations for the three years
ended December 31, 1999 7
Audited Statements of Changes in Shareholders' Equity for the
three years ended December 31, 1999 8
Audited Consolidated Statements of Cash Flows for the three years
ended December 31, 1999 9 - 10
Audited Notes to Consolidated Financial Statements
11 - 24
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2000 and
December 31, 1999 25 - 26
Unaudited Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and 1999 27
Unaudited Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 28 - 29
Unaudited Notes to Condensed Consolidated Financial Statements 30
COM21, Inc.
____________
Unaudited Pro Forma Condensed Combining Balance Sheet as of June 30,
2000 31
Unaudited Pro Forma Condensed Combining Statement of Operations for
the year ended December 31, 1999 32
Unaudited Pro Forma Condensed Combining Statement of Operations for
the Six Month Period Ended June 30, 2000 33
Unaudited Notes to Pro Forma Condensed Combining Financial Statements 34 - 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of GADline, Ltd.
We have audited the accompanying consolidated balance sheets of
GAD Line Ltd. ("the Company") as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in
shareholders' 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 auditing standards
generally accepted in the United States. 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 the 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, the aforementioned consolidated financial
statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 1999 and 1998 and
the consolidated results of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Brightman Almager & Co.
Certified Public Accountants (Israel)
A Member of Deloitte Touche Tohmatsu
Tel-Aviv, Israel
February 29, 2000
GADLINE, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
($ in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 5,565 $ 513
Short-term investments 25 37
Trade receivables (Note 13a) 888 630
Earned but unbilled receivables (Note 13b) - 300
Due from related parties (Note 13c) 12 17
Other receivables and prepaid expenses
(Note 13d) 835 247
Inventories (Note 3) 3,594 1,085
---------- ----------
Total current assets 10,919 2,829
Due from related parties (Note 13c) 157 148
Long-term investments 38 -
Property and equipment (Note 4)
Cost 2,015 1,425
Less - Accumulated depreciation and amortization 815 539
---------- ----------
1,200 886
Deferred financing costs - 55
---------- ----------
$ 12,314 $ 3,918
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements
</TABLE>
GADLINE, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
($ in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term loans and current maturities
of long-term debt (Note 5) $ 1,800 $ 59
Trade payables 2,393 749
Other payables and accrued expenses (Note 13e) 640 496
---------- ----------
Total current liabilities 4,833 1,304
Long-term liabilities
Long-term debts from banks (Note 6) 19 30
Convertible debentures (Note 7) 3,000 -
Accrued severance pay (Note 8) 350 211
---------- ----------
3,369 241
Commitments and contingent liabilities (Note 9)
Shareholders' equity (Note 10)
Share capital:
Ordinary shares of NIS 0.5 par value (Authorized
- 10,000,000 shares, issued and outstanding -
6,414,949 at December 31, 1999 and 5,657,060
at December 31, 1998) 999 908
Receipts on account of share capital - 20
Additional paid-in capital 12,847 5,840
Deferred stock compensation (615) (73)
Accumulated deficit (9,119) (4,322)
---------- ----------
Total shareholders' equity 4,112 2,373
$ 12,314 $ 3,918
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements
</TABLE>
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands, except share data)
Revenues: (Note 14a)
Research and development contracts $ - $ 990 $ 663
Systems sales 2,180 1,784 1,037
---------- ---------- ----------
Total revenues 2,180 2,774 1,700
Operating expenses:
Cost of revenues
Research and development contracts - 410 298
Systems sales 1,633 843 519
---------- ---------- ----------
Total cost of revenues 1,633 1,253 817
Research and development costs, net (Note 14b) 2,247 1,378 627
Sales and marketing expenses, net (Note 14c) 1,681 710 506
General and administrative expenses 911 611 519
Non-cash compensation expense (*) 615 90 37
---------- ---------- ----------
Operating loss (4,907) (1,268) (806)
Financial income (expenses), net 109 (112) (4)
Other income (expenses), net 1 (2) (87)
---------- ---------- ----------
Net loss $ (4,797) $ (1,382) $ (897)
========== ========== ==========
(*) Non-cash compensation expense consists of:
Cost of revenues $ 31 $ 5 $ 2
Research and development costs, net 369 54 22
Sales and marketing expenses, net 123 18 7
General and administrative expenses 92 13 6
---------- ---------- ----------
$ 615 $ 90 $ 37
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
GADLINE, LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Receipts on Deferred Total
shares NIS Additional account of stock share-
0.5 per Share paid-in share Accumulated compen- holders'
share capital capital capital deficit sation equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
($ in thousands)
-----------------------------------------------------------------
Balance at January 1, 1997 4,293,334 $ 710 $ 1,073 $ 1,894 $ (2,043) $ - $ 1,634
Issue of ordinary shares 592,330 93 1,783 (1,894) (18)
Stock compensation 37 37
Net loss for the year (897) (897)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 4,885,664 803 2,893 - (2,940) - 756
Issue of ordinary shares 771,396 105 2,784 - - 2,889
Deferred stock compensation
related to stock option grants 163 - - (163) -
Amortization of deferred stock compensation - - 90 90
Receipts on account of share capital 20 20
Net loss for the year - (1,382) (1,382)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 5,657,060 908 5,840 20 (4,322) (73) 2,373
Issue of ordinary shares 757,889 91 5,850 (20) 5,921
Deferred stock compensation
related to stock option grants 1,157 (1,157) -
Amortization of deferred stock compensation 615 615
Net loss for the year (4,797) (4,797)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 6,414,949 999 12,847 - (9,119) (615) 4,112
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
($ in thousands)
Cash flows from operating activities:
Net loss $ (4,797) $ (1,382) $ (897)
Adjustments to reconcile net loss to net cash
used in operating activities (Appendix A) (244) (234) (179)
---------- ---------- ----------
Net cash used in operating activities (5,041) (1,616) (1,076)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from realization of (investment in)
marketable securities - 74 -
Proceeds from realization of (investment in)
short-term investments 12 (37) 27
Investment in long-term deposits (37) - -
Grant of loans to related parties (12) - -
Repayment of related party loans 18 19 3
Purchase of equipment and other assets (535) (600) (190)
Proceeds from sale of equipment 1 12 7
---------- ---------- ----------
Net cash used in investing activities (553) (532) (153)
---------- ---------- ----------
Cash flows from financing activities:
Receipts on account of share capital - 20 -
Proceeds from issue of shares 5,921 2,889 (18)
Proceeds from issue of convertible debentures 3,000 - -
Receipts of short-term debt 1,748 - 318
Repayments of short-term debt - (280) -
Receipts of long-term debt - 45 13
Repayments of long-term debt (23) (20) (14)
---------- ---------- ----------
Net cash provided by financing activities 10,646 2,654 299
---------- ---------- ----------
Net change in cash and cash equivalents 5,052 506 (930)
Cash and cash equivalents at beginning of year 513 7 937
---------- ---------- ----------
Cash and cash equivalents at end of year $ 5,565 $ 513 $ 7
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
<TABLE>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
<S> <C> <C> <C>
Appendix A
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization $ 276 $ 194 $ 121
Loss (gain) on sale of property and equipment (1) 2 70
Effect of foreign exchange rate changes on
long-term loan 5 (8) -
Amortization of deferred compensation expenses 615 90 37
Loss (gain) from marketable securties - (74) (3)
Effect of foreign exchange rate changes on
related party loans (10) 8 15
Interest on long-term investments (1) - -
Changes in assets and liabilities:
Decrease (increase) in assets:
Trade receivables (258) (242) (121)
Earned but unbilled receivables 300 (300) -
Other receivables and prepaid expenses (588) (103) (1)
Inventories (2,509) (410) 8
Increase (decrease) in liabilities:
Trade payables 1,644 363 (236)
Other payables and accrued expenses 144 189 (90)
Accrued severance pay 139 57 21
---------- ---------- ----------
$ (244) $ (234) $ (179)
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 44 $ 66 $ 32
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
GADline, Ltd. ("the Company") is an Israeli corporation, which
designs, develops, manufactures, markets and supports CATTV head-end
equipment and two-way broad band, voice data, video communication
systems for use over coaxial/hfc networks worldwide.
The Company faces a number of risks including the fact that it has
significant operating losses, the uncertainties of future product
development and market acceptance of the Company's products.
Additionally, other risk factors, such as uncertainties concerning
government regulations, competition, dependence on proprietary
technology, ability to manage growth, loss of key personnel and the
effects of planned expansion of operations could impact the future
results of the Company.
Note 2 - Significant accounting policies
a. Use of estimates in preparation of financial statements
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 reported
period. Actual results could differ from those estimates.
b. Reporting currency
Financial statements in U.S. dollars
The primary currency of the economic environment in which
the Company operates is the U.S. dollar ("dollar" or "$").
Therefore, the Company uses the dollar as its functional and
reporting currency. Certain of the dollar amounts in the financial
statements may represent the dollar equivalent of other currencies,
including the new Israeli shekel ("NIS"), and may not be
exchangeable for dollars.
Transactions and balances denominated in dollars are presented at
their dollar amounts. Non-dollar transactions and balances are
remeasured into dollars in accordance with the principles set forth
in Statement No. 52 (Foreign Currency Translation) of the Financial
Accounting Standards Board of the United States ("FASB").
c. Exchange rates and linkage basis
Balances in or linked to currencies other than the dollar
are included at the rate of exchange prevailing at the balance
sheet date. During the years ended December 31, 1999, the rate of
exchange of the new Israeli shekel ("NIS") decreased relative to
the dollar by 0.17%. During 1998 and 1997, the rate of exchange of
the NIS increased relative to the dollar by 17.6% and 8.8%,
respectively.
d. Cash equivalents
Cash equivalents include all highly liquid deposits with an
original maturity of three months or less.
e. Allowance for doubtful accounts
The allowance for doubtful accounts has been made on the basis
of specific accounts receivable.
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Note 2 - Significant accounting policies (cont'd.)
f. Inventories
Inventories are stated at lower of cost or market. Cost is
determined as follows:
Components and accessories - on the moving average basis.
Work-in-process - on the basis of computed manufacturing costs.
g. Property and equipment
Property and equipment are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful
lives of the assets, as follows:
Computers and related equipment 3 - 5 years
Office furniture and equipment 6 - 16 years
Motor vehicles 6 years
Leasehold improvements are amortized by the straight-line method
over the term of the lease, which is shorter than the estimated
useful life of the improvements.
h. Revenue recognition
Revenue from product sales is generally recognized upon shipment to
customers, provided no significant vendor obligations remain
outstanding and collection of the related receivable is deemed
probable by management. Revenues from research and development
contracts are recognized using the percentage-of -completion method
based upon costs incurred and estimated future costs.
i. Research and development costs
Research and development costs, net of third-party participation,
are expensed as incurred.
j. Warranty costs
The Company grants a warranty on products sold and provides for
estimated warranty costs.
k. Deferred income taxes
Deferred income taxes are provided for temporary differences
between the assets and liabilities, as measured in the financial
statements and for tax purposes at the tax rates expected to be in
effect when these differences reverse, in accordance with Statement
No. 109 of the FASB (Accounting for Income Taxes).
l. Fair value of financial instruments
The financial instruments of the Company consist mainly of cash and
cash equivalents, current accounts receivable, accounts payable and
accruals. In view of their nature, the fair value of the financial
instruments included in working capital of the Company is usually
identical or close to their carrying amounts.
m. Concentration of credit risk
At December 31, 1999 and 1998, the Company had cash and cash
equivalents and short-term investment totaling $5,590,000 and
$550,000, respectively, most of which are deposited in Israeli
banks. Management
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Note 2 - Significant accounting policies (Cont'd.)
believes that the financial institutions holding the Company's cash
and cash equivalents are financially sound. Accordingly, the
Company does not anticipate credit losses in respect to this item.
Most of the Company's revenues are generated in Europe, Israel and
South America (see note 14). The Company maintains an allowance
for doubtful accounts, which management believes, adequately covers
all anticipated losses in respect of trade receivables.
n. Recently issued accounting standards
In June 1998, the Financial Accounting Standard Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999.
SFAS 133 requires that all derivatives instruments be recorded on
the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction, and if it is, the type of
hedge transaction. The Company does not expect the adoption of
SFAS 133 to have a material impact on its financial statements.
Note 3 - Inventories
Comprised as follows:
December 31,
1999 1998
---------- ----------
($ in thousands)
Components and accessories $ 1,370 $ 380
Work-in-process 1,837 624
Finished goods 387 81
---------- ----------
$ 3,594 $ 1,085
========== ==========
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Note 4 - Property and equipment
a. Comprised as follow:
December 31,
1999 1998
---------- ----------
($ in thousands)
Cost:
Computer and related equipment $ 1,582 $ 1,112
Office furniture and equipment 162 118
Motor vehicles 180 180
Leasehold improvements 91 15
---------- ----------
2,015 1,425
========== ==========
Accumulated depreciation and amortization:
Computer and related equipment $ 670 $ 436
Office furniture and equipment 44 35
Motor vehicles 94 68
Leasehold improvements 7 -
---------- ---------
$ 815 $ 539
========== =========
b. Liens - see Note 11
Note 5 - Short-term credits and current maturities of long-term debts
a. Comprised as follows:
Average December 31,
Interest
rate 1999 1998
% ---------- ----------
---------- ($ in thousands)
Bank overdraft (*) Prime+0.5% $ 36 $ 38
Short-term bank loans (*) LIBOR+0.6% 1,750 -
Current maturities of long-term debts 14 21
---------- ----------
$ 1,800 $ 59
========== ==========
(*) - Denominated in NIS and unlinked
b. Securities - see Note 11
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-term debts from banks
a. Comprised as follows:
Average December 31,
Interest
rate 1999 1998
% ---------- ----------
---------- ($ in thousands)
Unlinked (*) Prime+1.5% $ 24 $ 40
Unlinked 16 - 5
Linked to the Israeli
consumer price index (*) 4 9 6
---------- ----------
33 51
Less - current maturities (14) (21)
---------- ----------
$ 19 $ 30
========== ==========
(*) - Denominated in NIS
b. Aggregate maturities of long-term debt are as follows:
First year - Current maturities $ 14 $ 21
Second year 13 14
Third year 6 12
Fourth year - 4
---------- ----------
Total long-term debt $ 33 $ 51
========== ==========
c. Securities - see Note 11
Note 7 - Convertible debentures
In July 1999, the Company issued $3,000,000 of convertible debentures
to a private lender. The debentures are for a period of three years
and bear interest at 6% per annum compounding every six months during
the period commencing one year after issue. The debentures are
convertible into ordinary shares of the Company under the following
terms:
a. If, during 1999, the Company effects an initial public
offering (as defined in the agreement) or enters into a sale of
all or substantially all of the Company's assets or shares, or
merges with another Company (all the events are defined as
"liquidity events"), the conversion price shall be the price per
share used for the liquidity events less a discount of 40%.
b. If, during 1999, the Company does not undergo a liquidity
event then during the period commencing January 1, 2000 through
the end of the three years following the closing, the discount
will be increased by 1% for each month that the Company does not
undergo a liquidity event.
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Convertible debentures
c. If, during the three-year period following the closing, the
Company does not undergo a liquidity event, but issues its
securities in a qualified financing (defined in the agreement as
closing by the Company a financing in which it issues securities
in consideration of gross proceeds to the Company in excess of
$1,000,000), the conversion price shall be equal to the price per
share used for this qualified financing.
d. If, during the three-year period following the closing, the
Company does not undergo a liquidity event, then the conversion
price for each share purchasable during the period commencing
three years following the closing shall be the lower of: (1) the
price per share paid by purchasers of the Company's securities in
the abovementioned qualified financing, if any, immediately
preceding the election to convert the convertible debenture; or
(2) a price per share reflecting a Company valuation of
$75,000,000.
The Debentures are secured by a floating charge on the Company's
assets. The floating charge is subordinated to a senior secured bank
debt of the Company equivalent to an aggregate amount of $1,000,000.
In accordance with Emerging Issues Task Force Statement Number 98-5
"Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" the beneficial
conversion feature is not recognized in the Company's earnings until
the contingency is resolved (i.e. until the liquidity event occurs) as
the impact of the beneficial conversion feature is not quantifiable
until the liquidity event has occurred.
Note 8 - Accrued severance pay
The Company's liability for severance pay is calculated in accordance
with Israeli law based on the most recent salary paid to employees and
the length of their employment with the Company. The Company's
liability for severance pay is fully provided. Part of the liability
is funded though individual insurance policies, which are not under
the Company's management or control. The net severance pay expenses
for the years ended December 31, 1999, 1998 and 1997 were $303,000,
$149,000 and $97,000, respectively. The Company has no liability for
pension expenses to its employees.
Note 9 - Commitments and contingent liabilities
a. Royalties
The Company is committed to pay royalties to the Chief Scientist
of the Government of Israel ("Chief Scientist") on proceeds from
the sale of products in the research and development of which the
Government has participated by way of grants, up to the amount of
100-150% of the grants received (in dollar terms). The royalties
are payable at a rate of 3% for the first three years of product
sales, 4% for the following three years and 5% thereafter. The
total amount of grants received, net of royalties paid or
accrued, at December 31, 1999 was $6,027,000.
Royalty expenses to the Chief Scientist in the years ended
December 31, 1999, 1998 and 1997 were $49,000, $28,000 and
$6,000, respectively.
b. Lease commitments
The Company's premises are rented under operating agreement
through April 30, 2004. The total future aggregate minimum
annual rental payments linked to the Israeli consumer price
index, pursuant to existing lease commitments in effect at
December 31, 1999, are as follows:
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and contingent liabilities (cont'd.)
$ in thousands
--------------
2000 344
2001 380
2002 368
2003 351
2004 156
Total rent expenses for the years ended December 31, 1999,
1998 and 1997 were approximately $225,000, $184,000 and
$106,000, respectively.
Note 10 - Shareholders' equity
a. Changes in shareholders' equity during 1997 - 1999:
1. In March 1997, the Company effected a 2-for-1 stock
split of its entire authorized and outstanding share
capital. As a result, the Company's authorized share
capital comprises 10,000,000 ordinary shares of NIS 0.5 par
value and the number of shares issued and outstanding at
December 31, 1997 was 4,885,664.
2. In June 1998, the Company signed an agreement with an
investor, pursuant to which the Company issued 771,396
ordinary shares at $3.889 per share ($3,000 thousand in
aggregate). In addition, the investor was granted on option
at a price of $4.129 to purchase shares equivalent to 7.815%
interest in the Company. The option is for a period of one
year or until the Company's initial public offering,
whichever is earlier.
3. In April 1999, the Company signed an agreement with
private investors, pursuant to which the Company issued
304,748 ordinary shares (representing a 5% interest in the
Company) at $9.8442 per share ($3,000 thousand in aggregate)
which were issued in August 1999.
Pursuant to the agreement, the investors were granted the
right to purchase, through November 1, 1999, an additional
5% of the issued and outstanding ordinary shares of the
Company at an aggregate price of $2,700,000 providing the
Company did not effect an initial public offering ("IPO")
prior to October 1, 1999. In the event that the Company
does not effect an IPO prior to April 3, 2000, the investors
have the right to purchase, through May 3, 2000, an
additional 5% of the issued and outstanding ordinary shares
of the Company, as of immediately prior to closing,
excluding warrants and options for $2,250,000.
4. In June 1999, the Company signed an agreement with
private investors, pursuant to which the Company issued
304,748 ordinary shares (representing a 4.7619% interest in
the Company) at $9.8442 per share ($3,000 thousand in
aggregate) which were issued in August 1999.
Pursuant to the agreement, the investors were granted the
right to purchase, through November 1, 1999, an additional
4.7619% of the issued and outstanding ordinary shares of the
Company at an aggregate price of $2,700,000 providing the
Company did not effect an IPO prior to October 1, 1999. In
the event that the Company does not effect an IPO prior to
April 3, 2000, the investors have the right to purchase
through May 3, 2000, an additional 4.7619% of the issued and
outstanding ordinary shares of the Company, as of
immediately prior to closing, excluding warrants and options
at an aggregate price equal to $2,250,000.
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Shareholders' equity (cont'd.)
b. Stock option plans
The Company has adopted two option plans to provide for the grant
of options to certain officers and employees. As of December 31,
1999 and 1998, 255,000 and 128,820 options, respectively, had
been granted under the plans. The exercise prices of the options
granted ranged between $0 and $9.8442. The options are
exercisable between 2-5 years from the date of the grant,
providing that the employee remains in the Company's employment.
The options expire five years from the date of grant.
With respect to options granted at exercise prices below the fair
market value of the underlying shares at the date of grant,
deferred compensation is recorded and charged to earnings over
the vesting period of the options in accordance with APB 25
"Accounting for Stock Issued to Employees".
A summary of the status of the Company's stock option plans as of
December 31, 1999 and 1998 and changes during the years then
ended are as follows:
<TABLE>
Year ended Year ended Year ended
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
shares price $ shares price $ shares price $
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 419,820 2.76 362,000 3.02 20,000 2.00
Granted during year 315,000 6.13 128,820 2.45 342,000 3.08
Exercised during year - - - - - -
Cancelled during year (81,000) 4.28 (71,000) 3.50 - -
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 653,820 4.20 419,820 2.76 362,000 3.02
========== ========== ========== ========== ========== ==========
Options exercisable at end of year 215,820 2.39 - - - -
========== ========== ========== ========== ========== ==========
Weighted average fair value of
options granted during the year 4.55 2.20 1.90
========== ========== ==========
</TABLE>
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Shareholders' equity (cont'd.)
c. Stock option plans (cont'd.)
The following table summarizes information relating to stock
options outstanding at December 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
-------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Weighted
average
Number remaining Weighted Number Weighted
outstanding contractual average exercisable average
at December life (in exercise at December exercise
Exercise Price $ 31, 1999 years) $ price $ 31, 1999 price $
---------------- ---------- ---------- ---------- ---------- ----------
0.00 12,820 3.41 - 12,820 -
2.00 175,000 2.53 2.00 130,000 2.00
3.50 346,000 3.40 3.50 73,000 3.50
9.84-10.00 120,000 4.85 9.87 - -
---------- ---------- ----------
0.00-10.00 653,820 3.43 4.20 215,820 2.39
========== ========== ==========
</TABLE>
Fair Value Disclosures:
Had compensation expenses for the Company's option plans
been determined on the basis of the fair value at the grant
dates, as prescribed in SFAS No. 123, the Company's net loss
would have been as follows:
Year ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
Net loss:
As reported $ 4,797 $ 1,382 $ 897
Pro forma $ 4,971 $ 1,572 $ 1,077
Data in Respect of Option Plans
The fair value of each option grant is estimated on the date
of the grant using the minimum value method for grants in 1999,
1998 and 1997. The following assumptions were used:
Dividend yield of 0.00% for all periods; risk-free interest
rate of 5.65% in 1999, 5.57% in 1998 and 6.46% in 1997; weighted
average expected lives of 5 years granted in all periods.
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Liens and securities
a. The total secured liabilities of the Company are comprised
as follows:
December 31,
1999 1998
---------- ----------
($ in thousands)
Current liabilities $ 14 $ 21
Long-term liablities 19 30
---------- ----------
$ 33 $ 51
========== ==========
The Company has registered a fixed lien on its motor vehicles.
b. Negative pledge agreement
The Company has a negative pledge agreement with its principal
banks. Pursuant to this agreement, the Company undertook not to
register floating charges on its assets in favor of third parties
without the prior consent of the banks.
Note 12 - Taxes on income
a. Taxation under various laws
1. The Company is assessed under the provisions of the
Income Tax Law (Inflationary Adjustments), 1985, pursuant to
which the results for tax purposes are measured in Israeli
currency in real terms in accordance with changes in the
Israeli consumer price index.
2. "Approved enterprise"
a. The production facilities of the Company have been
granted "approved enterprise" status in two separate
programs under the Law for the Encouragement of Capital
Investments, 1959, as amended. Under this law, income
attributable to each of these enterprises is fully exempt
from tax for ten years, commencing the first year in which
each enterprise generates taxable income. (The expiry date
of the period of benefits is limited to the earlier of
twelve years from commencement of production or fourteen
years from the date of the approval). The period of
benefits has not yet commenced.
b. In the event of a distribution of cash dividend out of
tax-exempt income, as above, the Company will be liable to
corporate tax at a rate of 25% in respect of the amount
distributed.
c. The Company has submitted a final performance report
for the first approved enterprise program and received final
approval from the Investment Center.
d. Income derived from sources other than the "approved
enterprise" is taxable at the regular corporate tax rate of
36%.
3. "Industrial company"
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Taxes on income (cont'd)
The Company is an "industrial company" as defined in the Law
for the Encouragemnent of Industry (Taxes), 1969, and as
such, is entitled to certain tax benefits, mainly the right
to claim public issue expenses and the amortization of
patents and other intangible property rights as a deduction
for tax purposes.
b. Tax assessments
The Company has received final tax assessments for the years up
to and including 1995.
c. Deferred income taxes
There are no deferred tax balances as of the end of any reporting
period. As the Company is exempt from tax, the statutory tax
rate for the purposes of the reconciliation of reported tax
expense is zero.
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $6.5 million. The balance of such
net operating loss carryforwards has no expiration period.
Note 13 - Supplementary balance sheet information
a. Trade receivables
December 31,
1999 1998
---------- ----------
($ in thousands)
Allowance for doubtful accounts $ 30 $ -
========== ==========
b. Earned but unbilled receivables
December 31,
1999 1998
---------- ----------
($ in thousands)
Allowance for doubtful accounts $ - $ 300
========== ==========
c. Due from related parties
December 31,
1999 1998
---------- ----------
($ in thousands)
Loans to related parties $ 169 $ 165
========== ==========
The loans were made to two related parties who are employed by the
Company ("the related parties"). During the year ended December
31, 1999, the related parties are repaying the loans at $950 per
month. The loans are linked to the Israeli consumer price index
and are non-interest bearing.
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Supplementary balance sheet information (cont'd.)
d. Other receivables and prepaid expenses
December 31,
1999 1998
---------- ----------
($ in thousands)
Due from the Government of Israel:
Research and development participation $ 227 $ 85
Marketing participation 30 30
Advances to suppliers 69 10
Prepaid expenses 88 64
Tax authorities 34 14
Value added tax 224 44
Income receivable 144 -
Other 19 -
---------- ----------
$ 835 $ 247
========== ==========
e. Other payables and accrued expenses
December 31,
1999 1998
---------- ----------
($ in thousands)
Payroll and related amounts $ 540 $ 289
Accrued expenses 55 73
Prepaid income - 114
Tax authorities 17 -
Other 28 20
---------- ----------
$ 640 $ 496
========== ==========
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Supplementary statement of operations information
a. Revenues
1. Classification of total revenues by geographical
distribution:
Years ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
Israel $ 1,055 $ 1,802 $ 1,015
Germany 600 - -
Europe 145 - 85
Columbia 325 - -
South America - 25 164
South Korea - 945 406
Other 55 2 30
---------- ---------- ----------
Total revenues $ 2,280 $ 2,774 $ 1,700
========== ========== ==========
2. Sales to a single customer exceeding 10% of total
revenues:
Year ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
Customer A (1)% 17% 32%
Customer B - - (1)%
Customer C - 34% 24%
Customer D 21% 39% (1)%
Customer E 29% - -
Customer F 15% - -
(1) - Less than 10%
b. Research and development participation
Year ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
Gross research and development costs $ 4,557 $ 2,691 $ 1,616
Less: royalty-bearing grants from
the Government of Israel 2,310 1,313 989
---------- ---------- ----------
$ 2,247 $ 1,378 $ 627
========== ========== ==========
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Supplementary statement of operations information (cont'd.)
c. Sales and marketing expenses
Year ended December 31,
1999 1998 1997
---------- ---------- ----------
($ in thousands)
Bad debt expense $ 300 $ - $ 13
========== ========== ==========
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
June 30 December 31,
2000 1999
---------- ----------
<S> <C> <C>
($ in thousands)
ASSETS
Current assets
Cash and cash equivalent $ 3,217 $ 5,565
Short-term investments - 25
Trade receivable 636 888
Other receivables and prepaid expenses 607 847
Inventories 4,843 3,594
---------- ----------
Total current assets 9,303 10,919
Due from related parties 180 157
Long-term investments 44 38
Property and equipment, net 1,590 1,200
---------- ----------
$ 11,117 $ 12,314
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousand)
<TABLE>
June 30 December 31,
2000 1999
---------- ----------
<S> <C> <C>
($ in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term credits and current maturities
of long-term debt $ 4,692 $ 1,800
Trade payables 1,846 2,393
Other payables and accrued expenses 894 640
---------- ----------
Total current liabilities 7,432 4,833
Long-term liabilities
Long-term debts from banks 13 19
Convertible debentures 3,000 3,000
Accrued severance pay 432 350
---------- ----------
Total long-term liablities 3,445 3,369
---------- ----------
Shareholders' equity
Share capital:
Ordinary shares of NIS 0.5 par value:
10,000,000 shares authorized, 6,414,949 shares
issued and outstanding at June 30, 2000 and
December 31, 1999 999 999
Additional paid-in capital 12,420 12,847
Deferred stock compensation (61) (615)
Accumulated deficit (13,118) (9,119)
---------- ----------
Total shareholders' equity 240 4,112
---------- ----------
$ 11,117 $ 12,314
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousand, except shares data, unaudited)
<TABLE>
Six months ended June 30,
2000 1999
---------- ----------
<S> <C> <C>
Revenues:
Research and development contracts $ - $ 1,529
Systems sales 1,866 -
---------- ----------
1,866 1,529
Costs and expenses:
Cost of revenues 1,935 476
Research and development costs, net 1,520 920
Sales and marketing expenses, net 1,598 427
General and administrative expenses 742 766
---------- ----------
Operating loss (3,929) (1,060)
Interest income (expenses), net (82) (37)
Other income (expenses), net 12 -
---------- ----------
Net loss $ (3,999) $ (1,097)
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
Six months ended June 30,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,999) $ (1,097)
Adjustments to reconcile net loss to net cash
used in operating activities (Appendix A) (682) (131)
---------- ----------
Net cash used in operating activities (4,681) (1,228)
---------- ----------
Cash flows from investing activities:
Proceeds from realization of (investment in)
short-term investments 25 -
Investment in long-term deposits (6) -
Grant of loans to related parties (23) -
Repayment of related party loans - 3
Purchase of equipment and other assets (534) (214)
Proceeds from sale of equipment 22 17
---------- ----------
Net cash used in investing activities (516) (194)
---------- ----------
Cash flows from financing activities:
Payments on account of share capital (37) -
Proceeds from issue of shares, net - 3,042
Receipts of short-term debt 2,892 -
Repayments of short-term debt - (38)
Repayments of long-term debt (6) (12)
---------- ----------
Net cash provided by financing activities 2,849 2,992
---------- ----------
Net change in cash and cash equivalents (2,348) 1,570
Cash and cash equivalents at beginning of period 5,565 513
---------- ----------
Cash and cash equivalents at end of period $ 3,217 $ 2,083
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
(In thousand)
<TABLE>
Six months ended June 30,
2000 1999
---------- ----------
<S> <C> <C>
Appendix A
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 133 125
Loss (gain) on sale of property and equipment (11) -
Amortization of deferred compensation expenses 164 447
Gain from marketable securties - (6)
Changes in assets and liabilities:
Decrease (increase) in assets:
Trade receivables 252 (498)
Other receivables and prepaid expenses 240 53
Inventories (1,249) (609)
Increase (decrease) in liabilities:
Trade payables (547) 330
Other payables and accrued expenses 254 (28)
Accrued severance pay 82 55
---------- ----------
$ (682) $ (131)
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements
GADLINE, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 8-K and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six
month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
For further information, refer to the consolidated financial
statements and notes thereto included in the Company's 1999 Annual
Report.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements," which provides the SEC staff's views on
selected revenue recognition issues. The guidance in SAB 101 must be
adopted during the fourth quarter of fiscal 2000 and the effects, if
any, are required to be recorded through a retroactive, cumulative-
effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Our management
has not completed its evaluation of the effects, if any, that SAB 101
will have on the Company's income statement presentation, operating
results or financial position.
2. INVENTORIES
Inventories consist of (in thousands):
June 30 December 31,
2000 1999
---------- ----------
($ in thousands)
Raw materials $ 1,907 $ 1,370
Work-in-process 2,634 1,837
Finished goods 302 387
---------- ----------
$ 4,843 $ 3,594
========== ==========
3. 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 its net assets during the period from nonowner
sources. Comprehensive loss for the six month period ended June 30,
2000 and 1999 was the same as net loss.
4. SUBSEQUENT EVENT:
On July 3, 2000, GADline entered into an agreement to convert all
amounts owed, principal and accrued and unpaid interest, on the
Convertible Debentures into 470,822 shares of GADline's common stock.
COM21, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF JUNE 30, 2000
(In thousands)
<TABLE>
Pro Forma
Merger Pro Forma
Com21 Gadline Adjustments Notes Com21
---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,739 $ 3,217 $ - $ 43,956
Short-term investments 35,305 - - 35,305
Accounts receivable 32,250 636 - 32,886
Inventories 6,206 4,843 - 11,049
Prepaid expenses and other 4,097 607 - 4,704
---------- ---------- ---------- ----------
Total current assets 118,597 9,303 - 127,900
Investments 14,986 - - 14,986
Property and equipment, net 10,540 1,590 - 12,130
Intangible assets, net - - 68,913 4, 9 68,913
Other assets 2,493 224 - 2,717
---------- ---------- ---------- ----------
Total assets $ 146,616 $ 11,117 $ 68,913 $ 226,646
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,727 $ 1,846 $ - $ 21,573
Accrued compensation and related
benefits 3,982 432 - 4,414
Deferred revenue 286 - - 286
Other current liabilities 4,734 894 2,800 2 8,428
Current capital lease and debt
obligations 473 4,692 - 5,165
---------- ---------- ---------- ----------
Total current liabilities 29,202 7,864 2,800 39,866
Deferred rent 297 - - 297
Capital lease and debt obligations 86 13 - 99
Convertible debentures - 3,000 - 9 3,000
---------- ---------- ---------- ----------
Total Liabilities 29,585 10,877 2,800 43,262
Stockholders' equity:
Common stock 22 999 (997) 1,3 24
Additional paid in capital 183,321 12,420 64,181 1,3,5,10 259,922
Deferred stock compensation (700) (61) (1,366) 3,5 (2,127)
Accumulated deficit (65,180) (13,118) 4,295 3,6 (74,003)
Accumulated other comprehensive income (432) - - (432)
---------- ---------- ---------- ----------
Total Stockholders' Equity 117,031 240 66,113 183,384
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity $ 146,616 $ 11,117 $ 68,913 $ 226,646
========== ========== ========== ==========
</TABLE>
See notes to pro forma condensed combining financial statements
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands, except for per share data)
<TABLE>
Pro Forma
Merger Pro Forma
Com21 Gadline Adjustments Notes Com21
---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 95,743 $ 2,180 $ - $ 97,923
Cost of revenues 60,918 1,633 - 62,551
---------- ---------- ---------- ----------
Gross Profit 34,825 547 - 35,372
---------- ---------- ---------- ----------
Operating costs
Research and development 29,821 2,247 3,959 7 36,027
Selling and marketing 16,250 1,681 209 7 18,140
General and administrative 4,120 1,526 10,575 7,8,9 16,221
---------- ---------- ---------- ----------
Total operating expenses 50,191 5,454 14,743 70,388
---------- ---------- ---------- ----------
Loss from operations (15,366) (4,907) (14,743) (35,016)
Total other income, net 5,104 110 - 5,214
---------- ---------- ---------- ----------
Loss before income taxes (10,262) (4,797) (14,743) (29,802)
Provision for income taxes 55 - - 55
---------- ---------- ---------- ----------
Net loss $ (10,317) $ (4,797) $ (14,743) $ (29,857)
========== ========== ========== ==========
Net loss per share, basic and
diluted $ (0.49) $ (1.28)
========== ==========
Shares used in computation, basic
and diluted 20,932 1 23,382
========== ==========
</TABLE>
See notes to pro forma condensed combining financial statements
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands, except for per share data )
<TABLE>
Pro Forma
Merger Pro Forma
Com21 Gadline Adjustments Notes Com21
---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 92,914 $ 1,866 $ - $ 94,780
Cost of revenues 66,314 1,671 - 67,985
---------- ---------- ---------- ----------
Gross Profit 26,600 195 - 26,795
---------- ---------- ---------- ----------
Operating costs
Research and development 18,882 1,520 1,980 7 22,382
Selling and marketing 12,673 1,862 104 7 14,639
General and administrative 3,982 742 5,288 7,8,9 10,012
---------- ---------- ---------- ----------
35,537 4,124 7,372 47,033
---------- ---------- ---------- ----------
Loss from operations (8,937) (3,929) (7,372) (20,238)
Total other income (expense), net 2,795 (70) - 2,725
---------- ---------- ---------- ----------
Loss before income taxes (6,142) (3,999) (7,372) (17,513)
Provision for income taxes 22 - - 22
---------- ---------- ---------- ----------
Net loss $ (6,164) $ (3,999) $ (7,372) $ (17,535)
========== ========== ========== ==========
Net loss per share, basic and
diluted $ (0.28) $ (0.72)
========== ==========
Shares used in computation, basic
and diluted 21,847 1 24,297
========== ==========
</TABLE>
See notes to pro forma condensed combining financial statements
COM21, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
1. ACQUISITION
On July 3, 2000, pursuant to a Share Purchase Agreement dated April
18, 2000 among the Registrant, Com21, Inc., a Delaware corporation,
and GADline, Ltd., an Israeli company, GADline was merged with and
into Com21. GADline develops, manufactures and market innovative,
fully managed networking solutions that deliver high-speed data and
telephony services over a hybrid fiber coaxial infrastructure.
Pursuant to the GADline Agreement, the former shareholders
of GADline received an aggregate of two million four hundred and fifty
thousand (2,450,000) shares of Com21 common stock, all outstanding
GADline options converted into options to purchase of approximately
232,000 shares of the Registrant's common stock, and an additional
350,000 shares of the Registrant's common stock may be issued to
GADline shareholders upon completion of predefined milestones through
December 31, 2000. The fair value of the contingent shares will be
measured upon achievement of the predefined milestones and will be
accounted for as additional purchase price. The Registrant also
assumed certain operating assets and liabilities of GADline. The
acquisition was treated by the Registrant as a purchase for accounting
purposes.
2. PRO FORMA ADJUSTMENTS
The accompanying pro forma financial statements are presented in
accordance with Article 11 of Regulation S-X.
The unaudited pro forma condensed combining balance sheet has been
prepared as if the acquisition, which was accounted for as a purchase,
was completed as of June 30, 2000. The aggregate purchase price, and
approximately $2.8 million of costs directly attributable to the
completion of the acquisition have been allocated to the assets and
liabilities acquired. The allocation of the purchase price among the
identifiable intangible assets was based on estimates of the fair
market value of those assets. As a result, $8.8 million was allocated
to purchased in-process research and development, which has not yet
reached technological feasibility and does not have alternative future
uses. This amount has been charged to the company's operations in
accordance with generally accepted accounting principles in the
quarter ending September 30, 2000.
To prepare the pro forma unaudited condensed combining statements of
operations, the Com21 statement of operations for the year ended
December 31, 1999 has been combined with the consolidated statement of
operations of GADline for the year ended December 31, 1999. Also, the
Com21 condensed consolidated statement of operations for the six
months ended June 30, 2000 has been combined with the condensed
consolidated statement of operations of GADline for the six months
ended June 30, 2000. This method of combining the companies is only
for the presentation of pro forma unaudited condensed combining
financial statements. Actual statements of operations of the
companies will be combined from the effective date of the acquisition,
with no retroactive restatement.
The unaudited pro forma condensed combining statement of operations
for the year ended December 31, 1999 and six months ended June 30,
2000 reflect the GADline transaction as if it had taken place on
January 1, 1999.
The unaudited pro forma condensed combining statements of operations
do not include the one-time charge of $8.8 million for purchased in-
process technology arising from this acquisition, as it is a material
nonrecurring charge. This charge will be included in the actual
condensed consolidated statement of operations of Com21 in the third
quarter of fiscal 2000.
The unaudited pro forma condensed combining financial statements
should be read in conjunction with the historical financial statements
of Com21 and GADline.
COM21, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
(CONT'D)
The unaudited pro forma condensed combining financial statements have
been prepared on the basis of assumptions described in the notes
hereto and include assumptions relating to the allocation of the
consideration paid for the assets and liabilities of GADline based
upon independent estimates of fair value. Below is a table of the
total purchase price, purchase price allocation and annual
amortization of the intangible assets acquired used for the purposes
of the pro forma condensed combining financial statements (in
thousands):
<TABLE>
<S> <C> <C> <C>
Common Stock $ 71,400
Options Assumed 3,776
Acquisition Expenses 2,800
----------
Total Purchase Price $ 77,976
==========
Purchase Price Allocation:
Fair market value of net tangible
assets acquired of GADline at
June 30, 2000 $ 240
Economic Annual
Life Amortization
---------- -----------
Intangible assets acquired:
Customer base 239 3 $ 80
Workforce-In-Place 1,564 5 313
Tradename 1,111 5 222
Core technology 9,114 5 1,823
Current technology 6,038 5 1,208
In-Process research & development 8,823
Goodwill 50,847 5 10,169
----------
$ 77,976
==========
</TABLE>
Com21 is recording a one-time charge of $8.8 million in the third
quarter of 2000 for purchased in-process technology related to a
development project that had not reached technological feasibility,
had no alternative future use, and for which successful development
was uncertain. The conclusion that the in-process development effort,
or any material sub-component, had no alternative future use was
reached in consultation with Com21 and GADline managements.
The development project is an integrated network solution for data and
voice over Internet protocol. The primary project tasks open include
integration of the Gateway, circuit design, card development, design
of the V-board and testing. At the time of acquisition, development
remained on all tasks and estimated costs to complete were
approximately $9.0 million. Management expects that product being
developed will become available for sale in fiscal 2001; however, no
assurances can be given. Com21 will begin to benefit from the
acquired research and development related to this product once it
begins shipping. Failure to reach successful completion of this
project could result in impairment of the associated capitalized
intangible assets and could require the Company to accelerate the time
period over which the intangibles are being amortized, which could
have a material adverse effect on the Company's business, financial
condition or results of operations.
COM21, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
(CONT'D)
Significant assumptions used to determine the value of in-process
technology included several factors, including the following. First,
an income approach that focuses on the income producing capability of
the acquired technology, and best represents the present value of the
future economic benefits expected to derive from them. Second, a
forecast of net cash flows that were expected to result from the
development effort, using
projections prepared by Com21's management. Third, a discount rate of
approximately 25% was computed after analysis of the risk of an
investment in GADline and considered the implied rate of the
transaction and the weighted average cost of capital.
The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:
(1) To reflect the issuance of 2,450,000 shares of Com 21 common
stock ($0.001 par value) to the holders of the Gadline Ltd.
common stock.
(2) To record the transaction fees directly attributable to the
acquisition.
(3) To eliminate GADline stockholders' equity.
(4) To record goodwill and other intangibles such as workforce,
customer base, trade name, core and current technologies
identified in the purchase price allocation the acquisition.
(5) To record deferred compensation on the intrinsic value of
unvested options assumed.
(6) To record the one-time charge of $8.8 million for purchased
in-process research and development identified in the purchase
price allocation.
(7) To record the amortization of acquired intangible assets on
a straightline basis over estimated useful lives ranging from
three to five years of $13.8 million for the year ended December
31, 1999 and $6.9 million for the six months ended June 30, 2000.
(8) To record the amortization of deferred stock compensation
over the vesting period of options assumed.
(9) Excludes the impact of the conversion of the $3.0 million
debt obligation into 470,822 shares of GADline common stock on
July 3, 2000.
(10) To record the fair value of options exchanged in the
transaction.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Com21, Inc.
Dated: September 18, 2000 By: /s/ David L. Robertson
--------------------------
David L. Robertson
Chief Financial Officer
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent auditors of Gad-Line Ltd. ("the Company"), we hereby consent to
the inclusion of our report on the Company's consolidated balance sheets as of
December 31, 1999 and 1998 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999 in form 8K-A of Com21, Inc. to be filed in September
2000.
/s/Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte Touche Tohmatsu
Tel-Aviv, Israel
September 13, 2000
