<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): 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
The undersigned Registrant hereby amends Item 2 and Item 7 of its Current Report
on Form 8-K dated July 18, 2000 and its Current Report on Form 8-K/A dated
September 18, 2000, to read in its entirety as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 3, 2000 (the "GADline Closing Date"), the registrant, Com21,
Inc. ("Com21" or "the Registrant"), purchased all of the issued and outstanding
ordinary shares of GADline Ltd. ("GADline"), pursuant to a certain Share
Purchase Agreement (the "GADline Agreement") by and among Com21, GADline, the
sellers party thereto and Ofir Zemer, as Sellers' Representative, dated April
18, 2000 (the "GADline Acquisition"). GADline is 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.
The aggregate purchase price for the GADline Acquisition consisted of
2,281,750 shares of Com21's common stock (the "Com21 Shares"), including shares
which are being held in escrow to indemnify Com21 against certain damages that
it may incur arising out of the GADline Agreement. An additional 231,737 shares
of Com21's common stock are reserved for issuance upon exercise of outstanding
GADline stock options that were assumed in the GADline Acquisition, and an
additional 359,636 shares of Com21's common stock may be issued to the former
shareholders and optionholders of GADline upon the achievement of certain
milestones. The Registrant also assumed certain operating assets and liabilities
of GADline.
All of the Com21 Shares issued in the GADline Acquisition were sold in
reliance on an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), and constitute "restricted
1
<PAGE> 2
securities" under the Securities Act. The Com21 Shares are also subject to
additional restrictions on transfer as set forth in the GADline Agreement.
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 FORMA 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 $67.3
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
<TABLE>
<S> <C>
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.
</TABLE>
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GADline, Inc. Page
<S> <C>
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
</TABLE>
3
<PAGE> 4
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
4
<PAGE> 5
GADLINE, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE> 6
GADLINE, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
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 13c) 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
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
6
<PAGE> 7
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
($ in thousands, except share data)
<S> <C> <C> <C>
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
7
<PAGE> 8
GADLINE, LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Receipts
shares Additional on account Deferred Total
NIS 0.5 Share paid-in of share Accumulated stock shareholders'
per share capital capital capital deficit compensation equity
--------- --------- ---------- ---------- ----------- ------------ -------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
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
8
<PAGE> 9
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
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
9
<PAGE> 10
GADLINE, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
<TABLE>
<CAPTION>
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 securities -- (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
10
<PAGE> 11
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.
11
<PAGE> 12
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:
<TABLE>
<S> <C>
Computers and related equipment 3 - 5 years
Office furniture and equipment 6 - 16 years
Motor vehicles 6 years
</TABLE>
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 $550,000, respectively, most
of which are deposited in Israeli banks. Management
12
<PAGE> 13
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Note 2 - Significant accounting policies (Cont'd.)
believes that the financial institutions holding the Company's cash and cash
equivalents are financially sound. Accordingly, the Company does not
anticipate credit losses in respect to this item.
Most of the Company's revenues are generated in Europe, Israel and South
America (see note 14). The Company maintains an allowance for doubtful
accounts, which management believes, adequately covers all anticipated
losses in respect of trade receivables.
n. Recently issued accounting standards
In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. SFAS 133 requires that all
derivatives instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and if it is, the
type of hedge transaction. The Company does not expect the adoption of SFAS
133 to have a material impact on its financial statements.
Note 3 - Inventories
Comprised as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
Components and accessories $ 1,370 $ 380
Work-in-process 1,837 624
Finished goods 387 81
-------- --------
$ 3,594 $ 1,085
======== ========
</TABLE>
13
<PAGE> 14
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Note 4 - Property and equipment
a. Comprised as follow:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
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
====== ======
</TABLE>
b. Liens - see Note 11
Note 5 - Short-term credits and current maturities of long-term debts
a. Comprised as follows:
<TABLE>
<CAPTION>
Average December 31,
Interest rate ------------------
% 1999 1998
------------- ------ ------
($ in thousands)
<S> <C> <C> <C>
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
====== ======
</TABLE>
(*) - Denominated in NIS and unlinked
b. Securities - see Note 11
14
<PAGE> 15
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-term debts from banks
a. Comprised as follows:
<TABLE>
<CAPTION>
Average December 31,
Interest Rate ---------------
% 1999 1998
------------- ---- ----
($ in thousands)
<S> <C> <C> <C>
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
==== ====
</TABLE>
(*) - Denominated in NIS
b. Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C> <C>
First year - Current maturities $ 14 $ 21
Second year 13 14
Third year 6 12
Fourth year -- 4
---- ----
Total long-term debt $ 33 $ 51
==== ====
</TABLE>
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.
15
<PAGE> 16
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:
16
<PAGE> 17
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and contingent liabilities (cont'd.)
<TABLE>
<CAPTION>
$ in thousands
--------------
<S> <C>
2000 344
2001 380
2002 368
2003 351
2004 156
</TABLE>
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.
17
<PAGE> 18
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>
<CAPTION>
Year ended Year ended Year ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
average Number average Number average
Number of exercise of exercise of exercise
shares price $ shares price $ shares price $
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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>
18
<PAGE> 19
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>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------- -----------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
December 31, contractual life exercise December 31, exercise
Exercise price $ 1999 (in years) $ price $ 1999 price $
-------------------- -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
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:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
Net loss:
As reported $ 4,797 $ 1,382 $ 897
Pro forma $ 4,971 $ 1,572 $ 1,077
</TABLE>
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.
19
<PAGE> 20
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Liens and securities
a. The total secured liabilities of the Company are comprised as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
Current liabilities $ 14 $ 21
Long-term liablities 19 30
------ ------
$ 33 $ 51
====== ======
</TABLE>
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"
20
<PAGE> 21
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 $6.5 million. The balance of such net
operating loss carryforwards has no expiration period.
Note 13 - Supplementary balance sheet information
a. Trade receivables
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
Allowance for doubtful accounts $ 30 $ --
====== ======
</TABLE>
b. Earned but unbilled receivables
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
Allowance for doubtful accounts $ -- $ 300
====== ======
</TABLE>
c. Due from related parties
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
Loans to related parties $ 169 $ 165
====== ======
</TABLE>
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 $950 per month. The loans are
linked to the Israeli consumer price index and are non-interest bearing.
21
<PAGE> 22
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Supplementary balance sheet information (cont'd.)
d. Other receivables and prepaid expenses
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
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
====== ======
</TABLE>
e. Other payables and accrued expenses
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------ ------
($ in thousands)
<S> <C> <C>
Payroll and related amounts $ 540 $ 289
Accrued expenses 55 73
Prepaid income -- 114
Tax authorities 17 --
Other 28 20
------ ------
$ 640 $ 496
====== ======
</TABLE>
22
<PAGE> 23
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Supplementary statement of operations information
a. Revenues
1. Classification of total revenues by geographical distribution:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
------ ------ ------
($ in thousands)
<S> <C> <C> <C>
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 $2,180 $2,774 $1,700
====== ====== ======
</TABLE>
2. Sales to a single customer exceeding 10% of total revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Customer A (1)% 17% 32%
Customer B -- -- (1)%
Customer C -- 34% 24%
Customer D 21% 39% (1)%
Customer E 29% -- --
Customer F 15% -- --
</TABLE>
(1) - Less than 10%
b. Research and development participation
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
($ in thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
23
<PAGE> 24
GADLINE., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Supplementary statement of operations information (cont'd.)
c. Sales and marketing expenses
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
($ in thousands)
<S> <C> <C> <C>
Bad debt expense $ 300 $ -- $ 13
====== ====== ======
</TABLE>
24
<PAGE> 25
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
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
25
<PAGE> 26
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousand)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
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 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
26
<PAGE> 27
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousand, except shares data, unaudited)
<TABLE>
<CAPTION>
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
27
<PAGE> 28
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
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
28
<PAGE> 29
GADLINE, LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
(In thousand)
<TABLE>
<CAPTION>
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 securities -- (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
29
<PAGE> 30
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):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Raw materials $1,907 $1,370
Work-in-process 2,634 1,837
Finished goods 302 387
------ ------
$4,843 $3,594
====== ======
</TABLE>
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.
30
<PAGE> 31
COM21, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
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 -- -- 64,544 4,9 64,544
Other assets 2,493 224 -- 2,717
--------- --------- --------- ---------
Total assets $ 146,616 $ 11,117 $ 64,544 $ 222,277
========= ========= ========= =========
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 3,060 2 8,688
Current capital lease and debt obligations 473 4,692 -- 5,165
--------- --------- --------- ---------
Total current liabilities 29,202 7,864 3,060 40,126
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 3,060 43,522
Stockholders' equity:
Common stock 22 999 (997) 1,3 24
Additional paid in capital 183,321 12,420 58,852 1,3,5,10 254,593
Deferred stock compensation (700) (61) (666) 3,5 (1,427)
Accumulated deficit (65,180) (13,118) 4,295 3,6 (74,003)
Accumulated other comprehensive income (432) -- -- (432)
--------- --------- --------- ---------
Total Stockholders' Equity 117,031 240 61,484 178,755
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 146,616 $ 11,117 $ 64,544 $ 222,277
========= ========= ========= =========
</TABLE>
See notes to pro forma condensed combining financial statements
31
<PAGE> 32
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
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 3,030 7 65,581
--------- --------- --------- ---------
Gross Profit 34,825 547 (3,030) 32,342
--------- --------- --------- ---------
Operating costs
Research and development 29,821 2,247 588 7,8 32,656
Selling and marketing 16,250 1,681 159 7,8 18,090
General and administrative 4,120 1,526 9,637 7,8,9 15,283
--------- --------- --------- ---------
Total operating expenses 50,191 5,454 10,384 66,029
--------- --------- --------- ---------
Loss from operations (15,366) (4,907) (13,414) (33,687)
Total other income, net 5,104 110 -- 5,214
--------- --------- --------- ---------
Loss before income taxes (10,262) (4,797) (13,414) (28,473)
Provision for income taxes 55 -- -- 55
--------- --------- --------- ---------
Net loss $ (10,317) $ (4,797) $ (13,414) $ (28,528)
========= ========= ========= =========
Net loss per share, basic and diluted $ (0.49) $ (1.23)
========= =========
Shares used in computation, basic and diluted 20,932 1 23,214
========= =========
</TABLE>
See notes to pro forma condensed combining financial statements
32
<PAGE> 33
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
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 1,515 7 69,500
--------- --------- --------- ---------
Gross Profit 26,600 195 (1,515) 25,280
--------- --------- --------- ---------
Operating costs
Research and development 18,882 1,520 294 7,8 20,696
Selling and marketing 12,673 1,862 80 7,8 14,615
General and administrative 3,982 742 4,818 7,8,9 9,542
--------- --------- --------- ---------
35,537 4,124 5,192 44,853
--------- --------- --------- ---------
Loss from operations (8,937) (3,929) (6,707) (19,573)
Total other income (expense), net 2,795 (70) -- 2,725
--------- --------- --------- ---------
Loss before income taxes (6,142) (3,999) (6,707) (16,848)
Provision for income taxes 22 -- -- 22
--------- --------- --------- ---------
Net loss $ (6,164) $ (3,999) $ (6,707) $ (16,870)
========= ========= ========= =========
Net loss per share, basic and diluted $ (0.28) $ (0.70)
========= =========
Shares used in computation, basic and diluted 21,847 1 24,129
========= =========
</TABLE>
See notes to pro forma condensed combining financial statements
33
<PAGE> 34
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 2,281,750 shares of Com21 common stock, all outstanding
GADline options converted into options to purchase 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 $3.1 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.
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<PAGE> 35
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>
Common Stock $ 67,340
Options Assumed 3,207
Acquisition Expenses 3,060
--------
Total Purchase Price $ 73,607
========
</TABLE>
<TABLE>
<CAPTION>
Economic Annual
Life Amortization
-------- ------------
<S> <C> <C> <C>
Purchase Price Allocation:
Fair market value of net tangible assets acquired
of GADline at June 30, 2000 $ 3,240
Intangible assets acquired:
Customer base 239 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 43,478 5 8,696
--------
$ 73,607
========
</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.
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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 2,281,750 shares of Com21 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 $12.9 million for the year ended December 31, 1999 and
$6.5 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.
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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: December 5, 2000 By: /s/ David L. Robertson
David L. Robertson
Chief Financial Officer
37
