8-K/A 1 0001.txt 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 December 31, 1999 1998 ---------- ---------- ($ 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
GADLINE, LTD. CONSOLIDATED BALANCE SHEETS December 31, 1999 1998 ---------- ---------- ($ 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
GADLINE, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1999 1998 1997 ---------- ---------- ---------- (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 ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements GADLINE, LTD. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 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 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements GADLINE, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 1998 1997 ---------- ---------- ---------- ($ 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 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements GADLINE, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.) Year Ended December 31, 1999 1998 1997 ---------- ---------- ---------- ($ in thousands) 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 ========== ========== ==========
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: Year ended Year ended Year ended December 31, 1999 December 31, 1998 December 31, 1997 --------------------- --------------------- --------------------- 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 ========== ========== ==========
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: Options Outstanding Options Exercisable -------------------------------- --------------------- 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 ========== ========== ==========
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) June 30 December 31, 2000 1999 ---------- ---------- ($ 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 ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements GADLINE, LTD. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousand) June 30 December 31, 2000 1999 ---------- ---------- ($ 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 ========== ==========
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) Six months ended June 30, 2000 1999 ---------- ---------- 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) ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements GADLINE, LTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six months ended June 30, 2000 1999 ---------- ---------- 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 ========== ==========
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) Six months ended June 30, 2000 1999 ---------- ---------- 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) ========== ==========
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) Pro Forma Merger Pro Forma Com21 Gadline Adjustments Notes Com21 ---------- ---------- ---------- ------- ---------- 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 ========== ========== ========== ==========
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) Pro Forma Merger Pro Forma Com21 Gadline Adjustments Notes Com21 ---------- ---------- ---------- ------- ---------- 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 ========== ==========
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 ) Pro Forma Merger Pro Forma Com21 Gadline Adjustments Notes Com21 ---------- ---------- ---------- ------- ---------- 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 ========== ==========
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): 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 ==========
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