-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OOKY+GDeumDoyxAVpgXkJu9U4qpIvncoEs79kGPV+PuUDxO7z4nvNuflj8rZooA8 DL3Gr1jISYGneh8x5M9anA== 0000950005-97-000972.txt : 19971125 0000950005-97-000972.hdr.sgml : 19971125 ACCESSION NUMBER: 0000950005-97-000972 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970907 ITEM INFORMATION: FILED AS OF DATE: 19971124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYLINK CORP /CA/ CENTRAL INDEX KEY: 0001005230 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 952891600 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-27742 FILM NUMBER: 97727209 BUSINESS ADDRESS: STREET 1: 910 HERMOSA COURT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 BUSINESS PHONE: 4087355800 MAIL ADDRESS: STREET 1: 910 HERMOSA CT CITY: SUNNYVALE STATE: CA ZIP: 94086-4103 8-K/A 1 FORM 8-K/A 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) September 7,1997 CYLINK CORPORATION (Exact name of registrant as specified in its charter) California 0-27742 95-3891600 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.) 910 Hermosa Court Sunnyvale, California 94086 (Address of principal executive offices) (408) 735-5800 (Registrant's telephone number, including area code) The undersigned hereby amends its Form 8-K dated September 7, 1997 and filed on September 23, 1997 by adding items 7(a), 7(b), and 7(c). Item 7. Financial Statements and Exhibits (a) Consolidated Financial Statements of A.R. Data Security Ltd. The following are attached: Auditor's Report Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996 and 1995 Consolidated Statements of Income for the six month periods ended June 30, 1997 and 1996 (unaudited), and for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the six months ended June 30, 1997 (unaudited) and for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the six month periods ended June 30, 1997 and 1996 (unaudited), and for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. (b) Pro Forma Financial Information. The following are attached: For the six months ended June 27, 1997 and the year ended December 31, 1996, Unaudited Pro Forma Combined Condensed Statements of Operations and Unaudited Notes to Pro Forma Combined Condensed Statements of Operations (c) Exhibits 23.1 Consent of Independent Auditors 1 A.R. DATA SECURITY, LTD. REPORT OF INDEPENDENT AUDITORS To: The shareholders of A.R. Data Security, Ltd. We have audited the consolidated balance sheets of A.R. Data Security Ltd. and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity (deficiency) and cash flows for each of the three years in the period ending December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United states and Israel, including those prescribed by the Israel Auditors Regulations (Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either originating within the financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles in Israel. As permitted by Securities and Exchange Commission rules, these financial statements have been prepared in accordance with the requirements of Item 17 of Form 20-F. For a description of the differences between generally accepted accounting principles in Israel and United States generally accepted accounting principles as applicable in these financial statements see Note 15. Tel-Aviv, Israel /s/ KOST, LEVARY and FORER March 4, 1997 ---------------------- Certified Public Accountants (Israel) A member of Ernst & Young International 2 A.R. DATA SECURITY LTD. Consolidated Balance Sheets (In U.S. dollars)
December 31, June 30, --------------------------- 1997 1996 1995 ----------- ----------- ----------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 864,055 $ 659,027 $ 95,784 Restricted cash 682,760 714,310 -- Marketable securities 1,769,062 1,577,876 -- Trade receivables 1,830,907 1,839,947 1,755,312 Other receivables and prepaid expenses (Note 3) 554,732 216,922 286,792 Inventories (Note 4) 314,490 561,775 227,856 ----------- ----------- ----------- Total current assets 6,016,006 5,569,857 2,365,744 ----------- ----------- ----------- Investment in a subsidiary (Note 5) -- -- 48,775 ----------- ----------- ----------- Severence pay fund (Note 9) 349,993 324,209 209,285 ----------- ----------- ----------- Fixed assets (Note 6): Cost 1,832,690 1,604,044 1,322,623 Less - accumulated depreciation 546,467 451,001 321,607 ----------- ----------- ----------- 1,286,223 1,153,043 1,001,016 ----------- ----------- ----------- Other assets: Goodwill (net of accumulated amortization of $3,354 and $2,236) 19,010 20,128 -- Patent (net of accumulated amortization of $58,424, $53,319 and $43,078) 23,503 28,608 38,849 Deferred income taxes (Note 12) 53,813 68,649 54,230 ----------- ----------- ----------- 96,326 117,385 93,079 ----------- ----------- ----------- $ 7,748,548 $ 7,164,494 $ 3,717,899 =========== =========== =========== Liabilities and Shareholders' Equity Current liabilities: Short-term bank debt $ 585 $ 2,152 $ 1,758,813 Current maturities of long-term debt (Note 8) 34,674 45,947 36,616 Trade payables 370,198 403,079 405,080 Deferred revenues 212,005 67,016 111,274 Accrued expenses and other liabilities (Note 7) 898,431 997,478 569,528 Shareholders 12,262 10,500 39,694 ----------- ----------- ----------- Total current liabilities 1,528,155 1,526,172 2,921,005 ----------- ----------- ----------- Long-term debt (Note 8) 194,930 218,831 233,715 ----------- ----------- ----------- Accrued severance pay (Note 9) 627,086 588,255 337,898 ----------- ----------- ----------- Commitments and contingencies (Note 10) Shareholders' equity (Note 11): Share capital Authorized 330,000 Ordinary Shares par value NIS 0.01; Issued and outstanding: December 31, 1995; 52,780 December 31, 1996; 81,750 June 30, 1997; 81,750 5,422 5,422 4,787 Additional paid-in capital 4,145,885 4,145,885 88,168 Retained earnings 1,727,944 1,160,803 685,954 Treasury stock (480,874) (480,874) (553,628) ----------- ----------- ----------- Total shareholders' equity 5,398,377 4,831,236 225,281 ----------- ----------- ----------- $ 7,748,548 $ 7,164,494 $ 3,717,899 =========== =========== =========== The accompanying notes are an integral part of the financial statements.
3 A.R. DATA SECURITY LTD. Consolidated Statements of Income (In U.S. dollars)
Six months ended June 30, Year ended December 31, ------------------------- ------------------------------------------ 1997 1996 1996 1995 1994 ----------- ---------- ----------- ----------- ----------- (Unaudited) Revenue from software sales and services $ 3,965,147 $3,892,113 $ 7,205,731 $ 4,311,925 $ 3,142,983 Cost of software sales and services 1,267,318 971,494 2,001,094 1,361,549 1,051,769 ----------- ---------- ----------- ----------- ----------- Gross profit 2,697,829 2,920,619 5,204,637 2,950,376 2,091,214 ----------- ---------- ----------- ----------- ----------- Operating expenses: Research and development (Note 13) 649,866 475,061 904,243 788,786 828,567 Selling, general and administrative 1,185,528 1,471,145 2,936,219 1,219,225 795,044 ----------- ---------- ----------- ----------- ----------- Total operating costs and expenses 1,835,394 1,946,206 3,840,462 2,008,011 1,623,611 ----------- ---------- ----------- ----------- ----------- Operating income 862,435 974,413 1,364,175 942,365 467,603 Financial income (expenses), net (72,525) (233,481) (53,565) (251,982) (260,006) ----------- ---------- ----------- ----------- ----------- Income before taxes on income and equity in losses of subsidiary 789,910 740,932 1,310,610 690,383 207,597 Provision for taxes on income (Note 12) 127,236 179,073 197,898 161,000 136,659 ----------- ---------- ----------- ----------- ----------- Income before equity in losses of subsidiary 662,674 561,859 1,112,712 529,383 70,938 Equity in losses of subsidiary -- -- -- (1,600) (2,056) ----------- ---------- ----------- ----------- ----------- Net income $ 662,674 $ 561,859 $ 1,112,712 $ 527,783 $ 68,882 =========== ========== =========== =========== =========== The accompanying notes are an integral part of the financial statements.
4 A.R. DATA SECURITY LTD. Consolidated Statements of Changes in Shareholders' Equity (In U.S. dollars)
Additional Total Share paid-in Retained Treasury shareholders' capital capital earnings stock equity ----------- ----------- ----------- ----------- ----------- Balance at January 1, 1994 $ 4,787 $ 88,168 $ 89,289 $ -- $ 182,244 Purchase of treasury stock -- -- -- (441,681) (441,681) Net income -- -- 68,882 -- 68,882 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 4,787 88,168 158,171 (441,681) (190,555) Purchase of treasury stock -- -- -- (111,947) (111,947) Net income -- -- 527,783 -- 527,783 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 4,787 88,168 685,954 (553,628) 225,281 Sale of treasury stock -- 7,246 -- 72,754 80,000 Issuance of shares 635 4,050,471 -- -- 4,051,106 Dividends paid -- -- (637,863) -- (637,863) Net income -- -- 1,112,712 -- 1,112,712 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 5,422 4,145,885 1,160,803 (480,874) 4,831,236 Dividends paid (Unaudited) -- -- (95,533) -- (95,533) Net income (Unaudited) -- -- 662,674 -- 662,674 ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1997 (Unaudited) $ 5,422 $ 4,145,885 $ 1,727,944 $ (480,874) $ 5,398,377 =========== =========== =========== =========== =========== The accompanying notes are an integral part of the financial statements.
5 A.R. DATA SECURITY LTD. Consolidated Statements of Cash Flows (In U.S. dollars)
Six months ended June 30, Year ended December 31, -------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Unaudited) Cash flows from operating activities: Net income $ 662,674 $ 561,859 $ 1,112,712 $ 527,783 $ 68,882 Adjustemnts to reconcile net income to net cash provided by operating activities: Depreciation and amortization 101,689 51,372 130,611 96,359 88,388 Increase (decrease) in accrued severance pay, net 13,047 134,980 135,433 51,337 (164) Loss from sale of equipment -- -- 276 2,259 -- Decrease (increase) in inventories 247,285 (122,641) (325,592) (30,274) (54,863) Increase in marketable securities (191,186) -- (1,577,876) -- -- Decrease (increase) in trade receivables 9,040 (69,625) (69,963) (1,047,413) (416,709) Decrease (increase) in other receivalbles and prepaid expenses (337,810) 50,909 80,860 (61,182) 28,022 Increase (decrease) in deferred revenues 144,989 52,963 (44,258) 38,218 Increase (decrease) in trade payables (32,881) (156,966) (19,116) 84,156 127,227 Decrease (increase) in deferred income taxes 14,836 (109,783) (14,419) (17,406) (4,940) Increase (decrease) in other liabilities and accrued expenses (99,047) 1,063,657 403,411 (121,943) 397,118 Equity in losses of a subsidiary -- -- -- 1,600 2,056 Erosion of restricted cash 31,550 -- -- -- -- Other -- -- -- 97 331 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 564,186 1,456,725 (187,921) (476,409) 87,968 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Investment in a subsidiary -- -- -- (35,600) -- Investment in patent -- -- -- -- (24,633) Purchase of property and equipment (228,646) (84,739) (269,354) (65,916) (318,946) Proceeds from sale of property and equipment -- -- 4,883 1,015 -- Cash acquired in acquisition of subsidiary -- 28,122 28,122 -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (228,646) (56,617) (236,349) (100,501) (343,579) ----------- ----------- ----------- ----------- ----------- The accompanying notes are an integral part of the financial statements.
6 A.R. DATA SECURITY LTD. Consolidated Statements of Cash Flows (In U.S. dollars)
Six months ended June 30, Year ended December 31, -------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Unaudited) Cash flows from operating activities: Issuance of shares, net -- 4,051,106 4,051,106 -- -- Purchase of treasury stock -- -- -- (111,947) (441,681) Proceeds from sale of treasury stock -- 80,000 80,000 -- -- Payments related to long-term debt (35,174) (18,308) (36,616) (38,020) (41,788) Deposits -- -- (714,310) -- -- Increase (decrease) in short-term debt (1,567) (1,041,513) (1,756,673) 1,269,718 489,095 Proceeds related to long-term debt -- 33,389 31,063 24,527 264,444 Shareholders' and affiliates' loans 1,762 (39,694) (29,194) (650,692) (699,525) Dividends paid (95,533) -- (637,863) -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (130,512) 3,064,980 987,513 493,586 (429,455) ----------- ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 205,028 4,465,088 563,243 (83,324) (685,066) Balance of cash and cash equivalents at beginning of year 659,027 95,784 95,784 179,108 864,174 ----------- ----------- ----------- ----------- ----------- Balance of cash and cash equivalents at end of year $ 864,055 $ 4,560,872 $ 659,027 $ 95,784 $ 179,108 =========== =========== =========== =========== ===========
In January 1996 the Company acquired the remaining 51% outstanding shares of A.R. "GMBH" and assumed liabilities exceeding the fair value of assets as follows:
Fair value of assets acquired $ 39,955 $ 39,955 Liabilities assumed $ (41,666) $ (41,666) --------- --------- Liabilities assumed in excess of net cash acquired $ (1,711) $ (1,711) ========= ========= The accompanying notes are an integral part of the financial statements.
7 A.R. DATA SECURITY LTD. Notes to Consolidated Financial Statements (In U.S. dollars) Note 1 - General A.R. Data Security Ltd. and its subsidiaries ("the Company") are engaged in providing cryptographic solutions to security problems of large organizations. The Company provides high-level, integrated solutions that enable organizations to take full advantage of advanced computing environments without incurring the security risks attached to such systems. The Company's primary markets have been in Europe and the Far East. The North American market is one of the targets of a new marketing strategy and preparations are underway to penetrate this market. Organization In 1985, Algorithmic Research Ltd. ("A.R. Ltd.") was formed to provide cryptographic solutions to security problems of large organizations. In 1994, certain shareholders of A.R. Ltd. established Algart Holdings Ltd. ("Algart") and concurrently, Algart acquired 34% of A.R. Ltd. In 1995, Algart increased its holdings in A.R. Ltd. by acquiring additional shares in A.R. Ltd. from certain shareholders. In 1996, A.R. Data Security Ltd. was formed as a result of the transfer of all shares of A.R. Ltd. and Algart into, and in exchange of, all the outstanding shares of the newly formed corporation. The activities of all the companies have been combined and accounted for in a manner similar to a pooling of interests. In 1992, A.R. Ltd. established and acquired a 49% interest in a foreign subsidiary "A.R. GmbH" and in December 1995 acquired the remaining 51%. In 1996, the Company established a wholly owned subsidiary in Singapore, "A.R. PTE Ltd." to further penetrate the Far East market. Note 2 - Significant Accounting Policies a. General The financial statements presented herein are prepared in accordance with generally accepted accounting principles in Israel ("Israeli GAAP"). The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b. Financial statements in U.S. dollars The majority of the Company's sales are made in United States dollars or are dollar linked by virtue of the fact that a portion of its sales are based on contracts that are stated in both dollars and New Israeli Shekels ("NIS") and are paid in NIS linked to changes in the exchange rate between the dollar and the NIS. In addition, a portion fo the Company's costs are incurred in dollars. Since the dollar is the primary currency in the economic environment in which the Company operates, the dollar is its functional currency, and accordingly, monetary accounts maintained in currencies other than the dollar are remeasured using the foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at rates in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations. The functional currency of the foreign subsidiaries are the respective local currencies, and not the U.S. dollar. However, remeasurement effects are not material and have been reported in current operations. 8 c. Consolidated financial statements The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, A.R. GmbH and A.R. PTE Ltd. Intercompany transactions and balances therefrom have been eliminated in consolidation. d. Marketable securities The Company classifies its marketable securities as "trading securities" in accordance with Statement No. 115 of the FASB. Realized and unrealized holding gains and losses related to trading securities are included in financial income and expenses. e. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets as estimated by the Company. Annual depreciation rates are as follows: % ------- Building 4 Computers and related equipment 20-33 Motor vehicles 15 Office furniture and equipment 6-10 f. Revenue recognition Revenue from software license agreements is recognized upon delivery of the software and execution of a signed contract where no significant vendor obligations remain and the collection of the related receivable is probable. The Company recognizes revenues from fixed price contracts using the percentage of completion method of accounting based on the contract value of the total work performed to the balance sheet date, based on the ratio of actual costs to total costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Maintenance revenue is recognized ratable over the term of the agreement. g. Royalty-bearing grants Royalty-bearing grants from the Government of Israel for funding of marketing activity and for research and development are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred. h. Research and development costs Research and development costs are charged to the statement of operations as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Therefore, such costs have been expensed. 9 i. Deferred income taxes Deferred income taxes are provided in respect of temporary differences in the recognition of certain income and expense items for financial reporting and tax purposes. The Company utilizes the asset and liability method of accounting for income taxes as set forth in SFAS No. 109. j. Cash equivalents For the purpose of the statement of cash flows, liquid investments with a maturity of three months or less at date of investment are considered by the Company to be cash equivalents. k. Restricted cash The restricted cash pertains to a portion of the funds received in the 1996 private placement offering which will be available to the Company in the third quarter of 1997. l. Goodwill Goodwill is amortized by the straight-line method over ten years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation and other considerations. m. Concentration of risks Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. The Company invests primarily in money market accounts and marketable securities and places its investments with high quality financial, government or corporate institutions. The Company's accounts receivable are derived from sales to customers located primarily in Europe and in the Far East. The Company performs ongoing credit evaluations of its customers. No collateral was required. n. Fair value of financial instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents and short term deposits - The carrying amount reported in the balance sheet for cash and cash equivalents and short term deposits approximates its fair value. Marketable securities - The fair values for marketable securities are based on quoted market prices. 10 The carrying amounts and fair valueof the Companys financial instruments are as follows: Carrying amount Fair value ----------------------- ----------------------- December 31, December 31, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Cash and cash equivalents $ 659,027 $ 95,784 $ 659,027 $ 95,784 Marketable securities $1,577,876 $ -- $1,577,876 $ -- Note 3 - Other receivables and Prepaid Expenses December 31, -------------------------- 1996 1995 ----------- ----------- Prepaid expenses $ 48,208 $ 37,286 Government grants receivable -- 180,085 Income tax authorities 137,805 22,490 Employees 4,628 10,429 Other 26,281 36,502 ----------- ----------- $ 216,922 $ 286,792 =========== =========== Note 4 - Inventories Raw materials $ 126,392 $ 120,336 Work in progress 153,902 36,512 Finished products 281,481 71,008 ----------- ----------- $ 561,775 $ 227,856 =========== =========== Note 5 - Investment in Subsidiary Investment in a 49% owned subsidiary $ -- $ 68,464 Accumulated losses of subsidiary -- (19,689) ----------- ----------- $ -- $ 48,775 =========== =========== Note 6 - Property and Equipment, Net Cost: Land $ 211,220 $ 211,220 Building 595,008 592,092 Computers and related equipment 361,928 251,541 Motor vehicles 251,648 163,369 Office furniture and equipment 184,240 104,401 ----------- ----------- Total cost 1,604,044 1,322,623 Accumulated depreciation (451,001) (321,607) ----------- ----------- $ 1,153,043 $ 1,001,016 =========== =========== Note 7 - Accrued Expenses and Other Liabilities Accrued payroll and related payables $ 511,208 $ 269,990 Accrued expenses 207,759 115,131 Royalties 185,267 127,244 Other 93,244 57,163 ----------- ----------- $ 997,478 $ 569,528 =========== =========== 11 Note 8 - Long-term Debt
December 31, Interest --------------------- Currency Linked to Rate % 1996 1995 -------- --------- ---------- -------- -------- Mortgage payable NIS CPI 4.18 $233,774 $248,584 Prime + Purchase of motor vehicle NIS Unlinked 1.75 - 2.40 30,554 21,747 -------- -------- 264,328 270,331 Less - current maturities 45,497 36,616 -------- -------- $218,831 $233,715 ======== ======== Aggregate maturities of long-term debt are as follows: 1997 $ -- 1998 39,390 1999 32,825 2000 32,825 2001 32,825 Therafter 80,966 -------- $218,831 ========
Note 9 - Accrued Severance Pay The company's liability for severance pay, pursuant to Israeli law, is fully provided. Part of the liability is funded through insurance policies which are not under the control of the Company. Note 10 - Commitments and Contingencies a. Royalties are due to financing participants in the development of certain products mainly to the Chief Scientist of the Ministry of Industry and Trade in the Government of Israel. Under the Company's research and development agreements with the Chief Scientist and pursuant to applicable law, the Company is required to pay royalties at the rate of 2% - 3% of sales of products developed with funds provided by the Chief Scientist, up to an amount equal to 100% - 150% of the Chief Scientist's research and development grants (dollar linked) related to such projects. For the years ended December 31, 1996, 1995 and 1994, the Company recognized grants in the amount of $147,851, $201,430 and $126,230, respectively, which are presented in the financial statements as an offset to research and development costs. Related to the grants, the Company has expensed royalties for the three years ended December 31, 1996, 1995 and 1994 in the amount of $160,544, $67,372 and $30,394, respectively. b. The Israel Government, through the Fund for Encouragement of Marketing Activities, awarded the Company grants for participation in marketing expenses overseas. These grants are awarded for specific marketing expenses incurred by the Company overseas and these expenses are reported to the Israeli government accordingly. All marketing grants received from the Israeli government are payable only in the form of 3% royalties as a percentage of increased export sales. Total royalties are not to exceed the amounts of the grants received by the Company, linked to the U.S. dollar. However, if the Company does not achieve an increase in export sales, it has no obligation to pay any royalties or to return any funds received from these grants. Accordingly, these proceeds are presented in the financial statements as an offset to marketing expenses. The Company recognized grants amounting to $144,969 and $95,523 for the years ending December 31, 1995 and 1994, respectively, which are offset against marketing expenses. 12 Repayment of such grants is not required in the event that there are no sales of products with respect to such grants. Note 11 - Shareholders' Equity In 1996, the Company issued 20,520 shares in a private placement offering and raised proceeds in the amount of $4,051,106, and also sold 8,450 shares of its treasury stock in exchange for proceeds in the amount of $80,000. Additionally in 1996, the Company paid $637,863 in dividends to its shareholders from the accumulated net after-tax earnings. Note 13 - Income Taxes a. Domestic 1. Approved Enterprises: Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereafter "the law"): The Company's operations have been granted the status of "approved enterprise" under the law. Income derived from such enlargement during a period of seven years from the year in which this enterprise first realizes taxable income, is exempt from income tax and subject to a corporate tax of 25%. Under the provisions of the law, the Company has chosen to enjoy "alternative benefits" - waiver of grants in return for tax exemption - and, accordingly, the Company's income will be tax exempt for a period of four years commencing with the year it first earns taxable income. In the remaining three years of benefits, the Company will be subject to a corporate tax rate of 25%. In 1996, the Company received approval for an enlargement of its "approved enterprise." Accordingly, the Company's income from the enlargement will be tax exempt for a period of two years and will be subject to a reduced tax rate of 25% for an additional period of three years. If a dividend is distributed out of such tax-exempt profits deriving from the approved enterprise, the Company will be liable to corporate tax at the rate of 25%. The period of tax benefits described above, is subject to limits of 12 years from the commencement of production, or 14 years from the approval date, whichever is earlier. The law also grants entitlement to claim accelerated depreciation on machinery and equipment used by the "approved enterprise." Any income derived from outside or other sources is subject to the regular corporate tax rate, which is 37% in 1995 and 36% in 1996 and thereafter. 2. Israeli Tax Law: Measurement of results for tax purposes under the Income Tax Law (Inflationary Adjustments) - 1985: Under this law, the Company is entitled to deduct from its taxable income an "Equity Preservation Deduction" (which partially compensates for the decrease in value of shareholders' equity resulting from the annual increase in the Israel CPI) or has to add to its taxable income an "Additional Amount" (which reflects the effect of such increase in the Israeli CPI on the excess of depreciated costs of fixed assets over shareholders' equity). 3. Tax assessments: The Company has not received final tax assessments since its inception. 13 b. Foreign Tax assessments: The Company has not yet received assessments from foreign tax authorities since its inception. c. Deferred income taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: December 31, ---------------------- 1996 1995 ------- ------- Accrued severance pay, net $41,807 $22,967 Accrued vacation pay 27,402 33,161 Other (560) (1,898) ------- ------- $68,649 $54,230 ======= ======= d. Reconciliation of the theoretical tax expense and actual tax expense A reconciliation of the theoretical income tax expense, assuming all income is taxed at the statutory rate of 36%, 37% and 38% for the years ended December 31, 1996, 1995 and 1994, respectively, applicable to the income of companies in Israel, and the actual tax expense, is as follows:
Year Ended December 31, ----------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Income before taxes on income, as reported in the statement of operations $ 1,310,610 $ 690,383 $ 207,597 =========== =========== =========== Theoretical tax on the above amount $ 471,820 $ 255,442 $ 78,887 Non-deductible expenses and other 77,010 39,631 50,213 Adjustments to tax in respect of inflation in Israel 12,722 5,560 36,152 Tax exempt income during the benefit periods, see a. above (1) (363,654) (139,633) (28,593 ----------- ----------- ----------- Taxes on income for the reported year $ 197,898 $ 161,000 $136,65 =========== =========== =========== e. Income before tax is comprised of the following: Domestic $ 1,264,785 $ 690,383 $ 207,597 Foreign -- -- 45,825 ----------- ----------- ----------- $ 1,264,785 $ 690,383 $ 253,422 =========== =========== ===========
14 f. The provision for income taxes is comprised as follows:
Year Ended December 31, ------------------------------------------------ 1996 1995 1994 ----------- ----------- ----------- Current taxes $ 212,317 $ 178,406 $ 141,599 Deferred taxes (14,419) (17,406) (4,940) $ 197,898 $ 161,000 $ 136,659 ----------- ----------- ----------- Domestic $ 193,386 $ 161,000 $ 136,659 Foreign 4,512 -- -- ----------- ----------- ----------- $ 197,898 $ 161,000 $ 136,659 =========== =========== =========== Note 13 - Supplementary Statement of Operations Data and Identifiable Assets a. Operating income: Israel $ 1,315,563 $ 942,365 $ 467,603 Europe 36,237 -- -- Far East 12,375 -- -- ----------- ----------- ----------- $ 1,364,175 $ 942,365 $ 467,603 =========== =========== =========== b. Research and development cost, net: Total costs $ 1,052,094 $ 990,216 $ 954,797 Royalty bearing grants (147,851) (201,430) (126,230) ----------- ----------- ----------- $ 904,243 $ 788,786 $ 828,567 =========== =========== =========== December 31, ----------------------------- 1996 1995 ----------- ----------- c. Identifiable assets: Israel $ 6,626,215 $ 3,717,899 Europe 512,544 -- Far East 25,735 -- ----------- ----------- $ 7,164,494 $ 3,717,899 =========== ===========
Note 14 - Subsidiaries Percentage of Ownership ----------------------- Jurisdiction of 1996 1995 1994 incorporation ------ ------ ------ --------------- A.R. Ltd. 100% -- -- Israel Algart Holdings Ltd. 100% -- -- Israel A.R. GmbH 100% 49% 49% Germany A.R. PTE Ltd. 100% -- -- Singapore Note 15 - Effect of Material Differences Between Israel and U.S. GAAP on the Financial Statements The consolidated financial statements of A.R. Data Security Ltd. conform with accounting principles generally accepted in Israel which differ in certain respects from those followed in the United States as described below. Treatment of compensation expenses for warrants issued to employees: 15 The benefit component (compensation expense of warrants issued to employees) is usually not recognized in the financial statements under Israeli GAAP. Under U.S. GAAP, the excess of the quoted market price over the exercise price of an option at the date of the grant is recognized as compensation expense of the periods in which the employee performs the services for which the compensation was granted. Note 16 - Subsequent Event (Unaudited) In September 1997, A.R. Data Security Ltd. entered into a stock purchase agreement with Cylink Corporation ("Cylink" or the "Acquiring Company") to sell all of the outstanding common stock of Algart and A.R. Ltd. to Cylink. Subsequent to this transaction, the only remaining assets of A.R. Data Security were cash and equity securities received from the Acquiring Company. 16 Item 7 (b). Pro Forma Financial Information Included are the unaudited pro forma combined condensed statements of operations for the six month period ended June 27, 1997 and for the year ended December 31, 1996. On September 8, 1997, Cylink acquired all of the outstanding shares of Algorithmic Research, Ltd. and Algart Holdings, Ltd. (hereafter referred to on a combined basis as "Algorithmic Research"), both limited liability companies organized under the laws of the State of Israel. Consideration for this purchase was $44,881,000 in cash, net of cash acquired, including transaction expenses paid and accrued of $2,996,000 and $531,000, respectively; and 2,593,169 shares of Cylink's common stock and 409,641 fully vested options to purchase common stock of Cylink for $0.01 per share. The total value placed on the common stock and options issued was $29,525,000. The common stock and options issued are subject to decreasing restrictions on trading and exercise, respectively, for three years from the transaction date. The acquisition was recorded under the purchase method of accounting; and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon the fair market values at the date of acquisition. The following unaudited pro forma combined condensed financial information gives effect to the acquisition as if the transaction had taken place at the beginning of 1996. A pro forma combined condensed balance sheet is not being filed pursuant to Rule 11-02 of Regulation S-X. The consolidated balance sheet of Cylink filed in connection with the Cylink Corporation Quarterly Report on Form 10-Q for the quarter ended September 26, 1997 includes the balance sheet data for Algorithmic Research. The unaudited pro forma combined condensed statements of operations are not necessarily indicative of the operating results that would have been achieved if the transaction had occurred on the date indicated and should not be construed as representative of future operations. The historical financial statements of A.R. Data Security, Ltd. are included elsewhere in this filing, and the unaudited pro forma financial information presented herein should be read in conjunction with those financial statements and related notes. 17 CYLINK CORPORATION PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited For the Six Months Ended June 27, 1997 (in thousands, except per share data)
Algorithmic Cylink Research Adjustments Pro Forma -------- -------- ----------- --------- Revenue $ 34,451 $ 3,965 $ 38,416 Cost of revenue 11,722 1,267 12,989 -------- -------- -------- Gross profit 22,729 2,698 25,427 -------- -------- -------- Operating expenses: Research and development, net 7,787 650 8,437 Selling and marketing 9,663 -- 9,663 General and administrative 4,209 1,185 1,344 (a) 6,738 -------- -------- -------- Total operating expenses 21,659 1,835 24,838 -------- -------- -------- Income from operations 1,070 863 589 Other income (expense), net Interest income, net 1,816 (73) (898) (b) 845 Royalty and other income, net 442 -- 442 -------- -------- -------- Income before income taxes 3,328 790 1,876 Provision for income taxes 998 127 (368) (c) 757 -------- -------- -------- Net income $ 2,330 $ 663 $ 1,119 ======== ======== ======== Net income per share $ 0.09 $ 0.04 ======== ======== Shares used to compute net income per share 26,567 29,570 ======== ========
18 CYLINK CORPORATION PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited For the Year Ended December 31, 1996 (in thousands, except per share data)
Algorithmic Cylink Research Adjustments Pro Forma -------- -------- ----------- --------- Revenue $ 51,958 $ 7,206 $ 59,164 Cost of revenue 21,767 2,001 23,768 -------- -------- -------- Gross profit 30,191 5,205 35,396 -------- -------- -------- Operating expenses: Research and development, net 11,342 904 12,246 Selling and marketing 13,788 -- 13,788 General and administrative 6,185 2,937 2,687 (a) 11,809 Employee severance costs 634 -- 634 -------- -------- -------- Total operating expenses 31,949 3,841 38,477 -------- -------- -------- Income from operations (1,758) 1,364 (3,081) Other income (expense), net Interest income, net 3,303 (53) (2,654) (b) 3,250 Royalty and other income (expense), net (97) -- (97) -------- -------- -------- Income before income taxes 1,448 1,311 (2,582) Provision for income taxes 251 198 (1,088) (c) (639) -------- -------- -------- Net income $ 1,197 $ 1,113 $ (1,943) ======== ======== ======== Net income per share $ 0.05 $ (0.07) ======== ======== Shares used to compute net income per share 25,761 27,187 ======== ========
19 CYLINK CORPORATION NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited Note 1 - The Acquisition The total purchase price amounts to $76,263,000 and was allocated to the assets acquired and liabilities assumed at the acquisition date based on an independent appraisal of the fair market values. The allocation of the purchase price is as follows (in thousands):
Current assets (including cash and cash equivalents of $1,857) $ 4,380 Property and equipment 1,261 In-process technology 63,920 Developed technology and other intangibles 7,498 Goodwill 1,317 Other non-current assets 96 Current liabilities assumed (2,021) Long-term debt assumed (188) -------- $ 76,263 ========
Note 2 - Adjustments to the Statements of Operations (a) To reflect amortization of intangible assets over the estimated lives:
Value at Estimated Acquisition Lives Six Months Year ----------- ----------- ---------- ---------- Assembled workforce $ 707,591 Three years $ 117,932 $ 235,864 Developed technology 6,790,623 Three years 1,131,771 2,263,541 Goodwill 1,317,139 Seven years 94,081 188,163 ---------- ---------- $1,343,784 $2,687,567 ========== ==========
(b) To reflect the reduction in interest income resulting from a decreased level of invested funds due to cash used for the acquisition of Algorithmic Research. (c) To reflect the tax benefit resulting from the decrease in interest income calculated at the estimated combined federal and state statutory rates. The amortization of capitalized intangibles is not deductible for income tax purposes. Note 3 - Nonrecurring Charges The nonrecurring charge resulting from acquired in-process technology is not reflected in the pro forma information presented herein pursuant to Article 11 of Regulation S-X. Amounts allocated to technology were estimated using a risk adjusted income approach applied to specifically identified technologies. In-process technology was expensed upon acquisition because technological feasibility had not been established and no alternative future uses existed. The charge resulting from in-process technology is not deductible for income tax purposes. 20 SIGNATURES 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, hereunto duly authorized. Date: November 24, 1997 CYLINK CORPORATION By: /s/ JOHN H. DAWS ---------------------------- John H. Daws Vice President of Finance and Administration and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the inclusion in this Form 8-K of our report dated March 4, 1997, relating to the consolidated financial statements of A.R. Data Security Ltd. for the years ended December 31, 1996, 1995 and 1994. Tel-Aviv, Israel /s/ KOST, LEVARY and FORER November 24, 1997 ---------------------- Certified Public Accountants (Israel) A member of Ernst & Young International -----END PRIVACY-ENHANCED MESSAGE-----