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)
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
A.R. DATA SECURITY LTD.
Consolidated Balance Sheets
(In U.S. dollars)
<CAPTION>
December 31,
June 30, ---------------------------
1997 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
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
=========== =========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
A.R. DATA SECURITY LTD.
Consolidated Statements of Income
(In U.S. dollars)
<CAPTION>
Six months ended
June 30, Year ended December 31,
------------------------- ------------------------------------------
1997 1996 1996 1995 1994
----------- ---------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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
=========== ========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
A.R. DATA SECURITY LTD.
Consolidated Statements of Changes in Shareholders' Equity
(In U.S. dollars)
<CAPTION>
Additional Total
Share paid-in Retained Treasury shareholders'
capital capital earnings stock equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
A.R. DATA SECURITY LTD.
Consolidated Statements of Cash Flows
(In U.S. dollars)
<CAPTION>
Six months ended
June 30, Year ended December 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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)
----------- ----------- ----------- ----------- -----------
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
A.R. DATA SECURITY LTD.
Consolidated Statements of Cash Flows
(In U.S. dollars)
<CAPTION>
Six months ended
June 30, Year ended December 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
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:
<CAPTION>
<S> <C> <C>
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)
========= =========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
Note 8 - Long-term Debt
<CAPTION>
December 31,
Interest ---------------------
Currency Linked to Rate % 1996 1995
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
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
========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
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:
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
14
<PAGE>
<TABLE>
f. The provision for income taxes is comprised as follows:
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
CYLINK CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited
For the Six Months Ended June 27, 1997
(in thousands, except per share data)
<CAPTION>
Algorithmic
Cylink Research Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
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
======== ========
</TABLE>
18
<PAGE>
<TABLE>
CYLINK CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited
For the Year Ended December 31, 1996
(in thousands, except per share data)
<CAPTION>
Algorithmic
Cylink Research Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
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
======== ========
</TABLE>
19
<PAGE>
CYLINK CORPORATION
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS - Unaudited
<TABLE>
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):
<CAPTION>
<S> <C>
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
========
</TABLE>
<TABLE>
Note 2 - Adjustments to the Statements of Operations
(a) To reflect amortization of intangible assets over the estimated
lives:
<CAPTION>
Value at Estimated
Acquisition Lives Six Months Year
----------- ----------- ---------- ----------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
(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
<PAGE>
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)
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
