<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 5, 1998
ADC TELECOMMUNICATIONS, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 0-1424 41-0743912
--------- ------ ----------
(State or other jurisdiction (Commission file number) (IRS employer
of incorporation) identification No.)
12501 Whitewater Drive, Minnetonka, Minnesota 55343
---------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 938-8080
-------------------
Not Applicable
--------------------------------------------------------------------
(Former name or former address, if changed since last report)
Page 1 of 3 Pages
Exhibit Index Appears on Page 2
<PAGE>
ADC 8-K/A
The undersigned registrant, ADC Telecommunications, Inc. (the
"Company"), hereby amends Item 7 of its Current Report on Form 8-K, dated
November 5, 1998 (initially filed with the Commission on November 20, 1998), to
include the financial statement information indicated in Item 7 below. The
November 20, 1998 original filing of the Form 8-K described the Company's
November 5, 1998 acquisition of Teledata Communications, Ltd. ("Teledata")
pursuant to an Agreement, dated as of September 16, 1998.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The following financial statements of Teledata and the report of
BDO Almagor & Co., Teledata's independent public accountants are
included in this Report:
1. Report of BDO Almagor & Co. dated February 19, 1998
2. Financial Statements and accompanying footnotes of Teledata
at December 31, 1997 and 1996 and for each of the two years
in the period ended December 31, 1997
3. Unaudited Financial Statements and accompanying interim
footnotes of Teledata at September 30, 1998 and 1997 and for
the three- and nine-month periods ended September 30, 1998
and 1997
(b) PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information is included in this
Report:
1. Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the fiscal year ended October 31, 1998 and
accompanying notes
2. Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of October 31, 1998 and accompanying Notes.
(c) EXHIBITS
Exhibit No. Description
----------- -----------
23.1 Consent of BDO Almagor & Co.
Page 2 of 3 Pages
<PAGE>
ADC 8-K/A
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: January 14, 1999
ADC TELECOMMUNICATIONS, INC.
By: /s/ Robert E. Switz
----------------------------------------
Robert E. Switz
Chief Financial Officer
Page 3 of 3 Pages
<PAGE>
ADC 8-K/A
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
- -------
Number Item
- ------ ----
<S> <C>
23.1 Consent of BDO Almagor & Co.
</TABLE>
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 2
Consolidated Financial Statements:
Balance Sheets at December 31, 1997 and 1996 3-4
Statements of Operations for each of
the three years ended December 31, 1997 5
Statement of Shareholders' Equity for each of
the three years ended December 31, 1997 6
Statements of Cash Flows for each of
the three years ended December 31, 1997 7-8
Notes to Consolidated Financial Statements 9-26
</TABLE>
= = = = =
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
TELEDATA COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of Teledata
Communications Ltd. (the "Company") at December 31, 1997 and 1996 and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 did not audit the financial statements of a consolidated subsidiary, whose
assets constitute approximately 6% and 5% of the total consolidated assets at
December 31, 1997 and 1996, respectively, and whose total revenues constitute
approximately 13%, 11% and 13% of the consolidated total revenues for the years
ended December 31, 1997, 1996 and 1995, respectively. Those statements were
audited by other accountants whose reports have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for the
abovementioned subsidiary, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditors' (Mode of Performance)
Regulations (Israel), 1973. Such auditing standards are substantially identical
to generally accepted auditing standards 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 statements presentation. We believe
that our audits and the reports of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of other independent auditors
as stated above, the aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States.
BDO Almagor & Co.
Certified Public Accountants
Ramat-Gan, Israel,
February 19, 1998
2
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS (Note 13)
Cash and cash equivalents (Note 2d) $ 13,716 $ 10,647
Short-term investments (Notes 2e & 3) 33,501 18,383
Accounts receivable:
Trade 25,195 16,528
Other and prepaid expenses (Note 12a) 3,841 2,172
Inventories (Notes 2f & 4) 19,598 14,784
------------ ------------
Total current assets 95,851 62,514
------------ ------------
INVESTMENTS AND LONG-TERM RECEIVABLES
(Notes 2e & 5) 32,499 7,389
------------ ------------
FIXED ASSETS (Notes 2g & 6)
Cost 16,107 12,368
------------ ------------
Less - accumulated depreciation 7,971 6,256
------------ ------------
8,136 6,112
------------ ------------
OTHER ASSETS, NET (Note 2h) 163 195
------------ ------------
$ 136,649 $ 76,210
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
---------------- -------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES (Note 13)
Accounts payable:
Trade $ 8,445 $ 6,755
Other and accrued expenses (Note 12b) 10,341 8,730
-------------- -------------
Total current liabilities 18,786 15,485
-------------- -------------
LONG-TERM LIABILITIES
Capital note to a related party (Notes 7 and 13) 130 141
Accrued severance pay (Note 8) 1,331 833
-------------- -------------
1,461 974
-------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
MINORITY INTEREST 2,210 599
-------------- -------------
SHAREHOLDERS' EQUITY (Note 10)
Share capital:
Ordinary shares of NIS 0.1 par value
(Authorized - 20,000,000 shares,
issued and outstanding 12,562,611 and 10,789,132
shares at December 31, 1997 and 1996, respectively) 506 453
Additional paid-in capital 74,527 34,525
Retained earnings 39,159 24,174
-------------- -------------
114,192 59,152
-------------- -------------
$ 136,649 $ 76,210
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
--------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales (Notes 2i & 14a) $ 84,149 $ 57,089 $ 32,127
Cost of sales (Note 14b) 44,108 31,365 19,281
-------------- ------------ ------------
GROSS PROFIT 40,041 25,724 12,846
Research and development costs, net (Notes 2j & 14c) 8,721 7,357 5,850
Selling, general and administrative expenses (Note 14d) 18,543 13,190 9,769
-------------- ------------ ------------
OPERATING INCOME (LOSS) 12,777 5,177 (2,773)
Financial income, net (Note 14e) 2,826 1,766 1,556
Capital gain, net 61 34 34
-------------- ------------ ------------
INCOME (LOSS) BEFORE TAXES ON INCOME 15,664 6,977 (1,183)
Taxes on income (Note 11) (257) 47 (11)
-------------- ------------ ------------
INCOME (LOSS) AFTER TAXES ON INCOME 15,407 7,024 (1,194)
Minority interest (422) (33) 6
-------------- ------------ ------------
NET INCOME (LOSS) $ 14,985 $ 6,991 $ (1,188)
-------------- ------------ ------------
-------------- ------------ ------------
EARNINGS (LOSS) PER ORDINARY SHARE: (Note 2m)
Basic $ 1.26 $ 0.66 $ (0.11)
-------------- ------------ ------------
-------------- ------------ ------------
Diluted $ 1.23 $ 0.64 $ (0.11)
-------------- ------------ ------------
-------------- ------------ ------------
SHARES USED IN COMPUTING EARNINGS (LOSS)
PER ORDINARY SHARE:
Basic 11.851 10.527 10.400
-------------- ------------ ------------
-------------- ------------ ------------
Diluted 12.192 10.850 10.400
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
TELEDATA COMMUNICATIONS LTD.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
SHARES ADDITIONAL TOTAL
NIS 0.1 SHARE PAID-IN RETAINED SHAREHOLDERS'
PAR VALUE CAPITAL CAPITAL EARNINGS EQUITY
----------- ---------- ------------ ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1995 10,392,838 $ 441 $ 31,434 $ 18,371 $ 50,246
Exercise of employee options 18,417 * 123 123
Loss for the year (1,188) (1,188)
----------- ---------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1995 10,411,255 441 31,557 17,183 49,181
Exercise of employee options 377,877 12 2,968 2,980
Net income for the year 6,991 6,991
----------- ---------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1996 10,789,132 453 34,525 24,174 59,152
Issue of shares to the public, net (1) 1,514,000 45 36,426 36,471
Exercise of employee options 259,479 8 1,650 1,658
Net income for the year 14,985 14,985
Tax benefits from employee stock
transaction 150 150
Issue of stock by subsidiary
(Note 10b) 1,776 1,776
----------- ---------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1997 12,562,611 506 74,527 39,159 114,192
----------- ---------- ------------ ------------ -------------
----------- ---------- ------------ ------------ -------------
</TABLE>
(*) Less than $1,000.
(1) Net of share issue expenses totalling $3,020,000.
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,985 $ 6,991 $ (1,188)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities (see Appendix A) (9,361) (1,545) 8,479
--------------- --------------- --------------
Net cash provided by operating activities 5,624 5,446 7,291
--------------- --------------- --------------
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (18,427) (14,623) (12,958)
Proceeds from realization of marketable securities 13,038 13,867 12,005
Investment in bank deposits, net (33,332) (2,279) (3,818)
Purchase of fixed assets (4,024) (2,706) (708)
Proceeds from sale of fixed assets 165 120 82
Cash and cash equivalents in reduction in holdings in
subsidiary 2,955 -- --
Investment in other company (1,059) -- --
--------------- --------------- --------------
Net cash used in investing activities (40,684) (5,621) (5,397)
--------------- --------------- --------------
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of ordinary shares 36,471 -- --
Proceeds from exercise of employee options 1,658 2,980 123
--------------- --------------- --------------
Net cash provided by financing activities 38,129 2,980 123
--------------- --------------- --------------
--------------- --------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,069 2,805 2,017
Cash and cash equivalents at the beginning of the year 10,647 7,842 5,825
--------------- --------------- --------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 13,716 $ 10,647 $ 7,842
--------------- --------------- --------------
--------------- --------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 117 $ 158 $ 90
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
TELEDATA COMMUNICATIONS LTD.
APPENDIX TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
APPENDIX A -
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization $ 1,938 $ 1,667 $ 1,483
Charge for purchased research and development -- 400 --
Capital gain, net (61) (34) (34)
Minority interest 422 33 (6)
Deferred income taxes, net 150 (150) --
Increase (decrease) in accrued severance pay 370 (161) 41
Gain from erosion in value of capital note to a
related party (11) (5) (6)
Interest accrued on investments (1,125) (127) (124)
Decrease (increase) in assets:
Trade receivables (including non-current portion) (7,990) (3,291) 3,587
Other receivables (1,669) (140) 19
Inventories (4,814) (6,116) 2,615
Increase (decrease) in liabilities:
Trade payables 1,690 2,643 1,119
Other payables and accrued expenses 1,739 3,736 (215)
-------------- --------------- --------------
$ (9,361) $ (1,545) $ 8,479
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
TELEDATA COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Teledata Communications Ltd. ("the Company") is an Israeli company which
designs, develops, manufactures, markets and supports advanced wireline and
wireless customer access network equipment for telephone operating companies
worldwide. Its products enable telephone operating companies to enhance the
capacity, reach and functionality of the network of transmission links that
connects subscribers to the local exchange, generally known as the "local loop"
or "customer access network". Using the Company's products, telephone operating
companies can quickly and cost-effectively deploy new networks using fiber,
copper or microwave radio links and upgrade their existing local loop
infrastructure. The Company also develops and markets realtime
telecommuncations software and protocol converters for exchange interfaces. The
Company sells its products in Europe, Africa, Asia, Australia and South America,
mainly to governmental telephone companies.
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
The reporting currency of the Company is the United States Dollar
("dollar").
The dollar is the functional currency of the Company and its subsidiaries.
Transactions and balances originally denominated in dollars are presented
at their original amounts. Non-dollar transactions and balances have been
remeasured into dollars in accordance with the requirements of Statement
No. 52 of the Financial Accounting Standards Board of the United States
("FASB") and the resulting gains and losses are included in the statement
of operations in the same items as the related transactions.
c. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
d. CASH EQUIVALENTS
Cash equivalents include all highly liquid deposits with a maturity of
three months or less at date of purchase.
e. MARKETABLE DEBT SECURITIES
Investments in marketable debt securities are classified as
"held-to-maturity" in accordance with the provisions of Statement No. 115
of the FASB and are stated at amortized cost. Interest income, including
amortization of premium and discount arising on acquisition is included in
financial income.
9
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
f. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
as follows:
Raw materials and components - on the moving average basis.
Work-in-process and finished products - on the basis of computed
manufacturing costs.
g. FIXED ASSETS
Fixed assets are stated at cost. Equipment manufactured by the Company for
its own use is stated on the basis of manufacturing costs. Depreciation is
calculated by the straight-line method over the estimated useful lives of
the assets.
Annual rates of depreciation are as follows:
<TABLE>
<S> <C>
Computers 20 - 33%
Manufacturing equipment 10 - 20%
Office furniture and equipment 6 - 10%
Motor vehicles 15%
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the term of the lease, which is shorter than the estimated useful life of
the improvements.
h. OTHER ASSETS
Other assets comprise goodwill, which is amortized on a straight-line basis
over a period of 5 years. In accordance with Statement No. 121 of the
FASB, management periodically reassesses the appropriateness of both the
carrying value and remaining life of the goodwill, principally based on
future cash flows. Amortization expenses for the year ended December 31,
1997 were $42,000.
i. REVENUE RECOGNITION
Revenue from product sales is generally recorded on shipment to the
customer, provided that no significant vendor obligations remain
outstanding and collection of the related receivable is deemed probable by
management.
Revenues from software sales are recognized upon delivery to the customer,
provided that the Company's remaining obligations, if any, are
insignificant and collectibility is probable.
j. RESEARCH AND DEVELOPMENT
Research and development costs, net of related royalty-bearing
participation, are charged to income as incurred.
k. WARRANTY COSTS
The Company generally provides warranties on products sold for a period of
one year. The Company provides for warranty costs in accordance with
management's estimation.
10
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
l. 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 109 of the FASB
(Accounting for Income Taxes).
m. EARNINGS PER ORDINARY SHARE
The Company has adopted Statement No.128 of the FASB "Earnings Per Share"
("SFAS 128"), beginning with the fourth quarter of 1997. All prior
periods' earnings (loss) per ordinary share data have been restated to
conform to the provisions of SFAS 128. Basic earnings per ordinary share
is computed using the weighted average number of shares outstanding.
Diluted earnings per share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to
outstanding options to purchase ordinary shares. 341,000 and 323,000
incremental shares in 1997 and 1996, respectively, were used in the
calculation of diluted earnings per ordinary share.
n. 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. Rates of
exchange of the dollar for the New Israeli Shekel ("NIS") are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
NIS to the dollar NIS 3.536 NIS 3.251 NIS 3.135
</TABLE>
o. CURRENCY HEDGING TRANSACTIONS
The Company enters into forward contracts to reduce the impact of
fluctuations of certain currencies against the dollar. Gains and losses
resulting from hedging transactions relative to sales contracts are
reflected in sales in the statement of operations. The Company's hedging
activities do not subject the Company to exchange rate risk because gains
and losses on these contracts offset losses and gains on the assets and
transactions being hedged.
p. RECLASSIFICATION
Certain figures from prior years have been reclassified in order to conform
to the 1997 presentation.
q. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which requires that changes in comprehensive income
be shown in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes,
as applicable, foreign currency items and unrealized gains and losses on
certain investments in debt and equity securities which are currently
direct adjustments to equity. SFAS 130 will be effective for fiscal years
commencing after December 15, 1997. Reclassification for earlier periods
is required for comparative purposes. The Company is currently evaluating
the impact which SFAS 130 will have on its financial statements; however,
because it requires only additional disclosure, the Company does not expect
it to have a material impact on its financial position or results of
operations.
11
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
q. RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D)
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
supersedes Statement of Financial Accounting Standard No. 14 "Financial
Reporting for Segments of a Business Enterprise." SFAS 131, which will be
effective for fiscal years commencing after December 15, 1997, establishes
standards for the way in which public companies report information
regarding operating segments in annual financial statements and requires
those companies to report selected information regarding operating segments
in interim financial statements. It also requires disclosures regarding
products and services, geographic areas and major customers.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The Company is currently evaluating the impact which
SFAS 131 will have on its financial statements; however, because it
requires only additional disclosure, the Company does not expect it to have
a material impact on its financial position or results of operations.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the Statement of Position ("SOP") 97-2 "Software Revenue
Recognition" which will supersede SOP 91-1. SOP 97-2 has not changed the
basic rules of revenue recognition, but does provide more guidance
particularly with respect to multiple deliverables and "when and if
available" products. SOP 97-2 is effective for transactions entered into
for annual periods beginning after December 15, 1997. Company management
anticipates that the adoption of SOP 97-2 will not have a material effect
on the Company's operating results.
NOTE 3 - SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Marketable debt securities $ 8,972* $ 11,459
Bank deposits (1) 23,738 6,456
Marketable shares 791 468
----------- -------------
$ 33,501 $ 18,383
----------- -------------
----------- -------------
</TABLE>
* See Note 5(3).
(1) The balance of bank deposits, as at December 31, 1997, bears interest at a
weighted average rate of 6.3% per annum.
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- ------------
(IN THOUSANDS)
<S> <S> <C>
Raw materials and components $ 10,111 $ 5,624
Work-in-process 6,612 4,931
Finished goods 2,875 4,229
-------------- ------------
$ 19,598 $ 14,784
-------------- ------------
-------------- ------------
</TABLE>
12
<PAGE>
NOTE 5 - INVESTMENTS AND LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Trade receivables (1) $ 750 $ 1,926
Less-current maturity, included in accounts
receivable 310 809
------------ ------------
440 1,117
Bank deposits (2) 20,390 --
Marketable debt securities (3) 10,610 6,272
Investment in Mind C.T.I. Ltd. (4) 1,059 --
------------ ------------
$ 32,499 $ 7,389
------------ ------------
------------ ------------
</TABLE>
(1) The balance of trade receivables, at December 31, 1997, bears interest at
LIBOR and LIBOR+1%. (At December 31, 1997, LIBOR was 6.5%.) The aggregate
amount of receivables is repayable as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
----------------
(IN THOUSANDS)
<S> <C>
1998 $ 310
1999 440
----------------
$ 750
----------------
----------------
</TABLE>
(2) The balance of bank deposits, as at December 31, 1997, bears interest at a
weighted average rate of 6.5% per annum.
(3) The marketable debt securities are due to mature through 2000. The market
value of the marketable debt securities (including those in short-term
investments) is $19.2 million.
(4) In August 1997, the Company acquired 928 shares representing 15.1% of the
shares of Mind C.T.I. Ltd. ("Mind"), an Israeli company, which is engaged
in the development and marketing of software for accounting management and
billing for the telecommunications industry for $1,059,000. The Company
was also granted an option to acquire an additional 1,233 shares of Mind
for $2,400,000, exercisable through 2000 or until an initial public
offering of Mind.
13
<PAGE>
NOTE 6 - FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cost:
Computers and manufacturing equipment $ 11,650 $ 9,299
Motor vehicles 2,385 1,672
Office furniture and equipment 921 758
Leasehold improvements 1,151 639
------------ ------------
$ 16,107 $ 12,368
------------ -------------
------------ -------------
Accumulated depreciation:
Computers and manufacturing equipment $ 6,216 $ 4,775
Motor vehicles 803 631
Office furniture and equipment 312 263
Leasehold improvements 640 587
------------ ------------
$ 7,971 $ 6,256
------------ ------------
------------ ------------
</TABLE>
NOTE 7 - CAPITAL NOTE TO A RELATED PARTY
The capital note, which is denominated in NIS and unlinked, is non-interest
bearing and is due not earlier than 2008.
NOTE 8 - ACCRUED SEVERANCE PAY
The Company's liability for severance pay, pursuant to Israeli law, is fully
provided. Part of the liability is funded through individual insurance policies
which are not under the Company's control.
The aggregate value of the insurance policies at December 31, 1997 and 1996 was
$1,558,000 and $821,000, respectively.
The net severance pay expenses for the years ended December 31, 1997, 1996 and
1995 were $977,000, $661,000 and $887,000, respectively.
The Company has no liability for any pension expenses to its employees.
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES
a. ROYALTIES
i. The Company is committed to pay royalties to the Government of Israel
on proceeds from sale of products in the research and development of
which the Government has participated by way of grants up to the
amount of the grants received (in dollar terms). The royalties
payable are 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, as at December 31, 1997
was $9.6 million.
14
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
a. ROYALTIES (CONT'D)
ii. Total royalty expenses of the Company for the three years ended
December 31, 1997, 1996 and 1995 were $2,174,000, $774,000 and
$202,000, respectively.
b. LEASE COMMITMENTS
The Company has entered into several operating lease agreements in Israel
and abroad. The agreements expire on various dates from December 1997 to
2007 (including options) and are in local currencies or linked to the
dollar or to the Israeli consumer price index ("CPI").
The Company has an option to purchase the building which it rents in Israel
for $19 million, linked to the Israeli CPI. The option may be exercised
from the beginning of the fifth year of the lease period until the end of
the tenth year of the lease period.
Future minimum annual rental payments which the Company and its
subsidiaries are committed to pay under the above leases, at rates in
effect at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 $ 1,848
1999 1,848
2000 and thereafter 1,795
</TABLE>
c. PERFORMANCE GUARANTEES
As at December 31, 1997, the Company was contingently liable for bank
guarantees under performance obligations to customers totalling
approximately $5.5 million.
d. NEGATIVE PLEDGE AGREEMENT
The Company has a negative pledge agreement with its principal banks in
connection with a certain credit facility made available to it. 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.
e. FINANCIAL INSTRUMENTS
1. Off-balance sheet contracts:
The Company enters into currency forward exchange contracts to hedge
existing non-dollar assets. As at December 31, 1997, the Company has
purchased currency forward contracts for periods ending March 26, 1998
as a hedge against sales contracts receivable as follows:
- Obligation to sell DM 0.9 million for a total of $0.5 million.
- Obligation to sell Australian $2.9 million for a total of
$2 million.
Because the impact of fluctuations in currency exchange rates on
foreign exchange contracts offsets the effect on the underlying items
being hedged, these instruments do not expose the Company to risk that
would otherwise result from fluctuations in currency exchange rates.
15
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
e. FINANCIAL INSTRUMENTS (CONT'D)
2. Concentration of credit risk
Financial instruments of the Company which potentially expose the
Company to concentrations of credit risk consist mainly of cash
investments and trade accounts receivable.
At December 31, 1997 and 1996, the Company had cash and cash
equivalents, short-term investments and long-term investments
totalling $78.2 and $35.3 million, respectively, deposited for the
most part, with major Israeli and U.S. banks.
Most of the marketable securities held by the Company are debt
securities of highly-rated corporations. Therefore, no credit losses
in respect of these items are anticipated by the Company.
With respect to trade receivables, credit risk exposure is limited
since most of the Company's sales are to large governmental
telephone-operating companies with a wide geographical dispersion.
The Company has not provided for doubtful accounts, as historically,
the Company has not experienced material credit losses. As at
December 31, 1997, two of the Company's customers accounted for 16%
and 12%, respectively, of the total trade receivables. (As at
December 31, 1996, the balances of three customers accounted for 14%,
12% and 12%, respectively.)
3. Concentrations in the available sources of supply of materials
Certain components used in the Company's products are currently
available to the Company from only one source and other components are
currently available from only a limited number of sources. In
addition, the Company employs several unaffiliated subcontractors in
Israel to manufacture all of the sub-assemblies for its products.
While the Company has been able to obtain adequate supplies of
components and has experienced no material problems with its
subcontractors to date, in the event that any of these suppliers or
subcontractors is unable to meet the Company's requirements in a
timely manner, the Company may experience an interruption in
production. Any such disruption, or any other interruption of such
suppliers' or subcontractors' ability to provide components and
sub-assemblies to the Company could result in delays in making product
shipments, which could have a material adverse on the Company's
business, financial condition and results of operations.
4. Fair value of financial instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, short-term and long-term investments, current and
non-current accounts receivable, accounts payable and accruals and
long-term liabilities. In view of their nature, the fair value of the
financial instruments included in Company's working capital is usually
identical or close to their carrying amounts, except for the
investment in debt securities, which is presented at cost.
The fair value of non-current receivables and most of the long-term
debt also approximates their carrying value, since they bear interest
at rates close to the prevailing market rates.
16
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
e. FINANCIAL INSTRUMENTS (CONT'D)
4. Fair value of financial instruments (cont'd)
The following table summarizes the financial instruments held by the
Company at December 31, 1997 whose fair value is not identical to
their carrying amounts:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt securities (short and long-term
investments) $ 19,582 $ 19,222
Capital note 130 68
</TABLE>
NOTE 10 - SHAREHOLDERS' EQUITY
a. SHARE CAPITAL
1. The Company's shares are traded in the United States on the
over-the-counter market and listed on the Nasdaq National Market.
2. In May 1997, the Company effected a second issuance to the public.
The aggregate net proceeds from the issuance were $36,471,000.
3. Dividends
In the event that cash dividends are declared by the Company, such
dividends will be paid in NIS. Dividends paid to shareholders outside
Israel will be converted into dollars on the basis of the exchange
rate prevailing at the date of payment. In respect of the tax due in
the event of a distribution of cash dividends, see Note 11a2.
b. ISSUE OF STOCK BY SUBSIDIARY
1. In October 1997, G. Connect Ltd., an 80%-subsidiary of the Company
("G. Connect"), issued 20,000 convertible preferred shares,
constituting 16.67% of the G. Connect's issued and outstanding share
capital, to new investors ("the investors") in consideration of $3
million. As a result of this issuance, the Company's shareholding in
G. Connect decreased to 66.67%. G. Connect is engaged in the
development of internet access products.
The change in the Company's proportional share in G. Connect's equity
resulting from the additional equity raised by G. Connect, totalling
$1.8 million, is accounted for as an equity transaction and credited
to shareholders' equity.
2. Pursuant to the agreement between the Company, G. Connect and the
investors, G. Connect granted the investors three options, each
entitling the investors to invest in G. Connect a further $1 million
at a price per preferred share of $183.33, $208.33 and $233.33,
respectively, exercisable until the earlier of the initial public
offering of G. Connect or December 31, 1998, 1999 and 2000,
respectively.
17
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY (CONT'D)
c. OPTIONS
In 1992, the Company adopted two option plans (the "1992 Plans"), pursuant
to which options may be granted to employees, officers and Directors to
purchase up to 850,000 ordinary shares. Pursuant to these plans, options
to purchase 350,000 ordinary shares were granted to certain employees
(including one Director who was an employee) currently with the Company's
initial public offering in April 1992 as follows: options to purchase
200,000 ordinary shares at an exercise price of $8.80 per share and options
to purchase 150,000 ordinary shares at an exercise price of $6.26 per
share. Pursuant to the 1992 Plans, options to purchase the remaining
500,000 ordinary shares were granted to certain employees at an exercise
price not less than the average of the closing bid and asked prices of the
ordinary shares, during the three months prior to the date of grant and
with an exercise period of between two and five years. The options expire
if not exercised within five years of the date of grant.
In January 1995, the Company adopted another option plan (the "1994 Plan"),
pursuant to which options may be granted to employees, officers, Directors
and consultants of the Company to purchase up to 200,000 ordinary shares.
Options granted under the 1994 Plan have an exercise price equal to the
average market price for the five days prior to the date of grant and
vesting periods of between six months to three years from the date of
grant. Each option granted under the 1994 Plan expires if not exercised
within five years of its initial exercise date. Through December 31, 1997,
162,000 options had been granted.
In February 1996, the Company adopted an additional option plan (the "1996
Plan"), pursuant to which options may be granted to employees, officers,
Directors and consultants of the Company to purchase up to 300,000 ordinary
shares. Options granted under the 1996 Plan have an exercise price equal
to the average market price for the five days prior to the date of grant
and vesting periods of between two and five years from the date of grant.
Each option granted under the 1996 Plan expires if not exercised within
five years of its initial exercise date. Through December 31, 1997,
248,804 options had been granted.
In April 1997, the Company adopted an additional option plan (the "1997
Plan"), pursuant to which options may be granted to employees, officers,
Directors and consultants of the Company to purchase up to 250,000 ordinary
shares. Options granted under the 1997 Plan have an exercise price equal
to the average market price for the five days prior to the date of grant
and vesting periods of between two and five years from the date of grant.
Each option granted under the 1997 Plan expires if not exercised within
five years of its initial exercise date. Through December 31, 1997, no
options had been granted.
In general, all of the plans are administered by the Board of Directors'
Compensation Committee. Options granted to employees under the plans
expire upon the termination of an employee's employment with the Company or
any subsidiary of the Company, provided that the employee's right to
exercise the options has not vested at the time of such termination.
18
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY (CONT'D)
c. OPTIONS
The following table summarizes data with respect to the option plans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996
----------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 625,128 $ 7.80 899,269 $ 7.47
Granted during year 101,600 22.32 209,656 9.24
Exercised during year (258,179) 6.88 (377,877) 7.89
Forfeited during year (87,945) 7.19 (105,920) 7.53
-------------- -------------
Outstanding at year end 380,604 12.44 625,128 7.80
-------------- -------------
Options exercisable at year-end 49,500 140,822
-------------- -------------
Weighted average fair value of options granted during
the year $ 10.76 $ 4.10
</TABLE>
The following table summarizes information relating to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ----------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES DECEMBER 31, 1997 LIFE (IN YEARS) PRICE DECEMBER 31, 1997 PRICE
- ------------------ ------------------ -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$5 - $7 124,300 3.76 $ 5.76 42,000 $ 5.67
$7 - $9 21,750 2.57 8.30 6,250 7.96
$9 - $11.84 124,954 3.39 11.09 1,250 9.50
$11.84 - $18.44 54,500 5.15 18.00 -- --
$18.44 - $32.74 55,100 6.10 26.70 -- --
------------------ -------------------
$5 - $32.74 380,604 4.10 12.44 49,500 6.05
------------------ -------------------
</TABLE>
19
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY (CONT'D)
c. OPTIONS (CONT'D)
Fair value disclosures:
Had compensation cost for the Company's option plans been determined on the
basis of the fair value at the grant dates, as prescribed in Statement No.
123 of the FASB, the Company's net income and net income per share would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNT)
<S> <C> <C>
Net income:
As reported $ 14,985 $ 6,991
Proforma 14,487 6,540
Basic earnings per share:
As reported $ 1.26 $ 0.66
Proforma 1.22 0.62
Fully diluted earnings per share:
As reported $ 1.23 $ 0.64
Proforma 1.19 0.60
</TABLE>
Data in respect of the option plans
The fair value of each option grant is estimated on the date of the grant
using the Black & Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1996: a dividend yield of 0.0% for
both periods; expected volatility of 64% to 74% in 1997 and 59% to 71% in
1996; riskfree interest rates of 5.8% to 6.5% in 1997 and 5.24% to 5.39% in
1996; and expected lives of 1 - 5 years for options granted in 1997 and 2 -
4 1/4 years for options granted in 1996.
Because additional option grants are expected to be made each year, and due
to the factors described in the preceding paragraph, the above proforma
disclosures are not representative of proforma effects of reported net
income for future years.
NOTE 11 - INCOME TAXES
a. TAX BENEFITS UNDER VARIOUS TAX LAWS
1. "Industrial Company"
The Company is an "Industrial Company" as defined by the Law for the
Encouragement of Industry (Taxes), 1969, and as such, is entitled to
certain tax benefits, including accelerated depreciation of machinery
and equipment and deduction of expenses incurred in connection with a
public stock offering over a three-year period.
20
<PAGE>
NOTE 11 - INCOME TAXES (CONT'D)
a. TAX BENEFITS UNDER VARIOUS TAX LAWS (CONT'D)
2. "Approved Enterprise"
The Company's production facilities have been granted "Approved
Enterprise" status with respect to four approved programs under the
Law for Encouragement of Capital Investments, 1959. Pursuant to the
said law, the Company elected to adopt the "alternative benefits
program which entitles the Company to a complete exemption from tax on
income derived therefrom for a period of four years out of a
ten-year-period of benefits from the year in which such enterprises
first generates taxable income. Income derived during the remaining
years of benefits is taxable at the rate of 25%. The period of
benefits is limited to twelve years from the commencement of
production or fourteen years from the date of approval, whichever is
earlier. As of December 31, 1997, the four-year-period of benefits
for two of the four approved programs had ended, the period of
benefits for the third approved program commenced in 1996 and the
period of benefits for the fourth program had not yet commenced.
In the event of a distribution of cash dividends to shareholders of
earnings subject to the exemption, the Company will be liable to tax
at a rate of 25%. The Company has not provided deferred taxes on
future distributions of tax-exempt earnings, as management and Board
of Directors have determined not to make any distribution that may
result in a tax liability for the Company. Accordingly, such earnings
have been considered to be permanently reinvested. The tax-exempt
earnings may be distributed to shareholders without subjecting the
Company to taxes only upon a complete liquidation of the Company.
As of December 31, 1997, the aggregate amount of undistributed
tax-exempt earnings for which deferred taxes had not been provided was
$15.2 million and the amount of unrecognized deferred taxes in respect
of such earnings amounted to $3.8 million.
Income derived from sources other than the "approved enterprise" is
taxable at the regular corporate tax rate of 36%.
b. TAXATION UNDER VARIOUS LAWS
1. Taxation under inflationary conditions
The Company and its Israeli subsidiaries are assessed under the
provisions of the Income Tax Law (Adjustments for Inflation), 1985,
pursuant to which the results for tax purposes are measured in real
terms in accordance with changes in the Israeli CPI. The Company is
entitled to a tax deduction for the preservation of equity invested in
non-fixed assets. This equity is defined, primarily, as shareholders'
equity less fixed (inflation-resistant) assets. The deduction is
measured by the change in the Israeli CPI.
2. Foreign subsidiaries
The Company's foreign subsidiaries are taxed under the tax laws in
their countries of incorporation.
21
<PAGE>
NOTE 11 - INCOME TAXES (CONT'D)
c. COMPOSITION OF INCOME TAX BENEFIT (PROVISION):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before taxes on
income:
Israel $ 15,432 $ 6,906 $ (1,006)
Foreign subsidiaries 232 71 (177)
--------- --------- -----------
15,664 $ 6,977 $ (1,183)
--------- --------- -----------
--------- --------- -----------
Income tax benefit (provision):
Current:
Israel $ (39) $ -- $ --
Foreign subsidiaries (68) (103) (11)
--------- --------- -----------
$ (107) (103) (11)
--------- --------- -----------
--------- --------- -----------
Deferred:
Israel (150) 150 --
Foreign subsidiaries -- -- --
--------- --------- -----------
(150) 150 --
--------- --------- -----------
$ (257) $ 47 $ (11)
--------- --------- -----------
--------- --------- -----------
</TABLE>
d. DEFERRED INCOME TAXES
The main components of the Company deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards in Israel $ -- $ 271
Net operating loss carryforwards of foreign
subsidiaries 328 210
Severance pay and other allowances, net 131 81
------- -------
459 562
Less - valuation allowance 309 412
------- -------
$ 150 $ 150
------- -------
------- -------
</TABLE>
Under Statement No. 109 of the FASB, deferred tax assets are to be
recognized for the anticipated tax benefits associated with net operating
loss carryforwards and deductible temporary differences, unless it is more
likely than not that some or all of the deferred tax asset will not be
realized. The adjustment is made by a valuation allowance. Since the
realization of the net operating loss carryforwards and deductible
temporary differences of the foreign and the Israeli subsidiaries is less
likely than not, a valuation allowance has been established for the amounts
of the related tax benefits.
22
<PAGE>
NOTE 11 - INCOME TAXES (CONT'D)
d. DEFERRED INCOME TAXES (CONT'D)
The tax loss carryforwards in Israeli, totaling $0.7 million, are
denominated in NIS and linked to the Israeli CPI.
e. A reconciliation of the theoretical income tax expense (benefit) assuming
all income is taxable at the statutory rates of 36%, 36% and 37% for the
years ended December 31, 1997, 1996, and 1995, respectively, applicable to
the income of companies in Israel, to the actual income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before taxes on income, as reported in the
consolidated statements of operations $ 15,664 $ 6,977 $ (1,183)
------------ ------------ -------------
------------ ------------ -------------
Tax on net income (loss) at statutory rates $ 5,639 $ 2,512 $ (437)
Tax effect of non-Israel subsidiaries 2 3 (8)
Decrease in taxes resulting from permanent differences, net (1,167) (34) (319)
Tax benefit arising from the "Approved Enterprise" (4,114) (1,688) 175
Increase (decrease) in valuation allowance (103) (840) 600
------------ ------------ -------------
Taxes on income for the reported year $ 257 $ (47) $ 11
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
f. INCOME TAX ASSESSMENTS
The Company has final assessments up to and including the 1992 tax year.
Most of the Company's subsidiaries have not received final tax assessments
for any tax year since their incorporation. A subsidiary in Germany has
received final tax assessments through the 1995 tax year.
23
<PAGE>
NOTE 12 - SUPPLEMENTARY BALANCE SHEET INFORMATION
a. OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Government of Israel - Participation in
research and development $ 1,008 $ 285
Advances to suppliers -- 35
Loans to employees 191 246
Tax authorities 580 518
Value added tax 860 604
Prepaid expenses 628 134
Others 574 350
-------- --------
$ 3,841 $ 2,172
-------- --------
-------- --------
</TABLE>
b. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <S> <S>
Employees $ 4,423 $ 3,140
Accrued severance pay -- 128
Commissions 2,339 1,688
Royalties 1,041 1,187
Tax authorities 361 275
Advances from customers -- 1,094
Other accrued expenses 2,177 1,188
Related parties -- 30
-------- --------
$ 10,341 $ 8,730
-------- --------
-------- --------
</TABLE>
24
<PAGE>
NOTE 13 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------- ------------------------------------------------------
AUSTRALIAN AUSTRALIAN
DOLLAR NEW ISRAELI SHEKEL OTHER DOLLAR NEW ISRAELI SHEKEL OTHER
------------ ------------------------- -------- ------------ -------------------------- ----------
LINKED(1) UNLINKED LINKED(1) UNLINKED
----------- ---------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 4,662 $ 474 $ 9,546 $ 2,464 $ 2,273 $ 1,004 $ 7,205 $ 1,285
----------- ----------- ---------- -------- ----------- ----------- ---------- ---------
----------- ----------- ---------- -------- ----------- ----------- ---------- ---------
LIABILITIES:
Current liabilities $ 926 $ 45 $ 11,027 $ 593 $ 426 $ -- $ 8,315 $ 524
Capital note to a
related party -- -- 130 -- -- -- 141 --
----------- ----------- ---------- -------- ----------- ----------- ---------- ---------
$ 926 $ 45 $ 11,157 $ 593 $ 426 $ -- $ 8,456 $ 524
----------- ----------- ---------- -------- ----------- ----------- ---------- ---------
----------- ----------- ---------- -------- ----------- ----------- ---------- ---------
</TABLE>
(1) Linked to the Israeli CPI.
NOTE 14 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
a. SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Classification by geographical distribution:
Europe $ 29,275 $ 21,331 $ 16,320
Israel 12,228 14,542 7,451
South America 13,091 6,349 1,201
North America 1,377 -- --
Africa, Asia and Australia 28,178 14,867 7,155
----------- ----------- ---------
$ 84,149 $ 57,089 $ 32,127
----------- ----------- ---------
----------- ----------- ---------
Classified by major customers:
Percentage of sales to customers exceeding 10%
of revenues:
Customer A (1) (1) 11%
Customer B (1) (1) 13%
Customer C (1) -- 17%
Customer D (1) 16% (1)
Customer E 14% 24% 22%
Customer F 12% (1) --
Customer G 18% (1) --
</TABLE>
(1) Less than 10% of sales.
The Company operates in a single industry with facilities in Israel, Europe and
Australia. The Company reports the operations of all its marketing subsidiaries
under one segment, since this economic activity constitutes a direct continuity
of the manufacturing operations in Israel.
25
<PAGE>
NOTE 14 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONT'D)
b. COST OF SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Materials and components $ 31,710 $ 26,218 $ 10,634
Salaries, wages and employee
benefits 4,364 3,473 2,220
Sub-contractors 4,080 2,853 1,046
Depreciation and amortization 1,027 707 566
Other manufacturing costs 3,254 2,390 1,845
--------- --------- ---------
44,435 35,641 16,311
Decrease (increase) in finished
goods and work-in-process (327) (4,276) 2,970
--------- --------- ---------
$ 44,108 $ 31,365 $ 19,281
--------- --------- ---------
--------- --------- ---------
</TABLE>
c. RESEARCH AND DEVELOPMENT COSTS, NET
i. COMPRISED AS FOLLOWS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Research and development costs $ 12,470 $ 9,156 $ 8,030
Less - Participation from the
Government of Israel:
Royalty-bearing (2,892) (2,112) (2,180)
Other (857) (87) --
--------- --------- ---------
8,721 6,957 5,850
Charge for purchased
research and development -- 400 --
--------- --------- ---------
$ 8,721 $ 7,357 $ 5,850
--------- --------- ---------
--------- --------- ---------
</TABLE>
ii. a. In October 1996, the Company invested $2 million in a subsidiary,
G. Connect Ltd. ("G. Connect"), which Company established in
August 1996. Pursuant to an agreement among the Company, G.
Connect and certain key employees of G. Connect, 20% of the
shares of G. Connect were issued to such key employees of G.
Connect for no additional consideration. The excess of the
investment amount over the Company's share in the net assets of
G. Connect totalling $400,000 was allocated to in-process
research and development that had not yet reached technological
feasibility and was charged to the Company's operations.
26
<PAGE>
NOTE 14 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONT'D)
c. RESEARCH AND DEVELOPMENT COSTS, NET (CONT'D)
ii. b. In accordance with the abovementioned agreement among the
shareholders of G. Connect, the Company undertook to invest an
additional $2 million in loans, pursuant to the progress of the
research and development. The Company may cease financing,
wholly or partly, if it decides that the research and development
is not feasible. If the Company ceases financing, the Company's
holdings will be diluted according to a formula outlined in the
agreement.
d. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Selling $ 15,334 $ 10,400 $ 7,174
General and administrative 3,209 2,790 2,595
----------- --------- ---------
$ 18,543 $ 13,190 $ 9,769
----------- --------- ---------
----------- --------- ---------
</TABLE>
e. FINANCIAL INCOME, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Financial Income:
Interest on short-term deposits $ 1,410 $ 625 $ 445
Interest on marketable debt securities 1,625 1,082 1,064
Exchange rate differences, net 36 101
Gain on sale of marketable shares 110 132 5
Others 64 51 34
--------- --------- --------
3,209 1,926 1,649
--------- --------- --------
--------- --------- --------
Financial expenses:
Exchange rate differences, net (219) -- --
Interest expenses and bank charges (164) (160) (93)
--------- --------- --------
(383) (160) (93)
--------- --------- --------
$ 2,826 $ 1,766 $ 1,556
--------- --------- --------
--------- --------- --------
</TABLE>
27
<PAGE>
NOTE 15 - TRANSACTIONS WITH RELATED PARTIES
a. BALANCES DUE TO RELATED PARTIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Capital note $130 $141
Management fees payable -- 4
Amount due to directors -- 26
</TABLE>
b. EXPENSES TO RELATED PARTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
General and administrative
expenses $ 118 $ 95 $ 96
Directors' remuneration 60 77 78
</TABLE>
28
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONDENSED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Balance Sheet at September 30, 1998 2
Statement of Operations
for the nine month period ended September 30, 1998 4
Statement of Shareholders' Equity
for the nine month period ended September 30, 1998 5
Statement of Cash Flows
for the nine month period ended September 30, 1998 6
Notes to the Interim Consolidated Financial Statements 8
</TABLE>
1
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------- DECEMBER 31,
1998 1997 1997
------------ ------------ ------------
UNAUDITED
--------------------------------
(US$ IN THOUSANDS)
----------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 14,355 16,844 13,716
Short-term investments 26,654 39,156 33,501
Accounts receivable:
Trade 19,065 20,884 25,195
Other and prepaid expenses (Note 5a) 3,806 3,141 3,841
Inventories (Note 2) 21,821 20,217 19,598
------------ ------------ ------------
Total current assets 85,701 100,242 95,851
------------ ------------ ------------
INVESTMENTS AND
LONG-TERM RECEIVABLES (Note 3) 34,314 24,295 32,499
------------ ------------ ------------
FIXED ASSETS (Note 4)
Cost 20,258 14,375 16,107
Less - accumulated depreciation 9,803 7,367 7,971
------------ ------------ ------------
10,455 7,008 8,136
------------ ------------ ------------
OTHER ASSETS, NET -- 182 163
------------ ------------ ------------
130,470 131,727 136,649
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------- DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
UNAUDITED
----------------------------------
(US$ IN THOUSANDS)
----------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade 7,883 10,398 8,445
Other and accrued expenses (Note 5b) 10,220 11,683 10,341
---------- ---------- ----------
Total current liabilities 18,103 22,081 18,786
---------- ---------- ----------
LONG-TERM LIABILITIES
Capital note to a related party 119 131 130
Accrued severance pay 1,398 1,058 1,331
---------- ---------- ----------
1,517 1,189 1,461
---------- ---------- ----------
MINORITY INTEREST 3,979 844 2,210
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital
Ordinary shares of NIS 0.1 par value
(Authorized - 20,000,000 shares
issued and outstanding -
September 30, 1998 - 12,573,561 shares
December 31, 1997 - 12,562,611 shares 506 505 506
Additional paid-in capital 74,593 72,515 74,527
Treasury stock (1,173) -- --
Retained earnings 32,945 34,593 39,159
---------- ---------- ----------
106,871 107,613 114,192
---------- ---------- ----------
130,470 131,727 136,649
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 30
1998 1997 1998 1997 1997
----------- ----------- ----------- ----------- -----------
UNAUDITED UNAUDITED AUDITED
(US$ IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales (Note 6a) 41,311 61,873 17,009 21,997 84,149
Cost of sales (Note 6b) 24,951 32,981 9,685 10,950 44,108
----------- ----------- ----------- ----------- -----------
Gross profit 16,360 28,892 7,324 11,047 40,041
----------- ----------- ----------- ----------- -----------
Research and development
costs, net (Note 6c) 10,093 6,259 3,612 2,479 8,721
Selling, general and
administrative expenses (Note 6d) 16,610 13,662 5,417 5,031 18,543
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (10,343) 8,971 (1,705) 3,537 12,777
Financial income, net 3,275 1,881 953 1,054 2,826
Other income, net 1,425 61 17 23 61
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
TAXES ON INCOME (5,643) 10,913 (735) 4,614 15,664
Taxes on income (236) (258) (116) (71) (257)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) AFTER
TAXES ON INCOME (5,879) 10,655 (851) 4,543 15,407
Minority interest (335) (236) 31 (183) (422)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) (6,214) 10,419 (820) 4,360 14,985
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
EARNINGS (LOSS) PER ORDINARY
SHARE:
Basic (0.50) 0.90 (0.07) 0.35 1.26
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted (0.50) 0.87 (0.07) 0.34 1.23
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares in thousands used in
computing earnings (loss)
per ordinary share:
Basic 12,550 11,622 12,514 12,500 11,851
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted 12,550 11,990 12,514 12,839 12,192
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
TELEDATA COMMUNICATIONS LTD.
INTERIM STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES CAPITAL EARNINGS EQUITY
NIS 0.1 SHARE --------------- --------------- ---------------
PAR VALUE CAPITAL (US$ IN THOUSANDS)
--------------- --------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 10,411,255 441 31,557 17,183 49,181
Exercise of employee options 377,877 12 2,968 2,980
Net income for the year 6,991 6,991
--------------- --------------- --------------- --------------- ---------------
BALANCE AT DECEMBER 31, 1996 10,789,132 453 34,525 24,174 59,152
Issue of shares to the public 1,514,000 45 36,426 36,471
Exercise of employee options 259,479 8 1,650 1,658
Tax benefits from employee
stock transaction 150 150
Issue of stock by subsidiary 1,776 1,776
Net income for the year 14,985 14,985
--------------- --------------- --------------- --------------- ---------------
BALANCE AT DECEMBER 31, 1997 12,562,611 506 74,527 39,159 114,192
Purchase of Treasury stock (1,173) (1,173)
Exercise of employee options 10,950 (*) 66 66
Loss for the nine months
ended September 30, 1998
(unaudited) (6,214) (6,214)
--------------- --------------- --------------- --------------- ---------------
BALANCE AT SEPTEMBER 30, 1998
(unaudited) 12,573,561 506 73,420 32,945 106,871
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
</TABLE>
(*) Less than US$ 1,000.
The accompanying notes are an integral part of the financial statements
5
<PAGE>
TELEDATA COMMUNICATIONS LTD.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------------------------- DECEMBER 31,
1998 1997 1997
--------------- --------------- ---------------
UNAUDITED
--------------------------------------
(US$ IN THOUSANDS)
------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (6,214) 10,419 14,985
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities (see Appendix) 3,236 (2,574) (9,361)
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,978) 7,845 5,624
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,473) (2,297) (4,024)
Proceeds from sale of fixed assets 187 73 165
Investment in short-term deposits, net (1,970) (33,760) (33,332)
Investment in marketable securities (4,582) (10,314) (18,427)
Proceeds from realization of
marketable securities 12,746 7,667 13,038
Investment in company -- (1,059) (1,059)
Cash and cash equivalents in reduction
in holdings in subsidiary 2,816 -- 2,955
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 4,724 (39,690) (40,684)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of ordinary shares -- 36,471 36,471
Proceeds from exercise of employee options 66 1,571 1,658
Purchase of Treasury stock (1,173) -- --
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,107) 38,042 38,129
--------------- --------------- ---------------
--------------- --------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS 639 6,197 3,069
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 13,716 10,647 10,647
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD 14,355 16,844 13,716
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE>
TELEDATA COMMUNICATIONS LTD.
APPENDIX TO CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
------------------------------------- DECEMBER 31,
1998 1997 1997
--------------- --------------- ---------------
UNAUDITED
-------------------------------------
(US$ IN THOUSANDS)
------------------------------------------------------------
<S> <C> <C> <C>
APPENDIX -
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization 2,173 1,411 1,938
Capital gain, net (43) (61) (61)
Gain from reduction in holdings in subsidiary (1,382) -- --
Minority interest 335 236 422
Deferred income taxes, net 150 150 150
Increase in accrued severance pay 67 97 370
Gain from erosion in value of capital note
to a related party (11) (10) (11)
Interest accrued on investments (1,602) (890) (1,125)
Decrease (increase) in assets:
Inventories (2,223) (5,433) (4,814)
Trade receivables (including non-current portion) 6,570 (3,679) (7,990)
Other receivables and prepaid expenses (115) (1,119) (1,669)
Increase (decrease) in liabilities:
Trade payables (562) 3,643 1,690
Other payables and accrued expenses (121) 3,081 1,739
--------------- --------------- ---------------
3,236 (2,574) (9,361)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
7
<PAGE>
TELEDATA COMMUNICATIONS LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
a. TELEDATA COMMUNICATIONS LTD. ("THE COMPANY") is an Israeli corporation
which designs, develops, manufactures, markets and supports advanced
wireline and wireless customer access network equipment for telephone
operating companies worldwide.
b. The unaudited interim consolidated financial statements as at
September 30, 1998 and for the nine-month period then ended ("the interim
financial statements") have been drawn up in a condensed format and
should be read in conjunction with the Company's financial statements as
at December 31, 1997 and the year then ended and the notes thereto. In
the opinion of management, the interim financial statements reflect all
adjustments (included normal recurring accruals) necessary to fairly
present the results for the periods. The generally accepted accounting
principles applied in the preparation of the interim financial statements
are consistent with those applied in the preparation of the annual
financial statements. However, interim financial statements do not
include all of the information and explanations required for annual
financial statements. Operating results for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results of
operations for the full year.
NOTE 2 - INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------- DECEMBER 31,
1998 1997 1997
--------------- --------------- ---------------
UNAUDITED
-------------------------------------
(US$ IN THOUSANDS)
------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and components 10,418 8,414 10,111
Work-in-process 7,999 8,175 6,612
Finished goods 3,404 3,628 2,875
--------------- --------------- ---------------
21,821 20,217 19,598
--------------- --------------- ---------------
--------------- --------------- ---------------
<CAPTION>
NOTE 3 - INVESTMENTS AND LONG-TERM RECEIVABLES
SEPTEMBER 30,
------------------------------------- DECEMBER 31,
1998 1997 1997
--------------- --------------- ---------------
UNAUDITED
-------------------------------------
(US$ IN THOUSANDS)
------------------------------------------------------------
<S> <C> <C> <C>
Trade receivables -- 1,154 750
Less - current maturity included in accounts
receivable -- 714 310
--------------- --------------- ---------------
-- 440 440
Bank deposits 24,168 14,940 20,390
Marketable debt securities 9,087 7,856 10,610
Investment in Mind C.T.I Ltd. 1,059 1,059 1,059
--------------- --------------- ---------------
34,314 24,295 32,499
--------------- --------------- ---------------
--------------- --------------- ---------------
(1) The aggregate amount of the receivables are
repayable as follows:
First year -- 714 310
--------------- --------------- ---------------
Second year -- 440 440
--------------- --------------- ---------------
-- 1,154 750
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
8
<PAGE>
TELEDATA COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 4 - FIXED ASSETS
SEPTEMBER 30,
------------------------------------ DECEMBER 31,
1998 1997 1997
-------------- -------------- --------------
UNAUDITED
------------------------------------
(US$ IN THOUSANDS)
-----------------------------------------------------------
<S> <C> <C> <C>
Cost:
Computers and manufacturing equipment 14,824 10,608 11,650
Motor vehicles 3,134 2,066 2,385
Office furniture and equipment 1,132 827 921
Leasehold improvements 1,168 874 1,151
-------------- -------------- --------------
20,258 14,375 16,107
-------------- -------------- --------------
-------------- -------------- --------------
Accumulated depreciation
Computers and manufacturing equipment 7,792 5,688 6,216
Motor Vehicles 881 778 803
Office furniture and equipment 421 291 312
Leasehold Improvements 709 610 640
-------------- -------------- --------------
9,803 7,367 7,971
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>
NOTE 5 - SUPPLEMENTARY BALANCE SHEET INFORMATION
a. OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
SEPTEMBER 30,
------------------------------------ DECEMBER 31,
1998 1997 1997
-------------- -------------- --------------
UNAUDITED
------------------------------------
(US$ IN THOUSANDS)
-----------------------------------------------------------
<S> <C> <C> <C>
Government of Israel - participation in research
and development 1,521 1,135 1,008
Loans to employees 135 168 191
Tax authorities 603 488 580
Value added tax 792 586 860
Prepaid expenses 565 307 628
Others 190 457 574
-------------- -------------- --------------
3,806 3,141 3,841
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>
b. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
SEPTEMBER 30,
------------------------------------ DECEMBER 31,
1998 1997 1997
-------------- -------------- --------------
UNAUDITED
------------------------------------
(US$ IN THOUSANDS)
-----------------------------------------------------------
<S> <C> <C> <C>
Employees 4,326 4,506 4,423
Commissions 2,283 2,080 2,339
Royalties 473 648 1,041
Tax authorities 29 76 361
Advances from customers 407 666 --
Other accrued expenses 2,702 3,707 2,177
-------------- -------------- --------------
10,220 11,683 10,341
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
TELEDATA COMMUNICATIONS LTD.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
------------------------------ ------------------------------- DEC. 31,
1998 1997 1998 1997 1997
------------- ------------- ------------- ------------- -------------
UNAUDITED UNAUDITED
------------------------------ -------------------------------
(US$ IN THOUSANDS)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
a. SALES
Classification by geographical
distribution
Europe 17,899 23,446 5,222 6,517 29,275
Israel 4,358 9,627 417 1,379 12,228
South America 3,960 10,023 957 3,054 13,091
North America 3,396 885 1,494 779 1,377
Africa, Asia and Australia 11,698 17,892 8,919 10,268 28,178
------------- ------------- ------------- ------------- -------------
41,311 61,873 17,009 21,997 84,149
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
b. COST OF SALES
Materials and components 18,144 26,256 6,879 8,697 31,710
Salaries wages and employee
benefits 3,528 3,202 1,140 1,488 4,364
Sub-contractors 2,137 2,909 854 776 4,080
Depreciation and amortization 1,214 658 439 188 1,027
Other manufacturing costs 1,844 2,599 411 795 3,254
------------- ------------- ------------- ------------- -------------
26,867 35,624 9,723 11,944 44,435
Increase in finished
goods and work-in-process (1,916) (2,643) (38) (994) (327)
------------- ------------- ------------- ------------- -------------
24,951 32,981 9,685 10,950 44,108
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
c. RESEARCH AND DEVELOPMENT
COSTS, NET
Research and development costs 13,626 8,665 4,887 3,419 12,470
Less - Participation from the
Government of Israel;
Royalty-bearing (2,832) (1,787) (1,082) (622) (2,892)
Other (701) (619) (193) (318) (857)
------------- ------------- ------------- ------------- -------------
10,093 6,259 3,612 2,479 8,721
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
d. SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling 13,310 11,376 4,296 4,135 15,334
General and administrative 3,300 2,286 1,121 896 3,209
------------- ------------- ------------- ------------- -------------
16,610 13,662 5,417 5,031 18,543
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
10
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended October 31, 1998 gives effect to the Company's acquisition of
Teledata Communications Ltd., an Israeli corporation ("Teledata"), as if it had
occurred on November 1, 1997 and the Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of October 31, 1998, gives effect to the Company's acquisition
of Teledata as if it had occurred October 31, 1998.
The unaudited pro forma condensed consolidated financial data presented herein
are based on the assumptions and adjustments described in the accompanying
notes. The unaudited Pro Forma Condensed Consolidated Financial Statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results to be expected in the future or as they might have been
for the periods presented had the acquisition been effective as of November 1,
1997 or October 31, 1998, as the case may be. The Unaudited Condensed
Consolidated Pro Forma Financial Statements and the accompanying notes should be
read in conjunction with the historical financial statements of the Company and
of Teledata, including the notes thereto and the Company's most recent report on
Form 10-K.
The acquisition of Teledata has been accounted for using the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed will be
recorded at their fair values as of the date of acquisition. For purposes of
these Unaudited Pro Forma Condensed Consolidated Financial Statements, these
amounts have been recorded based upon preliminary estimates. The Company does
not believe that any changes to these estimates that may occur will have a
material impact on the pro forma financial information included herein.
<PAGE>
ADC TELECOMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Teledata
ADC 12 Months
Year Ended Ended Pro Forma Pro Forma
Oct. 31, 1998 Sept. 30, 1998 Adjustments As Adjusted
------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Sales $ 1,379,678 $ 63,586 $ 1,443,264
Cost of Products Sold 736,537 36,077 772,614
------------- ---------------- -------------
Gross Profit 643,141 27,509 670,650
Research and Development 137,912 12,555 150,467
Selling and Administrative 268,007 21,491 289,498
Goodwill Amortization 11,656 -- (1) 4,994 16,650
------------- ---------------- ------------ -------------
Total Expenses 417,575 34,046 4,994 456,615
------------- ---------------- ------------ -------------
Operating Income (loss) 255,566 (6,537) (4,994) 214,035
Other Income (expense) 168 5,124 (2) (11,200) (5,908)
------------- ---------------- ------------ -------------
Income before Income Taxes 225,734 (1,413) (16,194) 208,127
Provisions for Income Taxes 79,007 235 (3) (4,144) 75,098
------------- ---------------- ------------ -------------
Net Income $ 146,727 $ (1,648) $ (12,050) $ 133,029
------------- ---------------- ------------ -------------
------------- ---------------- ------------ -------------
Diluted EPS
Average Shares Outstanding 136,307 136,307
Earnings Per Share $ 1.08 $ 0.98
------------- -------------
------------- -------------
Basic EPS
Average Shares Outstanding 134,327 134,327
Earnings Per Share $ 1.09 $ 0.99
------------- -------------
------------- -------------
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) Adjustment to reflect the amortization of intangible assets (primarily
goodwill) related to the acquisition of Teledata Communications Ltd. For
purposes of these pro forma financial statements, estimated lives ranging
from 5 to 15 years were used for amortization of the intangible assets.
(2) Represents the pro forma effect of interest expense on the estimated debt
of $200 million at an assumed annual interest rate of 5.8% which
represents the Company's estimated average marginal borrowing rate for
the year ended October 31, 1998.
(3) To adjust the provision for income taxes on a pro forma basis to reflect
the Company's incremental tax rate of 37% as applied to the pro forma
interest expense adjustment only. Other pro forma adjustments do not
result in income tax benefits.
2
<PAGE>
ADC TELECOMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
As of October 31, 1998
----------------------------
Pro Forma Pro Forma
ADC Teledata Adjustments As Adjusted
-------------- ----------- -------------- -------------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 287,700 $ 40,201 (1) $ (198,672) $ 129,229
Accounts receivable 365,989 18,018 384,007
Inventories 175,763 21,286 197,049
Prepaid income taxes and other assets 33,418 11,303 44,721
-------------- ----------- -------------- -------------
Total current assets 862,870 90,808 (198,672) 755,006
PROPERTY AND EQUIPMENT, NET 256,961 10,646 267,607
OTHER ASSETS, principally goodwill 180,756 25,520 (2) 64,920 276,642
(2) 5,446
-------------- ----------- -------------- -------------
$ 1,300,587 $ 126,974 $ (128,306) $ 1,299,255
-------------- ----------- -------------- -------------
-------------- ----------- -------------- -------------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 67,150 $ 7,295 $ $ 74,445
Accrued liabilities 115,559 20,590 136,149
Note payable 200,000 -- 200,000
Current maturities of long-term debt 735 -- 735
-------------- ----------- -------------- -------------
Total current liabilities 383,444 27,885 411,329
LONG-TERM DEBT, less current maturities 2,769 2,769
SHAREOWNERS' INVESTMENT 914,374 99,089 (3) $ (99,089) 885,157
(2) (37,100)
(1) 7,883
-------------- ----------- -------------- -------------
$ 1,300,587 $ 126,974 $ (128,306) $ 1,299,255
-------------- ----------- -------------- -------------
-------------- ----------- -------------- -------------
</TABLE>
3
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(1) To record the cash outlay for the purchase of issued and outstanding
shares of Teledata and the issuance of options to purchase shares of the
Company in exchange for outstanding options to purchase shares of
Teledata. In connection with the anticipated acquisition of Teledata,
the Company obtained $200 million prior to October 31, 1998 under an
existing revolving credit facility. Such borrowings carry an interest
rate equal to the commercial paper rate plus 25 basis points.
(2) The following table sets forth the components of the aggregate purchase
price of the Teledata acquisition and the allocation of such purchase
price (in thousands):
<TABLE>
<S> <C> <C>
Teledata purchase price $ 204,555
Estimated fees and expenses 2,000
--------------
Total purchase price to be allocated $ 206,555
--------------
--------------
Historical net book value of assets acquired $ 99,089
Adjustment of net tangible assets to fair market value 5,446
Purchased in process research and development cost 37,100
Identifiable Intangible assets:
Technology - complete $ 28,566
Assembled work force 3,815
Agency relationships 2,236
Favorable leaseholds 956
Non-competition agreements 1,968
Customer accounts 6,950
-------------
Total identifiable intangible assets 44,491
Excess purchase price over net assets acquired - goodwill 20,429
--------------
Total purchase price allocated $ 206,555
--------------
--------------
</TABLE>
Management estimates that $37.1 million of the purchase price represents
purchased in-process research and development that has not yet reached
technological feasibility and has no alternative future use. This amount
was expensed as a non-recurring, non-tax deductible charge upon
consummation of the acquisition. This amount has been reflected as a
reduction to shareowners' equity and has not been included in the pro
forma combined financial statement of income due to its non-recurring
nature.
The value assigned to purchased in-process research and development, as
well as the fair value of other tangible and intangible assets, was
determined by an independent appraisal.
The intangible assets will be amortized on a straight-line basis over
periods ranging from 5 to 15 years.
(3) To eliminate Teledata's historical shareholder investment.
4
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EXHIBIT 23.1
[Letterhead of BDO Almagor & Co.]
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the inclusion of our
report dated February 19, 1998 with respect to the consolidated financial
statements of Teledata Communications, Ltd. in the Form 8-K/A filed by ADC
Telecommunications, Inc. on or about January 13, 1999. We acknowledge that such
financial statements may be incorporated into other filings made by ADC
Telecommunications, Inc.
/s/ Almagor & Co.
Almagor & Co.
Certified Public Accountants (Isr.)
Ramat-Gan, Israel
January 11, 1999
