UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File No. 0-27742
CYLINK CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3891600
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3131 Jay Street
Santa Clara, CA 95054
(Address of principal executive offices)
(408) 855-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 30,
2001, as reported by the Nasdaq National Market, was approximately $60,595,000.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock, based on Schedule 13G filings,
have been excluded from the computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not a conclusive
determination for other purposes.
As of March 30, 2001, there were 32,706,298 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders (the "Proxy Statement") to be held on May 16, 2001, are
incorporated by reference in Parts II, III of this Form 10-K to the extent
stated herein.
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS....................................................1
PART I........................................................................1
ITEM 1. BUSINESS.............................................................1
ITEM 2. PROPERTIES...........................................................14
ITEM 3. LEGAL PROCEEDINGS....................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15
PART II......................................................................16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................................16
ITEM 6. SELECTED FINANCIAL DATA..............................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................22
Report of Independent Accountants.......................................23
Consolidated Balance Sheets.............................................25
Consolidated Statements of Operations...................................26
Consolidated Statements of Shareholders' Equity.........................27
Consolidated Statements of Cash Flows...................................28
Notes to Consolidated Financial Statements..............................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE......................................................44
PART III.....................................................................45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................45
ITEM 11. EXECUTIVE COMPENSATION..............................................45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................45
PART IV......................................................................45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.....45
SIGNATURES...................................................................49
SCHEDULE II..................................................................50
INDEPENDENT AUDITORS' CONSENT................................................51
FORWARD LOOKING STATEMENTS
This Report on Form 10-K includes statements that reflect our belief
concerning future events and financial performance. Statements which are not
purely historical in nature are called "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We sometimes identify forward looking
statements with such words as "expects", "anticipates", "intends", "believes" or
similar words concerning future events.
You should not rely on these forward-looking statements. They are subject
to certain risks and uncertainties that may cause actual results to differ
materially from past results or our predictions. Factors that could contribute
to differences include, but are not limited to, those described under the
caption "Risk Factors" and other sections of this Report on Form 10-K. You
should also consult the risk factors listed from time to time in Cylink's
Reports on Form 10-Q, 10-Q/A, and 8-K.
All statements included in this document are based on information available
to us as of the date of this Report on Form 10-K, and we assume no obligation to
update any such statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
PART I
ITEM 1. BUSINESS
We develop, market and support a comprehensive family of secure e-business
solutions. We believe our cryptographically based products provide the most
secure, flexible and easily managed solutions for expanding our customers'
businesses.
Our solutions provide competitive advantages for our customers by building
trust into their communications networks. We create trust in customers' networks
by securing the access, privacy and integrity of information when it is
transmitted over their local area networks, or LANs, as well as globally over
wide area networks, or WANs, and public networks, such as the Internet. These
trusted solutions enable our customers to merge their operations and
transactions onto their existing networks, maximize their use, reduce the costs
of their operations, and expand their businesses. Our customers include leading
Fortune 500 corporations, multinational financial institutions and numerous
agencies within the United States Government.
INDUSTRY BACKGROUND
The introduction of new data services for enterprise WANs, the use of the
Internet for enterprise communications and transactions and the continued growth
in LANs, have increased the demand for reliable, easily managed security
solutions. Until recently, corporate communication networks within the United
States typically relied on private lines leased from telephone carriers.
Competing services based on shared networks, such as frame relay and
Asynchronous Transfer Mode, or ATM, and public networks such as the Internet,
now offer alternatives forever increasing communications. Enterprises are
adopting these varied network services to communicate and conduct their
transactions with business partners and customers. However, this growing
dependence on diverse, non-private networks magnifies both the risk of exposing
highly valuable enterprise information to unauthorized parties and the
complexity of managing reliable security solutions. Our customers' needs to
expand their e-business services without jeopardizing the integrity of their
electronic information, and to easily manage their e-business security
solutions, create a market for our products and services.
Prior to the invention of public key cryptography at Stanford University in
1976, the expense of managing and distributing unique cryptographic "keys"
limited the use of cryptographic solutions to governments and large financial
institutions. Public key cryptography offered the first economical method for
electronically automating cryptographic key management, drastically reducing the
cost of owning and operating cryptographic devices. In addition, public key
cryptography enables the use of "digital certificates" to establish
correspondents' identities, the authenticity of their communications and their
privileges within a network. By incorporating public key cryptography into our
products, we can satisfy customers' demands for reliable, easily managed
security solutions for their e-businesses.
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We provide a comprehensive portfolio of integrated security solutions. Our
public key based solution includes the NetHawk, which creates a secure, virtual
private network, or VPN, for transmitting high value information. Our link,
frame relay and ATM security appliances can be deployed easily throughout the
network to assure the integrity and privacy of information transmitted over
private leased lines or shared network services. These network security
appliances are designed to secure existing networks without reducing performance
or requiring modifications to customers' existing network hardware or software.
This ease of "drop in" integration is accomplished with a broad range of
hardware and software implementations of network interfaces, which enable our
security appliances to connect to most networks in use throughout the world. We
also offer a unified management platform for all of our security appliances to
authenticate these devices, configure their use and centrally manage their
operation. Our solutions include our public key infrastructure, or PKI, for
managing the digital identities and privileges of all correspondents on the
customer's network. We also offer professional services to integrate and support
our solutions within the customer's enterprise, and product-independent
consulting to assess customers' network security risks and policies.
COMPANY HISTORY
Founded in 1983, we are the first company created to market public key
based security solutions for high value networks. By 1985 we introduced to the
market our first line of link encryptors to secure private leased lines. Ten
years later, we began introducing our first security appliances for frame relay
services and the Internet. In the late 1990's, we acquired companies that
allowed us to add services and solutions for remote access over the Internet,
including tokens, smart cards and readers, as well as security consulting. In
mid-2000, we acquired Celotek Corporation, and became the premier source for the
increasingly important ATM market.
In February and March of 1996, we completed our initial public offering and
our Common Stock began trading on the Nasdaq National Market under the symbol
CYLK.
We operate in one industry reportable segment - network security products.
Our principal operations outside of the United States have primarily consisted
of research and development in Israel, as well as sales and service offices
located in Israel, the United Kingdom and several other countries in Europe and
the Far East. See Note 13 of the Notes to Consolidated Financial Statements for
geographic area information.
OUR PRODUCTS AND SERVICES
The following table sets forth our principal products and services:
Products and Services Description
- --------------------- -----------
Internet Security - VPNs
NetHawk High Performance, Highly Scalable VPN Appliance
PrivateWire Software Solution For Internet Communications
Public Key Infrastrucure
NetAuthority Highly Scalable Software For Trusted Authentication
Security Network Management
PrivaCy Manager Software For Managing Numerous Security Devices
WAN Security
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Cylink Link Encryptor High Speed Appliance For Point-To-Point
Communications
Frame Relay High Speed Appliance for Frame Relay Networks
ATM Encryptors High Speed Appliances For ATM Networks
ISDN Encryptors High Speed Appliances for ISDN Networks
Smart Cards
PrivateCard and PrivateSafe Embedded Cryptographic Processors and Secure PIN
Readers
Mini-Key Smart Card technology in a USB token form factor
Consulting Services
Security Design International Group Product-Independent Security Assessments and
Policies
Integration And Custom Development
Algorithmic Research Ltd. Over 10 Years Of Experience Designing and
Implementing Security Solutions
Internet Security - VPNs
NetHawk. The NetHawk VPN is our latest security appliance for
communications over the Internet. NetHawk enables encryption of thousands of
simultaneous connections at speeds from 10 to 100 Mbps, using strong, triple DES
encryption. Like all of our products, NetHawk uses public key cryptography for
fully automated key management. NetHawk began shipping to customers in June
2000.
PrivateWire. PrivateWire gateways and clients, including SecureSource and
SecureDestination clients, are a family of bundled security services, which can
be integrated into almost any network environment, with little or no
application, system, or network modifications. PrivateWire ensures security at
the application as well as the communications level. Application-level security
allows for digital signing of sensitive transactions. Public Key cryptography
enables reciprocal authentication and communications that are encrypted using
one-time session keys. We announced the introduction of PrivateWire 3.0 in
September 2000.
Public Key Infrastructure
NetAuthority. NetAuthority is a highly scalable, standards-based public key
infrastructure, or PKI, system that enables a wide variety of applications
including secure email, secure web browsing, virtual private networking, or VPN,
and e-commerce. NetAuthority consists of a Certificate Authority, Registration
Server, Registration Authority and a PKI Toolkit, that together provide all the
components necessary to make applications and devices PKI enabled. NetAuthority
is based on our PKI that we delivered to the United States Post Office under a
development agreement to support delivery of postage over the Internet. The
United States Post Office recently selected NetAuthority again for inclusion in
its Net.Post.Certified service.
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Security Network Management
PrivaCy Manager. PrivaCy Manager provides a single, Java-based, security
management platform for all of our Internet Security and WAN Security
appliances. PrivaCy Manger's graphical representation of the network's topology
and its point-and-click interface simplifies the tasks of configuring, modifying
and managing network security. Furthermore, PrivaCy Manager can implement a
broad range of security policies for determining access to network security
devices, while preventing unauthorized devices from masquerading as legitimate
devices within a user's network. We believe that PrivaCy Manager's ease of
management is one of our competitive advantages in lowering our customer's total
cost of network security.
WAN Security
Cylink Link Encryptors. The Cylink Link Encryptor and its predecessor, the
CIDEC product families, are network appliances that form a complete line of link
encryptors for securing sensitive data transmitted over high-speed,
point-to-point or dial-up communication links. Our Link Encryptors secure data
communications at speeds up to 2 Mbps over private and public networks and
support most widely used data link protocols. At the end of 2000, Cylink
introduced the CLE-HSSI, a link encryptor with high-speed serial integration,
which we believe tests confirm to be the fastest link encryptor on the market.
Cylink Frame Encryptor. The Frame Encryptor is a network appliance that
provides high-speed, high-level security for frame relay networks. It encrypts
data at speeds of up to 4 Mbps and is scalable across a wide range of networks
and applications. It positively identifies other Frame Encryptor units and will
not accept frames from unauthorized sources. Once a connection is made, data is
encrypted as it flows between nodes and different encryption keys are used for
each virtual circuit.
Cylink ATM Encryptor. The ATM Encryptor is a family of security gateways
for ATM networks operating at varying speeds. It creates a virtual trusted
network that provides data privacy and access control for connections between
trusted ATM local area networks across public ATM wide area networks. In August
2000, Cylink acquired Celotek, its former OEM supplier of ATM encryptors, and
opened the Cylink ATM Technology Center, devoted exclusively to the design and
production of ATM encryptor equipment.
Cylink ISDN Encryptor. The ISDN Encryptor is a new product line designed to
provide encryption across a range of ISDN applications including Primary Rate
Interface, or PRI, or Basic Rate Interface, or BRI, for applications including
remote computing and teleconferencing. Cylink ISDN encryptors are manufactured
for Cylink by DICA Technologies of Germany.
Smart Cards
PrivateCard. PrivateCard is an advanced, electronic smart card with an
on-board Public Key processor. PrivateCard serves as a secure personal token for
authenticated and encrypted transactions.
PrivateSafe. PrivateSafe is a highly portable secure PIN smart card reader
that is easily installed by plugging in two cables between the keyboard and the
client computer.
MiniKey. MiniKey extends our smart card technology by placing it in a USB
token, allowing users to take advantage of the ubiquity of the USB interface.
Consulting Services
Security Design International Group. SDI consultants based in Virginia and
the UK provide product-independent security assessments, risk management
analysis, policy guidance and implementation, penetration testing of customers'
networks, PKI policies and security awareness programs.
Integration And Custom Development
Algorithmic Research Ltd. Our subsidiary, based in Israel, Algorithmic
Research has over ten years of experience in developing and integrating security
components and products within customers' networks.
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Market Acceptance of Our Latest Products
Our future results of operations will be highly dependent on the successful
marketing and customer acceptance of our latest products, including both NetHawk
and NetAuthority. These newly developed products have been made commercially
available, but have yet to be widely accepted or deployed. If such new and
recently introduced products develop performance, reliability, quality or other
shortcomings, then such products could continue to fail to achieve market
acceptance and we may experience reduced orders, higher manufacturing costs,
delays in collecting accounts receivable and additional warranty and service
expenses, which in each case could have a material adverse effect on our
financial condition and results of operations. For more information on factors
affecting the market acceptance of our products, see "Risk Factors".
Sales, Marketing and Customer Support
We market our products primarily through our direct sales force and, to an
increasing extent, through distributors. Our direct sales force operates from
our headquarters in Santa Clara, California and other regional sales offices
located in the United States, Israel, Europe, and the Far East. Our sales force,
engineers and technical personnel work closely with customers to determine
system security and network configurations that meet the customers' needs.
International sales are made primarily through our headquarters in Santa
Clara, California, five foreign sales offices, and numerous distributors. We do
not have long-term contractual relationships with any of our distributors and,
therefore, have no assurance of a continuing relationship within a given market.
To date, the majority of our customers for our network security products
have been Fortune 1000 companies, financial institutions, government agencies
and telecommunication carriers who rely on our WAN Security Products to encrypt
and secure their WANs operating over private leased lines and packet switched
networks.
We believe that customer support is essential to developing and maintaining
good relationships with our customers. Our support personnel are responsible for
providing installation, technical training, technical support, on-site support
and repair services. We offer end-users a number of different levels of support,
maintenance and service options, including extended warranties, emergency
replacement services, product upgrades and on-site support. We offer service and
support from our headquarters and from service and support centers in New
Jersey, the United Kingdom, Brussels, Israel and Singapore. Telephone support is
also available twenty-four hours per day, seven days per week, through a
toll-free hotline.
Our products developed or manufactured in the United States are subject to
the export control laws of the United States and regulations promulgated by the
U.S. Department of Commerce. Certain limitations applied by the Commerce
Department affect the functionality of the products, which may be exported to
foreign governments. In addition, these United States export laws prohibit the
export of encryption products to a number of certain hostile countries.
Although to date we have been able to secure the necessary export licenses
to compete effectively in the international market, we may not be able to secure
such licenses in a timely manner in the future, or at all. In certain foreign
countries, our distributors are required to secure licenses or formal permission
before encryption products can be imported. To date, except for certain limited
cases, our distributors have not been denied permission to import our products.
For more information on our sales, marketing and customer support activities,
see "Risk Factors".
Backlog
Orders for our products are usually placed by customers on an as-needed
basis and we typically ship products within thirty to sixty days of receipt of a
customer's firm purchase order. Our backlog consists of all orders received,
where the anticipated shipping date is within twelve months. Because of the
possibility of customer changes in delivery schedules or cancellation of orders,
our backlog as of any particular date may not be indicative of sales in any
future period. We do not generally maintain long-term contracts with our
customers that require them to purchase our products. Our backlog for continuing
operations as of December 31, 1999 and 2000 was approximately $7.3 million and
$2.3 million, respectively. For more information on our product sales cycle, see
"Risk Factors".
Manufacturing
Our manufacturing operations consist primarily of component procurement,
final assembly and test, and quality control of subassemblies and systems. Our
standalone software products are replicated at our facilities. We generally use
domestic
5
independent contractors to manufacture and assemble printed circuit boards and
the metal packaging for our hardware appliances. The manufacturing process
enables us to configure the hardware and software in combinations to meet a wide
variety of customer requirements. We install our software into the
electronically programmable read-only memory of our products to maintain quality
control and security, and perform "burn-in" procedures and functional tests, as
well as comprehensive inspections to ensure the quality and reliability of our
products.
Our product designs are proprietary but generally incorporate
industry-standard algorithms and hardware components. However, certain
semiconductor devices, electronic components and subassemblies are currently
purchased from sole source suppliers. Specifically, each of our custom designed
integrated circuits, including our encryption circuits, are manufactured by one
supplier at a time. Our sole source suppliers include American Microsystems,
Inc., Atmel Corp., National Semiconductor and Chip Express. Certain other
components are currently available or acquired from only a limited number of
suppliers. Our ability to timely deliver our products is highly dependent upon
the availability of quality components and subsystems from these suppliers. We
also depend in part upon subcontractors to manufacture, assemble and deliver in
a timely and satisfactory manner. A failure to find an adequate source of supply
for components selected by our design engineers for new products or a
significant interruption in the delivery of sole source items from existing
suppliers could have a material adverse effect on our results of operations.
Although we believe, if necessary, that we will be able to locate another source
for components and subsystems, the delay in receiving supplies and in production
of our finished goods, may be material. For more information on our
manufacturing dependencies, see "Risk Factors".
Intellectual Property and Other Proprietary Rights
We rely on patents, trademarks, copyrights, licenses and trade secret law
to establish and preserve our intellectual property rights. We own a number of
U.S. patents covering certain aspects of our network security product designs,
and have additional U.S. patent applications pending. We regularly evaluate the
applicability of our patents to other products of third parties. We also seek to
protect our proprietary rights through a combination of employee and third party
nondisclosure agreements. For more information on our intellectual property and
other proprietary rights, see "Risk Factors".
Research and Development
The market for our products is characterized by rapidly changing
technologies, extensive research and new product introductions. We believe that
our future success will depend in part upon our ability to continue to enhance
our existing products and to develop, manufacture and market new products. As a
result, we expect to continue to make a significant investment in engineering
and research and development. In 1998, 1999 and 2000 we incurred $17.7 million,
$17.7 million and $22.2 million, respectively for research and development.
Competition
We compete in the market for network security solutions based on our
portfolio of products and services, their ease of deployment within customers'
existing networks and our integrated management platform for our network
security appliances. We believe that our offering of network appliances and
software solutions is the optimum selection for customers who are seeking to
expand their e-businesses with various network services. We also believe that
our cryptography-based products offer a more flexible and, easily managed
solution for our customers' networks than other vendors' security solutions. Our
consulting and integration services provide an opportunity for our customers to
learn more about network security issues, and for us to learn more about the
market's requirements for improvements to our solutions. We also believe that we
can increase the demand for our products and services by increasing the market's
awareness of network security and its positive contribution to customers'
e-businesses.
Our competitors in the network security market, including companies that
offer products similar to or perceived as an alternative to our products,
include Axent Technologies, Inc., Checkpoint Software Technologies, Ltd.,
Network Associates, Inc., SafeNet, Inc., Secure Computing Corporation, RSA
Security, Inc., and Zaxus, Inc. Our PKI product, NetAuthority, will be competing
with products offered by other vendors, including Baltimore Technologies,
Entrust Technologies, Inc., RSA, Inc. and VeriSign, Inc., that already have
numerous customers and significantly greater market recognition. Our NetHawk VPN
appliance competes with numerous other products, including those offered or
under development by Cisco Systems, Inc., Newbridge Networks Corporation,
Netscreen Technologies, Inc. and Nokia Corp. Our smart cards and tokens compete
with numerous vendors, including Datakey, Inc., Gemplus, S.A., Rainbow
Technologies, Inc. and Schlumberger Ltd. Our professional services business
competes with very large consulting organizations such as Accenture,
PricewaterhouseCoopers
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and other entities which have formidable resources to market and support their
security consulting businesses. A number of significant vendors, including
Microsoft, America On Line and Cisco Systems, have embedded security solutions
in their software. For more information on our competition see "Risk Factors."
Employees
As of December 31, 2000, we had 401 employees, of whom 144 were primarily
engaged in research and development, 148 in sales, marketing and related
customer support services, 58 in administration and 51 in manufacturing. Of
these employees approximately 33 were located in Europe, 82 in Israel, and 7 in
Asia. None of our employees is represented by a collective bargaining agreement
with respect to his or her employment by us, nor have we experienced any
organized work stoppage. We consider our relations with our existing employees
to be good.
Factors Affecting Stock Price
The market price of our stock may fluctuate substantially over short time
periods due to a number of factors, including facts that could affect our future
financial performance. The price may also be affected by factors that influence
the overall market for stocks, or stocks of high technology companies in
particular. For more information on factors affecting the price of our Common
Stock, see "Risk Factors."
RISK FACTORS
We have a history of losses and expect this to continue for the foreseeable
future.
We have incurred significant net losses in 2000 and in prior years. The
Company had an accumulated deficit as of December 31, 2000 of $98.7 million. We
expect to continue to incur net losses at least through 2001. We might not
increase or maintain our revenue or be profitable on a quarterly or an annual
basis for the foreseeable future. Our continuing losses may adversely impact our
ability to raise additional capital when required.
The Company believes that its principal sources of liquidity, which include
cash and cash equivalents of $15 million as of December 31, 2000 and prospective
borrowing will satisfy the Company's current anticipated working capital and
capital expenditure requirements through at least December 31, 2001. In
addition, the Company has a credit facility that provides for up to $10 million
of borrowings, dependent upon the amount of eligible domestic accounts
receivable, as defined in the agreement. The Company is renegotiating its credit
facility in order to obtain more favorable covenants. The new line of credit
will be subject to the Company's satisfaction of certain financial covenants
during the term of the loan. During the fourth quarter of 2000, the Company
began to realize the benefits of the actions taken to reduce operating costs in
its core business, and believes such cost reductions are sustainable in 2001.
However, there can be no assurance that the Company will not need to raise
additional capital to fund operations within this period. There can be no
assurance that additional financing can be obtained on acceptable terms, or at
all. If additional funds are raised by issuing equity securities, dilution to
shareholders may result. If adequate funds are not available, the Company and
its business and the price of our Common Stock will be adversely affected.
Our quarterly revenues and operating results may vary in the future, which could
cause our stock price to drop.
We have historically experienced significant fluctuations in our operating
results on a quarterly basis and could experience such fluctuations in the
future. Our revenues and operating results are affected by a number of factors
including the following:
o our inability to accurately forecast revenues and respond in a timely
manner to changes in the revenue levels;
o the timing of the introduction by us or by our competitors of new or
enhanced products;
o market acceptance of our new products and those of our competitors;
o the timing, cancellation or delay of customer orders, including
cancellation or delay in anticipation of new product introductions or
enhancements or resulting from uncertainty relating to intellectual
property claims;
o changes in our pricing policies or those of our competitors;
o changes in operating expenses, including those resulting from changes
in available production capacity of independent foundries and other
suppliers and the availability of raw materials;
o delays in manufacturing due to shortages in components or unanticipated
revisions in product design;
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o expenses incurred in seeking to enforce or defend claims with respect
to intellectual property rights;
o changes in the revenue mix from products or services sold;
o changes in the percentage of products sold through our direct sales
force;
o loss of an important customer;
o changes in the economy that effect the purchasing decisions of our
customers;
o failure to grow our customer base in accordance with market
expectations;
o disruption in our operations caused by the reduction in work force and
recent departures of a number of senior executives;
o customer discounts and credits; and
o our limited ability to reduce expenses to offset any unexpected
shortfall in revenue growth or decrease in revenue.
Many of these factors are outside of our control. Unforeseen reductions in
revenue can materially and adversely affect our ability to raise capital or
sustain ongoing operations.
We introduced a number of new products during 2000, and plan to release new
versions of existing products in 2001. The failure of any such products to
achieve market acceptance when anticipated, or at all, would materially and
adversely affect our financial condition and results of operations.
Changes in accounting practices could adversely affect the calculation of our
future operating results.
In connection with the acquisition of Algorithmic Research Limited, or ARL,
in September 1997, we allocated $63.9 million of the purchase price to
in-process research and development, or IPR&D, and in accordance with generally
accepted accounting principles recorded an immediate charge off of that amount
on the date of acquisition. The amount allocated to IPR&D was determined in a
manner consistent with widely recognized appraisal practices.
In a letter dated September 15, 1998, to the American Institute of
Certified Public Accountants, the Chief Accountant of the Securities and
Exchange Commission, or SEC, stated the SEC Staff's concerns about certain
appraisal practices generally employed in determining the fair value of IPR&D.
As a result, it is possible that the SEC staff may require that any enterprise
that recorded an IPR&D charge revise its estimate of the value of the IPR&D. To
the extent we are required by the SEC Staff to revise our estimate of the value
of IPR&D retroactively, such revision could result in the capitalization of
additional goodwill, the amortization of which would reduce future operating
results.
In November 1998, Cylink announced that its first and second quarter
earnings would have to be restated and that it would have operating losses for
each of the first three quarters of that year. During the ensuing review by the
company and its independent accountants, certain facts became known indicating
that revenue would have to be restated for the fourth quarter of 1997 as well.
As a result, Cylink filed amended Forms 10Q/A for the first and second quarters
of 1998, and an amended Form 10-K/A for 1997. Shortly thereafter, the SEC
instituted an investigation of Cylink's accounting policies and practices, and
the events leading to the restatements.
On September 27, 2000, the SEC issued an order by consent, finding that
former Cylink executives had engaged in fraudulent accounting practices in the
fourth quarter of 1997 and the first and second quarters of 1998, that the
Company had failed to maintain adequate accounting controls, and that Cylink had
promptly undertaken remedial measures. Cylink consented to entry of a cease and
desist order ensuring maintenance of strict accounting controls in the future.
As a result, we must be diligent in our decisions regarding whether to recognize
revenue in connection with certain transactions. To the extent that we err on
the side of failing to recognize revenue that might be legitimately attributable
to a particular period earnings may be reduced, and the price of our Common
Stock adversely affected.
8
Pending Litigation
See Item 3. "Legal Proceedings".
Our sales cycles are long and unpredictable, which makes period-to-period
revenues difficult to predict.
Sales of our products generally involve a significant commitment of capital
by customers, with the attendant delays frequently associated with large capital
expenditures. For these and other reasons, the sales cycle associated with our
products is typically lengthy and subject to a number of significant risks over
which we have little or no control. We are often required to ship products
shortly after we receive orders and, consequently, order backlog at the
beginning of any period has, at times in the past, represented only a small
portion of that period's expected revenue. Furthermore, increases in backlog
from quarter to quarter may be due to placement of orders calling for delivery
dates extended over a much longer period of time into future periods.
Consequently, our order backlog becomes more vulnerable to customer
cancellations. As a result of these fluctuations in our sales cycle and order
backlog, product revenue in any period has been and will continue to be
substantially dependent on orders booked and shipped in that period. We
typically plan our production and inventory levels based on internal forecasts
of customer demand, which are highly unpredictable and can fluctuate
substantially. In particular, market forces beyond our control, including
recession, labor strikes among our customers, and limits or changes on
government spending may have a material affect on customer demand for our
products. If revenue falls significantly below anticipated levels, as it has at
times in the past, our financial condition and results of operations would be
materially and adversely effected. In addition, our operating expenses are based
on anticipated revenue levels and a high percentage of our expenses are
generally fixed in the short term. Based on these factors, a small fluctuation
in the timing of sales can cause operating results to vary significantly from
period to period. It is possible that in the future our operating results will
again be below the expectations of securities analysts and investors. In such an
event, or in the event that adverse conditions prevail or are perceived to
prevail generally or with respect to our business, or the market sector in which
we operate, the price of our Common Stock would likely be adversely affected.
These factors make it difficult to predict our financial performance. As our
quarterly results fluctuate, they may fall below the expectations of public
market analysts or investors. If this occurs, the price of our Common Stock may
drop.
We are dependent on recently introduced and new network security products.
Our future results of operations will be highly dependent on the successful
marketing and manufacture of the NetAuthority and NetHawk products, as well as
successful marketing and manufacture of the Cylink Link Encryptors, PrivaCy
Manager, Cylink ATM, Cylink ISDN and Cylink Frame Encryptor products. To date,
we have made only limited commercial shipments of certain of these products. Our
NetHawk product began shipping in mid-year 2000. NetAuthority is based on a
pilot system that was delivered for the first time in mid-1999 under a
development contract with the United States Postal Service. Both of these
products may require additional development work, enhancement and testing or
further refinement before they achieve widespread commercial success. If these
new and/or other recently introduced products have performance, reliability,
quality or other shortcomings, they could fail to achieve adequate market
acceptance. The failure of our new or existing products to achieve or enjoy
market acceptance, whether for these or other reasons, could cause us to
experience reduced orders, higher manufacturing costs, delays in collecting
accounts receivable and additional warranty and service expenses, which in each
case could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, we rely on a third party original
equipment manufacturer to supply our ISDN Encryptor product, and we have limited
control over the supply of this product.
We face significant competition from other providers of network security
systems.
Competition is intense among providers of network security systems and we
expect such competition to increase in the future. Significant competitive
factors in these markets include:
o the development of new products and features;
o product quality and performance;
o customer perception regarding the adequacy of security provided by
existing software and routers;
o adoption of embedded security solutions in other vendor's hardware and
software products;
o the quality and experience of sales, marketing and service
organizations;
9
o product price;
o name recognition; and
o perception of our stability and long-term viability.
Many of these factors are beyond our control.
Our competitors in the information security markets, including companies
that offer products similar to or as an alternative to the Company's products,
include Axent Technologies, Inc., Checkpoint Software Technologies, Ltd.,
Network Associates, Inc., SafeNet, Inc., Secure Computing Corporation, RSA
Security, Inc. and Zaxus, Inc. Our PKI product, NetAuthority, will be competing
with numerous PKI products offered by other vendors, including Baltimore
Technologies, Entrust Technologies, Inc., and VeriSign Inc., that already have
numerous customers and significantly greater market recognition. Our NetHawk VPN
appliance competes with numerous other products, including those offered or
under development by Cisco Systems, Inc., Newbridge Networks Corporation,
Netscreen Technologies, Inc. and Nokia Corp. Our professional services business
competes with very large consulting organizations such as Accenture,
PricewaterhouseCoopers and other entities which have formidable resources to
market and support their security consulting businesses. Our smart cards and
tokens compete with numerous vendors, including Datakey, Inc., Gemplus, S.A.
Rainbow Technologies, Inc. and Schlumberger Ltd. A number of significant
vendors, including Microsoft Corporation, America On Line, Inc. and Cisco
Systems, Inc., have embedded security solutions in their software. To the extent
that these embedded or optional security capabilities provide all or a portion
of the functionality provided by our products, our products may no longer be
required by customers to attain network security.
Certicom Corporation and RSA Security, Inc., license various methods of
implementing public key cryptography, including some that are different from
(and incompatible with) the method of implementing public key cryptography
currently used in most of our products. Although we have a license to use all of
the public key methods promoted by Certicom and RSA, (and some of the methods
promoted by RSA have entered the public domain), to the extent significant
segments of the network security market adopt technical standards different from
those currently used by us, to the exclusion of our methods, sales of our
existing and planned products in that market segment may be adversely impacted,
which could have a material adverse effect on our financial condition and
results of operations.
Many of our competitors have substantially greater financial, technical,
marketing, distribution and other resources, greater name recognition and longer
standing relationships with customers than we possess. Competitors with greater
financial resources are better able to engage in more aggressive marketing
campaigns and sustained price reductions in order to gain market share. Any
period of sustained price reductions would have a material adverse effect on our
financial condition and results of operations. We may not be able to compete
successfully in the future and competitive pressures may result in price
reductions, loss of market share or otherwise have a material adverse effect on
our financial condition and results of operations.
We face the risks from tort and warranty claims that may be made against us.
We face the risks from tort and warranty claims that may be made against
us. Customers rely on our network security products to prevent unauthorized
access to their networks and data transmissions. A malfunction or the inadequate
design of our products could result in tort or warranty claims. A breach of a
customer's network by an unauthorized party, which is attributable to an alleged
defect in our products, may cause substantial damages due to loss or compromise
of the customer's valuable information. Furthermore, there is inadequate legal
precedent for allocating responsibility for such losses caused by the wrongful
acts of third parties. Although we attempt to reduce the risk of such losses
through warranty disclaimers and liability limitation clauses in its sales and
license agreements and by maintaining product liability insurance, there can be
no assurance that such measures will be effective in limiting our liability for
any such damages. Any liability for damages resulting from security breaches
could be substantial and could have a material adverse effect on our business,
financial condition and results of operations.
In addition, a well-publicized actual or perceived security breach could
adversely affect the market's perception of security products in general, or our
products in particular, regardless of whether such breach is attributable to our
products. This could result in a decline in demand for our products, which would
have a material adverse effect on our business, financial condition and results
of operations.
10
We may be unable to retain our executive officers and key personnel that are
critical to our business.
In late 1998 Mr. William C. Crowell, formerly Vice President of Product
Strategy was promoted to President and Chief Executive Officer. On November 3,
2000 Roger A. Barnes, our Vice President of Finance and Chief Financial Officer,
notified us of his decision to resign from Cylink to accept the position of
Chief Executive Officer and President of another company. On November 5, we
appointed Christopher Chillingworth, formerly our Corporate Controller, to the
position of Acting Chief Financial Officer. Mr. Chillingworth was appointed Vice
President of Finance and Chief Financial Officer in early 2001.
In addition to Mr. Barnes, our Vice Presidents of Professional Services and
Marketing, the Chief Executive Officer of our Israeli subsidiary, ARL, and our
Chief Scientist recently ended their employment relationships with us. Although
we filled the position of Chief Executive Officer for ARL, it is uncertain
whether and how quickly we will fill the remaining positions.
Our future success will depend in large part on the abilities of Mr.
Crowell, the contributions by our other executive officers, key management and
technical personnel and our ability to replace our departed executive officers
and key technical personnel with qualified and competent individuals. There is
no guarantee that our present executive management and technical staff will
remain with the Company, particularly if our performance is not meeting
expectations. The loss of the services of one or more of our remaining executive
officers or key personnel, or the inability to attract and retain additional
executives and other qualified personnel, could delay product development cycles
or otherwise have a material adverse effect on our business and operating
results.
We may not be able to hire and retain sufficient technical, marketing and
management personnel that we need to succeed because these people are limited in
number and in high demand.
We may not be able to hire and retain sufficient technical, marketing and
management personnel that we need to succeed because these people are limited in
number and in high demand. We recently experienced and may continue to
experience, substantial fluctuations in the number of employees and the scope of
our operations in the network security business, resulting in increased
responsibilities for management. To manage our business effectively, we will
need to continue to improve our operational, financial and management
information systems and to hire, train, motivate and manage our employees.
Competition is intense for qualified technical, marketing and management
personnel. In particular, the current availability of qualified engineers is
quite limited, and competition among companies, academic institutions,
government entities and other organizations for skilled and experienced
engineering personnel is very intense. We have experienced delays in filling
positions for engineering personnel and expect to experience continued
difficulty in filling our need for qualified engineers and other personnel.
Furthermore, necessary reductions in our workforce will create greater
uncertainty amongst our existing and prospective employees, who may decide not
to continue or accept employment with the Company. There can be no assurance
that we will be able effectively to achieve or manage any future growth and our
failure to do so could delay product development cycles or otherwise have a
material adverse effect on our financial condition and results of operations.
Any inability to protect our intellectual property could reduce our competitive
advantage, divert management attention, and require additional intellectual
property to be developed or cause us to incur expenses to enforce our rights.
We rely on patents, trademarks, copyrights, licenses and trade secret law
to establish and preserve our intellectual property rights. We own a number of
U.S. patents covering certain aspects of our network security product designs,
and have additional U.S. patent applications pending. There can be no assurance
that any patent, trademark, copyright or license owned or held by us will not be
invalidated, circumvented or challenged, that the rights granted there under
will provide competitive advantages to us or that any of our pending or future
patent applications will be issued with the scope of the claims sought by us, if
at all. Further, there can be no assurance that others will not develop
technologies that are similar or superior to our technology, duplicate our
technology, misappropriate our trade secrets, or design around the patents owned
by us. Resort to the courts to protect our intellectual property would require
significant financial and management resources. In addition, the laws of certain
countries in which our products are or may be developed, manufactured or sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States. Our inability to protect our intellectual
property adequately could have a material adverse effect on our financial
condition and results of operations.
The computer, communications, software and network security industries are
characterized by substantial litigation regarding patent and other intellectual
property rights. From time to time, we have received communications from third
parties
11
asserting that our patents, features or content of certain of our products
infringe upon the intellectual property rights held by third parties and we may
receive such communications in the future. There can be no assurance that third
parties will not assert claims against us that result in litigation, including
claims that may arise out of the ATM Encryptor business we acquired in August
2000. Any litigation, whether or not determined in our favor, could result in
significant expense to us and could divert management and other resources. In
the event of an adverse ruling in any litigation involving intellectual
property, we might be required to discontinue the use of certain processes,
cease the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology and may suffer significant monetary damages, which could
include treble damages. There can be no assurance that under such circumstances
a license would be available to us on reasonable terms or at all. In the event
of a successful claim against us and our failure to develop or license a
substitute technology on commercially reasonable terms, our financial condition
and results of operations would be adversely affected. There can be no assurance
that existing claims or any other assertions (or claims for indemnity from
customers resulting from infringement claims) will not materially and adversely
affect our financial condition and results of operations.
If we are unable to adapt our services to rapidly changing technology, or if the
market for our network security products fails to develop, our business and
operating results could suffer.
The market for our network security products is characterized by rapidly
changing technology, emerging industry standards, new product introductions and
changes in customer requirements and preferences. Our future success will depend
in part upon end users' demand for network security products in general and upon
our ability to enhance our existing products and to develop and introduce new
products and technologies that meet customer requirements. We face continuing
challenges to educate customers as to the value of our security products and
security consulting services. We believe that many potential customers do not
appreciate the need for our security products unless and until they have faced a
major security breach. Many potential customers prefer not to disclose
significant security breaches of their networks or are reluctant to invest in
the development of a professional security architecture to protect their
networks. This market resistance is compounded by our limited resources to
invest in marketing campaigns for our products and services.
If we are unable successfully to educate potential customers as to the
value of, and thereby obtain broad market acceptance for, our products and
services, we will continue to rely primarily on selling new and existing
products to our base of existing customers, which will significantly limit any
opportunity for growth. In addition, any significant advance in technologies for
attacking cryptographic systems could render some or all of our existing and new
products obsolete or unmarketable. To the extent that a specific method other
than ours is adopted as the standard for implementing network security in any
segment of the network security market, sales of our existing and planned
products in that market segment may be adversely impacted, which could have a
material adverse effect on our business, financial condition and results of
operations. The National Institute of Standards and Technology has recently
announced that it will adopt a new Advanced Encryption Standard, or AES, which
we expect to integrate into our products. Our ability to timely implement the
AES in our products may materially affect our development costs and ability to
timely market our solutions. Network security-related products or technologies
developed by others may adversely affect our competitive position or render our
products or technologies noncompetitive or obsolete.
In addition, a portion of the sales of our network security products will
depend upon a robust industry and infrastructure for providing access to public
switched networks, such as the Internet. The infrastructure or complementary
products necessary to make these networks into viable commercial marketplaces
may not be fully developed, and once developed, these networks may not become
viable commercial marketplaces.
If our research and development activities are unsuccessful, we will not be able
to market new products and services and our business operations and financial
results could be harmed.
The markets for our products are characterized by rapidly changing
technologies, extensive research and new product introductions. We believe that
our future success will depend in part upon our ability to continue to enhance
our existing products and to develop, manufacture and market new products. As a
result, we expect to continue to make a significant investment in engineering,
research and development. We may not be able to develop and introduce new
products or enhancements to our existing products in a timely manner that
satisfy customer needs, achieve market acceptance or address technological
changes in our target markets. If we fail to develop products and introduce them
successfully and in a timely manner, this could adversely affect our competitive
position, financial condition and results of operations.
12
We face risks associated with our international operations.
We plan to continue to expand our foreign sales channels and to enter
additional international markets, both of which will require significant
management attention and financial resources. International sales are subject to
a number of risks, including unexpected changes in regulatory requirements,
export control laws, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulties in the staffing, management and
integration of foreign operations, longer payment cycles, greater difficulty in
collecting accounts receivable, currency fluctuations and potentially adverse
tax consequences. Since most of our foreign sales are denominated in U.S.
dollars, our products become less price competitive in countries in which local
currencies decline in value relative to the U.S. dollar. The uncertainties of
monetary exchange values have caused, and may in the future cause, some foreign
customers to delay new orders or delay payment for existing orders. The
long-term impact of such devaluation, including any possible effect on the
business outlook in other developing countries, cannot be predicted.
Our ability to compete successfully in foreign countries is dependent in
part on our ability to obtain and retain reliable and experienced in-country
distributors and other strategic partners. We do not have long-term
relationships with any of our value added resellers and distributors and,
therefore, have no assurance of a continuing relationship within a given market.
Due to U.S. and Israeli government regulations restricting the export of
cryptographic devices and software, including sales to foreign governments of
certain of our network security products, we are often at a disadvantage in
competing for international sales compared to companies located outside the
United States and Israel that are not subject to such restrictions. Although the
Department of Commerce continues to relax the export control laws as they apply
to sales of our products to our commercial customers, we still face export
controls on sales to certain foreign governments and transfers of our technology
to foreign partners.
Our Israeli subsidiary, ARL, is vulnerable to disruption in its operations
due to political unrest concerning well-publicized territorial claims by some of
its residents, as well as within neighboring countries. These disruptions could
include delays in communications with our principal offices as well as the
operation of ARL's engineering and sales activities. Furthermore, a number of
ARL's employees owe continuing service obligations to the Israeli military and
these obligations may cause significant suspension of their employment or
unscheduled leaves of absence.
We face risks from our dependence on third party subcontractors and suppliers.
Our ability to deliver our products in a timely manner is dependent upon
the availability of quality components and subsystems used in these products. We
depend in part upon subcontractors to manufacture, assemble and deliver certain
items in a timely and satisfactory manner. We obtain certain components and
subsystems from single, or a limited number of, sources. We rely on a single OEM
supplier for our ISDN Encryptor, which we offer to our customers with our own
management solution. A significant delay in obtaining a source of supply for
components selected by our design engineers or interruption in the delivery of
such items could have a material adverse effect on our financial condition and
results of operations.
We face risks associated with our recently completed acquisition of Celotek
Corporation.
On August 30, 2000 we closed our acquisition of Celotek Corporation, or
Celotek, a privately held developer of high-performance Asynchronous Transfer
Mode network security appliances, in exchange for 1,590,137 shares of our Common
Stock with a fair value of $22,386,000 and cash of approximately $515,000. In
addition, we converted outstanding options to purchase Celotek Common Stock into
options to purchase 307,500 shares of our Common Stock with an aggregate fair
value of $2,329,000. Celotek employees who became our employees were issued
40,913 shares, which vest to the concerned employees if they continue in
employment for a period of 12 months. The shares issued in this acquisition have
increased the number of shares of our Common Stock outstanding, and therefore
will result in earnings per share dilution unless we are able to realize
sufficient financial benefits from the transaction. While we believe we will
achieve financial benefits that will offset the dilution, acquisitions
inherently involve risks and uncertainties. These include potential costs and
management distractions associated with integrating the operations of the two
companies, the potential loss of key employees of the acquired company, the
potential loss of key customers, and potential operational challenges that the
acquired company may have and which are sometimes unforeseeable. Any such
circumstances could result in the acquisition not rendering financial benefits
to offset the cost of the acquisition.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers as of December 31, 2000:
Name Age Position
---- --- --------
William P. Crowell 60 Chief Executive Officer and President
R. Christopher Chillingworth 49 Vice President Finance and Chief Financial
Officer
Pamela E. Drew 52 Vice President, Human Resources and Workplace
Environment
Robert B. Fougner 48 Vice President, Secretary and General Counsel
Peter J. Slocum 45 Vice President, Engineering
Michael Stewart 52 Vice President, World-wide Sales
Richard Walsh 45 Vice President and Chief Information Officer
Mr. Crowell joined Cylink as Vice President, Product Development and
Strategy in January 1998. Prior to joining Cylink, Mr. Crowell served as the
Deputy Director at the National Security Agency, and has also served as Vice
President of the Atlantic Aerospace Electronics Corporation.
Mr. Chillingworth has extensive senior level finance experience with
consulting firms and private companies. Most recently, he was the Corporate
Controller for Cylink and prior to that spent nearly five years providing
consulting services at the Chief Financial Officer and Controller level to a
number of Northern California firms. Mr. Chillingworth began his career with the
international accounting firm of Ernst & Young.
Ms. Drew has more than twenty years of experience in human resources, and
was until recently Cylink's Director of Human Resources. Prior to joining Cylink
she was the Global Human Resources Director for Honeywell-Measurex Corporation.
Mr. Fougner has been Secretary and General Counsel since joining Cylink in
December 1989. Prior to joining Cylink, he was a partner in the New York law
firm of Hill, Betts & Nash.
Mr. Slocum joined Cylink in February 1997. From July 1993 to February 1997
he served as Vice President of Engineering for Octel Communications Corporation,
a provider of voice messaging systems and services. Mr. Slocum also served as
Director of Engineering for Silicon Graphics, Inc. and MIPS Computer Systems,
Inc.
Mr. Stewart joined Cylink in February 1999. Prior to joining Cylink, Mr.
Stewart was President and Chief Executive Officer of Escalate Networks, Inc. He
was also Vice President of Worldwide Systems Products Sales & Marketing for
A.T.M.L. and Director of The Advanced Technology Team at Bay Networks.
Mr. Walsh, who joined Cylink in March 2000, has more than fifteen years of
experience in information technology management. Most recently he was director
of IT for Honeywell-Measurex Corporation.
ITEM 2. PROPERTIES
Our headquarters occupy 118,000 square feet in Santa Clara, California, the
lease for which expires in August 2009. We own, subject to an outstanding
mortgage, a 7,500 square foot office building in Petach Tikva, Israel and lease
an 11,000 square foot production facility. As a result of the acquisition of
Celotek, Cylink holds the lease to the Cylink ATM Center, comprising
approximately 10,000 square feet in Raleigh, North Carolina, which expires in
June 2003. Cylink also leases facilities for sales offices in New Jersey,
Virginia, North Carolina, Belgium, the United Kingdom and Singapore. Cylink
believes that its current facilities are well maintained and are adequate for
the foreseeable future and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
14
ITEM 3. LEGAL PROCEEDINGS
Between November 6, 1998 and December 14, 1998, several securities class
action complaints were filed against Cylink and certain of its current and
former directors and officers in federal courts in California. These complaints
alleged, among other things, that Cylink issued financial statements that were
materially false and misleading and that the defendants knew or should have
known that these financial statements caused Cylink's common stock price to rise
artificially. The actions variously alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), as amended and SEC Rule
10b-5 promulgated there under and Section 20 of the Exchange Act.
The securities class action lawsuits have been ordered consolidated into a
single action pending in the United States District Court for the Northern
District of California captioned In Re Cylink Securities Litigation, No.
C98-4292 (VRW). Plaintiffs' consolidated complaint was dismissed by the Court in
November. Cylink has moved to dismiss plaintiff's first amended complaint, and
the motion is currently pending before the Court. Cylink believes it has
meritorious defenses to this action and intends to defend itself vigorously.
However, it is not feasible to predict or determine the final outcome of these
proceedings and if the outcome is unfavorable, Cylink's business, financial
condition, cash flows and results of operations could be materially adversely
affected.
On September 27, 2000, the Company entered into a settlement with the SEC
under which the SEC enjoined Cylink from violating certain of the SEC's
regulations without requiring Cylink to admit the occurrence of any such
violations and without imposing any fines or penalties.
There is currently an action proceeding in the United States District Court
for the Northern District of California, captioned Securities and Exchange
Commission vs. John Daws, Thomas Butler and Mark Folit, No. C -00-2099, in which
the SEC seeks to enjoin violations of the SEC's regulations and impose civil
penalties and disgorgement of certain benefits realized by these individuals
while formerly employed by Cylink. Although neither Cylink nor any of its
current officers are parties to this proceeding, two of the defendants in this
action have demanded indemnification by Cylink for the costs of their defense.
Although Cylink has placed its insurance carriers on notice of the SEC's recent
action, the extent of Cylink's continuing obligations to these defendants, if
any, has not been determined. At this time, the Company believes its insurance
coverage is adequate for any indemnity obligations it may legally have to these
defendants, and intends to defend itself vigorously with respect to any claims
that exceed Cylink's obligations under the law. However, in the event Cylink's
insurance coverage for these claims is inadequate or unavailable for any reason,
Cylink's financial condition, cash flows and results of operations could be
adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock has been traded in the over-the-counter market under the
symbol CYLK since our initial public offering on February 15, 1996. The
following table sets forth the high and low closing prices as reported on the
Nasdaq National Market during the last two years:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended December 31, 2000
High 22 3/4 19 15/16 19 3/8 11 7/16
Low 10 7/8 8 13/16 8 3/4 1 9/16
Year Ended December 31, 1999
High 5 3/8 4 15/16 8 3/16 14 15/16
Low 3 3/8 3 3/8 3 3/8 6 1/4
As of March 14, 2001, we had approximately 393 shareholders of record. We
have never declared or paid dividends on our capital stock. We currently intend
to reinvest any earnings in the development of our business and do not intend to
pay dividends in the foreseeable future.
Our Registration Statement on Form S-1 was declared effective by the
Securities and Exchange Commission on February 15, 1996 (Reg. No. 33-80719). In
February and March 1996 we issued 5,750,000 shares of our Common Stock to the
public at a price of $15 per share. We received approximately $78.9 million net
of underwriting discounts and commissions of $6.0 million and other offering
expenses of $1.4 million. Through the period ended December 31, 2000, the net
proceeds have been used as follows (in thousands):
Purchase and installation of equipment $ 6,601
Acquisition of Algorithmic Research, Ltd. 45,913
Repayment of indebtedness 1,000
Working capital and funding of operations 25,350
-------
$78,864
=======
None of the net proceeds or expenses of issuance and distribution of the
securities have been, either directly or indirectly, paid to or invested with
any related party or shareholder other than in the ordinary course of business.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from our
audited consolidated financial statements. The information set forth below is
not necessarily indicative of results of future operations and is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and related notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
Year ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Revenue $ 68,107 $ 59,655 $ 42,760 $ 47,690 $ 25,793
Gross profit 40,794 40,496 25,862 33,704 16,062
Total operating expenses 76,853 59,289 54,720 101,673 24,270
Loss from continuing operations (35,388) (16,877) (17,356) (64,955) (5,522)
Loss from continuing
operations per share - basic and diluted (1.15) (0.58) (0.60) (2.43) (0.23)
Year ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands)
Cash, cash equivalents and
short-term investments $ 15,250 $ 33,170 $ 46,575 $ 22,977 $ 78,849
Working capital 25,138 43,243 60,587 47,985 93,518
Total assets 78,884 81,289 94,318 76,555 107,088
Capital lease and long term debt 86 112 147 256 241
Shareholders' equity 59,153 61,979 75,221 66,134 97,211
On March 28, 1998, we sold our Wireless Communications Group (the
"Wireless Group"), which has been reported as discontinued operations and,
therefore, the above consolidated statements of operations information excludes
discontinued operations for all periods presented.
The net loss for 1997 included a charge of approximately $63.9 million
($2.39 per share) for purchased in-process technology resulting from the
acquisition of ARL.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Discontinued Operations
On March 28, 1998, we sold our Wireless Group to P-Com for $46.0 million
in cash and an unsecured note in the amount of $12.1 million. The sale resulted
in an after-tax gain of approximately $22.8 million. See Note 2 of Notes to
Consolidated Financial Statements.
As a result, the operations of the Wireless Group have been classified as
discontinued operations in the accompanying Consolidated Financial Statements
and related Notes.
17
Results of Continuing Operations
Except where noted, the comments herein are associated with the results of
our continuing operations. The following table sets forth certain consolidated
statement of operations data as a percentage of revenue for the periods
indicated:
Year ended December 31,
-----------------------
2000 1999 1998
----- ----- -----
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 40.1 32.1 39.5
----- ----- -----
Gross profit 59.9 67.9 60.5
Operating expenses:
Research and development, net 32.3 27.1 37.0
Selling and marketing 50.4 44.1 56.4
General and administrative 20.1 23.5 28.2
Amortization of purchased intangibles 4.6 4.7 6.4
Purchased in-process technology 5.4 -- --
----- ----- -----
Total operating expenses 112.8 99.4 128.0
----- ----- -----
Loss from operations (52.9) (31.5) (67.5)
Other income, net 1.6 3.5 5.5
----- ----- -----
Loss from continuing operations
before income taxes (51.4) (28.0) (62.0)
Income tax expense (benefit) 0.6 0.3 (21.4)
----- ----- -----
Loss from continuing operations (52.0) % (28.3) % (40.6) %
===== ===== =====
Revenue. Revenue increased 14 % from $59.7 million for the year ended
December 31, 1999 to $68.1 million for the year ended December 31, 2000. This
increase was attributable to new revenue streams contributed by new product
releases of the NetAuthority Public Key Infrastructure software product, the
NetHawk VPN Encryptors, and the ISDN Encryptors. In addition, revenue growth was
also due to increases in unit shipments of existing products, shipments of
products with higher average selling prices, and increased revenues associated
with software maintenance and support services.
Revenues increased 40% from $42.8 million for the year ended December 31,
1998 to $59.7 million for the year ended December 31, 1999. This increase was
attributable to increases in unit shipments of existing products, shipments of
products with higher average selling prices and increased revenues associated
with software maintenance and support.
International product revenue was 39%, 44%, and 41% of revenue for 2000,
1999, and 1998, respectively.
Provision for Restructuring Charges. In the fourth quarter of 2000, the
Company incurred total pre-tax charges of $0.8 million related to the Company's
restructuring and reorganization efforts. This action was designed to streamline
the Company's operations, reduce operating costs, and position the Company for
profitability. The restructuring actions included $0.5 million in severance
charges related to streamlining the Company's operational, sales, marketing, and
administrative functions, and $0.3 million in building and equipment lease
charges related to the shut down of remote offices. As a result of
18
the fourth quarter restructuring, approximately 67 positions were eliminated.
The restructuring was completed by the end of the first quarter of 2001.
Gross Profit. Gross profit increased 1% from $40.5 million in 1999 to
$40.8 million in 2000, and decreased as a percentage of sales from 68% to 60%.
The dollar increase was due to increased revenues. The decrease in gross profit
as a percentage of revenue resulted from inventory valuation adjustments related
to discontinued products and overhead cost adjustments in addition to a shift in
product mix towards lower margin OEM products.
Gross profit increased 57% from $25.9 million in 1998 to $40.5 million in
1999 and increased as a percentage of sales from 61% to 68%. The dollar
increase was due to increased revenues and better absorption of manufacturing
overhead. The increase in gross profit as a percentage of revenue resulted from
better absorption of manufacturing overhead due to better manufacturing
utilization, offset by reduced profit margins from OEM products.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel-related expenses, depreciation of
development equipment, facilities costs and supplies. Gross research and
development expenses increased 25% from $17.7 million in 1999 to $22.2 million
in 2000 and were $17.7 million in 1998. The increase in expenses as a percent of
sales for 2000 as compared to 1999 resulted from increased product development
investments in NetAuthority, our Public Key Infrastructure product, ATM
Encryption technologies, associated with the acquisition of Celotek Corporation
and next generation encryption technologies. The decrease in expenses as a
percent of sales for 1999 as compared to 1998 resulted from a substantially
increased revenue base and reduced contract and other variable expenses related
to externally funded research and development.
From time to time, we receive engineering funding for development projects
to apply or enhance our technology to a particular customer's need. The amounts
recognized under these research and development contracts are offset against
research and development expense. Amounts that were recognized under
non-recurring engineering contracts totaled $0.2 million, $1.5 million, and $1.9
million in 2000, 1999 and 1998, respectively.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, including sales commissions, and costs of advertising, public
relations, seminars and trade shows. Selling and marketing expenses increased
31% from $26.3 million in 1999 to $34.3 million in 2000 and increased 9% from
$24.1 million in 1998 to $26.3 million in 1999. The increases were primarily to
support the launch of new products as well as the continued expansion of our
direct field operations, product line management, market development,
advertising via the "securing e-business" campaign, channel and distribution
development, and international operations.
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs, recruitment expenses, information
system costs, audit, legal and other professional service fees. General and
administrative expenses decreased 2% from $14.0 million in 1999 to $13.7 million
in 2000 and increased 16% from $12.1 million in 1998 to $14.0 million in 1999.
The dollar decrease in 2000 over 1999 resulted from lower spending related to
the implementation of the Enterprise Resource Planning system, accounting and
consulting expenses from the restatement and legal fees for litigation defense.
The decrease as a percentage of revenue in 2000 was due to lower spending and
the allocation of costs over a wider revenue base. The dollar increases in 1999
over 1998 resulted from training and post-implementation customization costs
associated with our new Enterprise Resource Planning system, relocation and
excess facilities costs, an additional provision for doubtful accounts,
accounting and consulting expenses from the restatement and legal fees for
litigation defense. The decrease as a percentage of revenue in 1999 was due to
the allocation of costs over a wider revenue base.
Amortization of Purchased Intangibles. The amortization of intangible
assets, which resulted from the acquisition of ARL in 1997, Security Design
International, or SDI, in 1999, and Celotek Corporation, or Celotek, in 2000
(see Note 4 to the Financial Statements) was $3.1 million, $2.8 million, and
$2.7 million in 2000, 1999, and 1998, respectively.
Purchased In-Process Technology. Approximately $3.7 million of the total
purchase price for the acquisition of Celotek represented the value of
in-process technology that had not yet reached technological feasibility, had no
alternative future uses and was charged to our operations in the third quarter
ended October 1, 2000 (see Note 4 to the Financial Statements).
Other Income (Expense), Net. Other income (expense), net, primarily
consists of royalties, interest income, interest expense and investment gains
and losses. We generated other income of $1.1 million in 2000, $2.1 million in
1999, and $2.3
19
million in 1998. Other income decreased from $2.1 million in 1999 to $1.1
million in 2000, and decreased from $2.3 million in 1998 to $2.1 million in 1999
due to the decrease in average balances of cash, cash equivalents, and
marketable securities resulting from operational losses.
Benefit from Income Taxes. In 2000, provisions for income taxes for
continuing operations was $0.4 million while no provision or benefit for income
taxes for continuing operations was recorded in 1999. Our effective tax rate for
2000, 1999 and 1998 was approximately 1%, 1%, and 35% respectively. Net deferred
tax assets of $0.8 million at December 31, 2000, were based on available
carryback capacity. The provision for income taxes for continuing operations for
2000 was based on an assessment of available carryback capacity.
Loss from Continuing Operations. We had losses from continuing operations
of $35.4 million in 2000, $16.9 million in 1999, and $17.4 million in 1998. In
1994, the Company began a strategic research and development program designed to
create new products and enhance existing products, which continued through 2000.
In 2000, we incurred an increased net loss due to lower gross profit margins
driven by inventory valuation adjustments related to discontinued products, a
shift in product mix toward lower margin OEM products, continued high levels of
research and development expenses related to our strategic research and
development projects and the acquisition of Celotek Corporation, high levels of
sales and marketing expenses to support the launch of new products as well as
the continued expansion of our direct field operations, product line management,
market development, advertising via the "securing e-business" campaign, channel
and distribution development, and international operations, amortization related
to the acquisition of Algorithmic Research Ltd ,or ARL, and Celotek, as well as
Purchased In-Process Technology charges partially offset by higher revenues.
Liquidity and Capital Resources
At December 31, 2000, we had working capital of $25.1 million, including
cash and cash equivalents of $15.3 million, representing a 41% decrease versus
prior year working capital balances of $42.9 million and a 46% decrease versus
prior year cash and cash equivalent balances of $33.2 million largely due to net
losses from operations. We have reported net losses from continuing operations
each year since 1994. Net cash used by operating activities for the years ended
December 31, 2000, 1999, and 1998 was $21.6 million, $8.4 million, and $25.7
million, respectively. Net cash used in operating activities increased in 2000
from 1999 primarily due to increased operating losses from continuing operations
and increases in inventory to fund revenue growth which were partially offset by
the recovery of income tax refunds due to Cylink. Net cash used in operating
activities decreased in 1999 from 1998 primarily due to reduced operating losses
from continuing operations, reduced income tax payments, better inventory
management, but offset by increases in accounts receivable to fund revenue
growth.
Net cash used in investing activities in 2000 was $2.7 million, resulting
from acquisition of property, plant and equipment related to our investment in
leasehold improvements and computer equipment purchases totaling $3.0 million,
the cash portion of our acquisition of Celotek Corporation totaling $1.1
million, offset in part by a $1.4 million collection of an employee note
receivable. In 1999, net cash used in investing activities was $5.8 million,
arising principally from investments in restricted cash related to our new
facility of $1.4 million, acquisition of property, plant and equipment related
to our investment in leasehold improvements, computer equipment and an
Enterprise Planning and Reporting System totaling $4.9 million, and the cash
portion of our acquisition of SDI of $0.6 million, long-term loans to employees
of $0.6 million, offset in part by a $3.3 million collection of a note
receivable related to the sale of our Wireless Group and a $0.9 million
collection of an employee note receivable. In 1998, net cash provided by
investing activities consisted of cash proceeds of $54.9 million from the sale
of the Wireless offset in part by the acquisition of property and equipment of
$2.0 million, long-term loans to employees of $2.1 million and an investment of
$3.0 million for a minority interest in an unaffiliated, emerging stage company.
Expenditures for property and equipment for all periods presented have generally
consisted of computer workstations, networking equipment, office furniture and
equipment, and leasehold additions and improvements.
Cash provided by financing activities was $6.3 million, $0.8 million, and
$1.6 million for the years ended December 31, 2000, 1999, and 1998,
respectively. For the years ended December 31, 2000, 1999, and 1998, cash
provided by financing activities resulted primarily from the proceeds from the
issuance of Common Stock under our stock option plans and, in 2000, from the
issuance of Common Stock under our stock purchase plan.
Assuming the Company's financial restructuring plan provides the intended
beneficial cost reduction, the Company believes that existing cash balances and
prospective borrowing will be sufficient to fund operations through 2001. Cylink
is renegotiating a $10 million revolving line of credit with its bank in order
to obtain more favorable covenants. The renegotiated
20
line of credit is intended to assist the Company, if necessary, in meeting its
working capital requirements. The new line of credit will be subject to the
Company's satisfaction of certain financial covenants during the term of the
loan, which the Company believes it will satisfy. There have been no advances
under the Company's existing line since inception. In the event the Company's
financial plan is unsuccessful, or it is otherwise unable to satisfy the
conditions for use of this revolving line of credit, the Company may require
additional funds in the near term to support working capital requirements or for
other purposes and may seek to raise such additional funds through public or
private equity or debt financing, sales of assets, or from other sources. No
assurance can be given that additional financing will be available or that, if
available, will be on terms favorable to the Company or its shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2000, we held a total of $15.3 million of cash and cash
equivalents. These securities consist primarily of money market funds and
high-grade, short-term corporate obligations. Certain of these securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 percent from levels as of December 31, 2000, the decline in fair value of the
portfolio would not be material.
We transact substantially all of our revenues and costs in U.S. dollars
and our results of operations would not be materially affected by fluctuations
in foreign exchange rates. Accordingly, to date, we have not used material
amounts of derivative financial instruments. As of December 31, 2000, we had no
fixed rate obligations except for capitalized leases and long-term debt of
approximately $374,000. As such, the fair value of our fixed rate obligations is
not subject to a material adverse impact from changes in interest rates.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
and Financial Statement Schedule
Page
Financial Statements:
Independent Auditors' Report 23
Consolidated Balance Sheets at December 31, 2000 and 1999 25
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998 26
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999, and 1998 27
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998 28
Notes to Consolidated Financial Statements 29
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999, and 1998 50
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
22
Independent Auditors' Report
To the Board of Directors and Shareholders of Cylink Corporation:
We have audited the accompanying consolidated balance sheets of Cylink
Corporation and subsidiaries ("Company") as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. Our audits also included the consolidated
financial statement schedule listed in Item 14. (a) 2 for the years ended
December 31, 2000 and 1999. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedule for the years ended December 31, 2000 and 1999, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements for the year ended
December 31, 2000 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the financial statements, the
Company's recurring net losses raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Jose, California
February 6, 2001
23
Report of Independent Accountants
To the Board of Directors and Shareholders
of Cylink Corporation:
In our opinion, the consolidated financial statements listed in the above index
present fairly, in all material respects, the results of operations and cash
flows of Cylink Corporation and its subsidiaries for the year ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Cylink Corporation for any period
subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
San Jose, California
February 26, 1999
24
Cylink Corporation
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
December 31,
----------------------
2000 1999
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 15,250 $ 33,170
Accounts receivable, net of allowances of $1,499 and $941 14,927 16,130
Inventories 10,741 6,745
Deferred income taxes 800 4,367
Other current assets 1,697 1,648
--------- ---------
Total current assets 43,415 62,060
Restricted cash 1,400 1,400
Property and equipment, net 10,241 10,038
Acquired technology, goodwill and other intangibles 20,707 3,188
Notes receivable from employees or former employees 2,310 3,165
Other assets 811 1,438
--------- ---------
$ 78,884 $ 81,289
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of lease obligations and equipment line of credit $ 288 $ 24
Accounts payable 5,137 6,635
Accrued liabilities 9,346 8,716
Income taxes payable 359 1,062
Deferred revenue 3,147 2,380
--------- ---------
Total current liabilities 18,277 18,817
--------- ---------
Capital lease obligations 86 112
Deferred revenue and other accruals, less current portion 1,368 381
--------- ---------
1,454 493
Commitments and contingencies (Notes 12 and 14)
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued and outstanding
Common stock, $0.01 par value; 40,000,000 shares authorized;
32,681,000 and 29,877,000 shares issued and outstanding 327 299
Additional paid-in capital 158,805 126,896
Deferred compensation (1,231) (1,790)
Accumulated other comprehensive loss (16) (82)
Accumulated deficit (98,732) (63,344)
--------- ---------
Total shareholders' equity 59,153 61,979
--------- ---------
$ 78,884 $ 81,289
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
25
Cylink Corporation
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Revenue $ 68,107 $ 59,655 $ 42,760
Cost of revenue 27,313 19,159 16,898
-------- -------- --------
Gross profit 40,794 40,496 25,862
-------- -------- --------
Operating expenses:
Research and development, net 21,994 16,176 15,809
Selling and marketing 34,344 26,316 24,111
General and administrative 13,719 13,998 12,082
Amortization of purchased intangibles 3,115 2,799 2,718
Purchased in-process technology 3,681 -- --
-------- -------- --------
Total operating expenses 76,853 59,289 54,720
-------- -------- --------
Loss from operations (36,059) (18,793) (28,858)
Other income (expense):
Interest income, net 1,308 1,858 2,281
Other income (expense), net (237) 232 66
-------- -------- --------
Loss from continuing operations before income taxes (34,988) (16,703) (26,511)
Income tax expense (benefit) 400 174 (9,155)
-------- -------- --------
Loss from continuing operations (35,388) (16,877) (17,356)
Loss from discontinued operations, net of income tax
benefit of $0, $0, and ($139) -- -- (259)
Gain on disposal of discontinued operations, net
of income tax expense of $0, $0, and $12,358 -- 2,304 22,776
-------- -------- --------
Net income (loss) $(35,388) $(14,573) $ 5,161
======== ======== ========
Earnings (loss) per share - basic and diluted
Continuing operations $ (1.15) $ (0.58) $ (0.60)
Discontinued operations -- 0.08 0.78
-------- -------- --------
Net income (loss) $ (1.15) $ (0.50) $ 0.18
======== ======== ========
Shares used in per share calculation - basic and diluted 30,771 29,217 29,009
======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
26
Cylink Corporation
Consolidated Statements of Shareholders' Equity
(dollars in thousands)
Additional
Common Stock Paid-in Deferred
Shares Amount Capital Compensation
------ ------ ------- ------------
Balance at December 31, 1997 28,695,000 $ 287 $ 120,092 $ (250)
Issuance of common stock
under stock option plans 420,000 4 1,813 -
Charge due to acceleration of options
upon disposal of Wireless Group - - 725 -
Tax benefit from stock options - - 1,299 -
Amortization of deferred
compensation - - - 83
Translation adjustment - - - -
Net income - - - -
Comprehensive income - - - -
---------- ----- -------- --------
Balance at December 31, 1998 29,115,000 291 123,929 (167)
Issuance of common stock
under stock option plans 456,000 5 936 -
Issuance of common stock and
options for S.D.I. 306,000 3 2,031 (2,034)
Amortization of deferred
compensation - - - 411
Translation adjustment - - - -
Net loss - - - -
Comprehensive loss - - - -
---------- ----- -------- --------
Balance at December 31, 1999 29,877,000 299 126,896 (1,790)
Issuance of common stock and
options for Celotek acquisition 1,664,000 16 25,743 (545)
Issuance of common stock under
stock option and stock purchase plans 1,140,000 12 6,387
Adjustment due to employee termination (221) 221
Amortization of deferred compensation - 883
Translation adjustment -
Net loss -
Comprehensive loss - - - -
---------- ----- -------- --------
Balance at December 31, 2000 32,681,000 $ 327 $ 158,805 $ (1,231)
========== ===== ======== ========
Cylink Corporation
Consolidated Statements of Shareholders' Equity
(dollars in thousands)
Accumulated
Other Comprehensive
Comprehensive Accumulated Income
Income (Loss) Deficit Total (Loss)
------------- ------- ----- ------
Balance at December 31, 1997 $ (63) $ (53,932) $ 66,134 $ -
Issuance of common stock
under stock option plans - - 1817
Charge due to acceleration of options
upon disposal of Wireless Group - - 725
Tax benefit from stock options - - 1299
Amortization of deferred
compensation - - 83
Translation adjustment 2 - 2 $ 2
Net income - 5,161 5,161 5,161
- -------- ---------
Comprehensive income - - - $ 5,163
------- ------- -------- ---------
Balance at December 31, 1998 (61) (48,771) 75,221
Issuance of common stock
under stock option plans - - 941
Issuance of common stock and
options for S.D.I. - - -
Amortization of deferred
compensation - - 411
Translation adjustment (21) - (21) $ (21)
Net loss - (14,573) (14,573) (14,573)
- -------- ---------
Comprehensive loss - - - $ (14,594)
------- ----- -------- ---------
Balance at December 31, 1999 (82) (63,344) 61,979
Issuance of common stock and
options for Celotek acquisition 25,214
Issuance of common stock under
stock option and stock purchase plans 6,399
Adjustment due to employee termination -
Amortization of deferred compensation 883
Translation adjustment 66 66 $ 66
Net loss (35,388) (35,388) (35,388)
---------
Comprehensive loss - - - $ (35,322)
------- --------- --------- ---------
Balance at December 31, 2000 $ (16) $ (98,732) $ 59,153
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
27
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
Twelve Months Ended
--------------------------------
Dec 31, Dec 31, Dec 31,
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(35,388) $(14,573) $ 5,161
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Write-off investment in unaffiliated company 3,000
Gain on disposal of discontinued operations (2,304) (22,776)
Loss on disposition of fixed assets 68 337
Depreciation 3,782 2,657 2,630
Amortization 3,199 2,799 2,676
Bonuses applied against employee notes receivable 1,253
Purchased in-process research & development 3,681 --
Deferred income taxes 3,567 128 (2,975)
Amortization of imputed interest on note receivable (231) (250) (301)
Amortization of deferred compensation 883 411 83
Tax benefit related to stock options 1,299
Changes in assets and liabilities (net of effects of
acquisition):
Accounts receivable 1,654 (7,927) 7,455
Inventories (2,367) 3,544 (6,134)
Other assets 390 3,036 (3,063)
Accounts payable (2,401) 2,937 653
Accrued liabilities 500 381 (3,892)
Income taxes payable (703) (29) (12,571)
Deferred revenue 1,754 420 1,769
-------- -------- --------
Net cash used in operating activities (21,612) (8,433) (25,733)
Cash flows from investing activities:
Investment of restricted cash -- (1,400)
Acquisition of property and equipment (2,994) (7,339) (2,060)
Loans to employees in exchange for notes receivable -- (570) (2,108)
Collections of employee notes receivable 1,369 870
Collection of note receivable -- 3,250
Proceeds from sale of discontinued operations 54,879
Acquisition of SDI -- (572)
Acquisition of preferred stock of unaffiliated company (3,000)
Acquisition of Celotek, net of of cash acquired (1,062) -- --
-------- -------- --------
Net cash provided by (used in)
investing activities (2,687) (5,761) 47,711
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 6,399 941 1,817
Other (86) (131) (199)
-------- -------- --------
Net cash provided by financing activities 6,313 810 1,618
-------- -------- --------
Effect of exchange rate changes on
cash and cash equivalents 66 (21) 2
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (17,920) (13,405) 23,598
Cash and cash equivalents at beginning of year 33,170 46,575 22,977
-------- -------- --------
Cash and cash equivalents at end of year $ 15,250 $ 33,170 $ 46,575
======== ======== ========
Supplemental disclosures
Cash paid for income taxes $ -- $ -- $ 8,117
Cash paid for interest -- 3 60
Note receivable from disposition of Wireless Communications Group 12,424
Equity issued for purchase of Celotek 25,759 -- --
Equity issued for purchase of SDI 2,034
Cash refunds of income tax 2,541
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
28
Cylink Corporation
Notes to Consolidated Financial Statements
1. The Company and a Summary of its Significant Accounting Policies
The Company
Cylink Corporation (the "Company") develops, markets and supports a
comprehensive family of secure electronic commerce and communications solutions
used by organizations worldwide to protect and manage the access, privacy and
integrity of information transmitted globally. The Company's products are
incorporated into local area networks (LANs), wide area networks (WANs), and
packet switched networks, such as the Internet.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred losses from continuing operations of $35
million in 2000 and $17 million in 1999, and its cash balances have declined
from $47 million as of December 31, 1998 to $15 million as of December 31, 2000.
These factors among others indicate that the Company may be unable to continue
as a going concern for a reasonable period of time. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
As previously announced, the Company effected significant cost cutting measures
during the fourth quarter of 2000, including staff reductions and field office
consolidations. Management believes the Company will be able to continue as a
going concern by the successful implementation of its plan to increase revenue,
continue to reduce its cost structure, maximize return on investments in
non-core areas of the business, and ultimately attain profitable operations. In
addition, the Company may seek debt or equity financing if required, however, no
assurances can be given that the Company will attain profitable operations or
that additional financing would be available.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates include allowances for doubtful receivables,
inventory reserves and valuation allowance on deferred assets.
Foreign currency
The functional currency of the Company's Israeli operations is the U.S.
dollar. The functional currencies of the Company's other foreign operations are
the local currencies. The effects of translating the financial position and
results of operations of local functional currency operations are included as a
component of other comprehensive income. The effects of foreign currency
transactions and of remeasuring the financial position and results of Israeli
operations into the functional currency are included in the statements of
operations. Net gains and losses from foreign currency transactions were not
significant during any of the periods presented.
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid investment instruments
with a maturity at the time of purchase of three months or less.
Inventories
29
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market.
Restricted cash
Restricted cash consists of certificates of deposit, which are restricted
from use pursuant to an operating lease obligation (Note 14).
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three-to-five years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the remaining lease term. Beginning in 1999, computer
software for internal use is capitalized in accordance with the guidelines of
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" issued by the American Institute of
Certified Public Accountants (AICPA).
Amortization of goodwill and other intangibles
Goodwill related to acquisitions is being amortized on a straight-line
basis over three to seven years. Amounts allocated to capitalized intangibles
other than goodwill are being amortized over three years to seven years.
Accumulated amortization relating to goodwill and other intangibles was $9.4
million and $6.3 million at December 31, 2000 and 1999, respectively.
Impairment of long-lived Assets
The Company periodically reviews the recoverability of all long-term
assets, including the related amortization period, whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. The Company determines whether there has been an impairment by
comparing the anticipated undiscounted future net cash flows to the related
asset's carrying value. If an asset is considered impaired, the asset is written
down to its fair value.
Revenue recognition
The Company's revenue is derived primarily from sales of commercial
network security products, and to a lesser extent, from the license of software
products and from professional services, including customer support and
consulting. Fees for maintenance and support services of hardware products are
charged separately from product revenue. Revenues derived from the sale or
license of the Company's products are recognized in accordance with the
applicable accounting standards, including Statement of Position No. 97-2,
"Software Revenue Recognition." Revenue is recognized when persuasive evidence
of a sale arrangement exists, such as receipt of a contract or purchase order,
the product has been shipped, the sales price is fixed and determinable,
collection is probable, and vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements of the
arrangement. Such undelivered elements typically consist of maintenance and
support, which are deferred and amortized over the applicable period. Vendor
specific objective evidence of the value of maintenance and support is generally
based on the annual renewal rate. Concurrent with sales, a provision is made for
estimated costs to repair or replace products under warranty arrangements.
Consulting revenues, which to date have been immaterial, are recognized on a
time-and-materials or percentage of completion basis in accordance with the
provisions of Accounting Research Bulletin-45, "Long-Term Construction-Type
Contracts," and Statement of Position 81-1: "Accounting for Performance of
Construction-type and Certain Production-type Contracts" depending on the
contract.
Research and development
Research and development costs are charged to operations as incurred.
30
During the year ended December 31, 1998, the Company performed research
and development under several government funded arrangements aggregating
$445,000. There were no such funded arrangements in 2000 and 1999. These
contracts provide funding (irrespective of the results) for research and
development of certain cryptographic technologies. Amounts received under these
contracts are offset against research and development expenses.
The Company performed research and development under several other
research and development contracts during 2000, 1999, and 1998, which provide
for the development and licensing of technology in exchange for development
funding. The Company recorded as a reduction of research and development
expenses $.2 million, $1.5 million and $1.5 million under such arrangements in
the years ended December 31, 2000, 1999, and 1998, respectively.
Software Development Costs
Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards No. 86
(SFAS 86) requires the capitalization of certain development costs of software
to be sold once technological feasibility is established, which the Company
defines as completion of a working model. The capitalized cost is then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater. To
date, the period between achieving technological feasibility and the general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs under SFAS 86.
Stock-based compensation
The Company accounts for stock based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. ("SFAS") 123, "Accounting for Stock-Based
Compensation" (See Note 9).
Income taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. A valuation
allowance is required to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted-average number of
common shares outstanding, excluding shares in escrow related to acquisitions
(Note 4). Diluted earnings (loss) per share is based on the weighted-average
number of common shares outstanding and dilutive potential common shares
outstanding excluding contingent shares held in escrow. The Company's only
potentially dilutive securities are stock options (See Note 9). All potentially
dilutive securities have been excluded from the computation of diluted earnings
per share, as their effect is anti-dilutive on the loss from continuing
operations for all periods presented.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and cash equivalents,
accounts receivable, and to a lesser extent, currency fluctuation of balances
denominated in currencies other than the United States dollar. The Company
limits the amount of investment exposure to any one financial institution and
financial instrument. The Company performs on-going credit evaluations and
maintains reserves for estimated potential credit losses. The Company minimizes
the amount of cash it maintains in local currencies by maintaining excess cash
in United States dollars.
One customer accounted for 13% of revenue for the year ended December 31,
2000, one customer for 11% of revenue for the year ended December 31, 1999 and
one customer for 14% of revenue for the year ended December 31, 1998.
31
Fair value of financial instruments
The carrying amount of cash and cash equivalents approximates fair value
based on the short-term nature of these instruments. The recorded amount of
long-term debt approximates fair value as the actual interest rates approximate
current competitive rates.
Dependence on suppliers
The Company's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products. The
Company depends in part upon subcontractors to manufacture, assemble and deliver
certain items in a timely and satisfactory manner. The Company obtains certain
components and subsystems from single, or a limited number of sources. A
significant interruption in the delivery of such items could have a material
adverse effect on the Company's financial condition and results of operations.
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income, which are excluded from net income (loss), include foreign
currency translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company has presented comprehensive income (loss) for each
period presented within the Consolidated Statements of Shareholders' Equity.
Reclassifications
Certain reclassifications have been made to the financial statements in
order to conform to the 2000 presentation. These reclassifications did not have
any effect on net income (loss) or the shareholders' equity.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value, and
provides hedge accounting when certain conditions are met. SFAS 133 is effective
for the Company in fiscal 2001. The Company has completed its evaluation of the
effects of adopting FAS 133 and believes that adoption of this statement will
not have a material impact on the Company's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 provided guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 outlines basic
criteria that must be met to recognize revenue and provides guidance for
disclosure related to revenue recognition policies. The Company was required to
implement SAB No. 101 in the fourth quarter of its fiscal year ended December
31, 2000. The provisions of SAB No. 101 did not have a material impact on the
Company's consolidated financial statements.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN No. 44")
Accounting for Certain Transactions Involving Stock Compensation-an
Interpretation of APB opinion No. 25. FIN 44, effective July 1, 2000, clarifies
the application of APB No. 25 for matters including: the definition of an
employee for purposes of APB No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option or award; and the
accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a material impact on the
financial position or results of operations.
32
2. Discontinued Operations
On March 28, 1998, the Company sold its Wireless Group to P-Com for $58.1
million ($46.0 million in cash and an unsecured note in the amount of $12.1
million). The sale resulted in an after tax gain of approximately $22.8 million
in 1998. As a result, the operations of the Wireless Group have been classified
as discontinued operations in the accompanying Consolidated Financial Statements
and related Notes. Accrued expenses in the amount of approximately $6.8 million,
primarily for professional services, anticipated excess facilities expenses, and
certain other transaction-related accruals were charged to discontinued
operations in computing the gain on disposal. On July 14, 1998, P-Com made a
partial payment of $8.9 million on its promissory note. In August 1999, P-Com
paid the Company $3.25 million in settlement of the entire remaining balance of
the promissory note and a complete settlement of all outstanding claims and
counterclaims. After the elimination of other claims by Cylink against P-Com and
the offset of certain reserves against those assets, Cylink recorded an
additional $2.3 million after-tax gain on disposal of discontinued operations in
1999. Revenues from the Wireless Group were $28.0 million in 1997 and $4.4
million in 1998 through the date of disposal.
3. Restructuring Charges
On October 30, 2000 the company announced a restructuring in order to
streamline operations and reduce costs. Employee severance and reorganization
costs of an estimated $0.8 million before taxes have been recorded.
Key elements of the restructuring charges include severance costs of
$528,000 and lease cancellation costs of $290,000.
4. Acquisitions
Celotek
On August 30, 2000, Cylink acquired all the outstanding shares of Celotek,
a developer of high-performance Asynchronous Transfer Mode network security
appliances. The Company exchanged 1,590,137 shares of Common Stock with a fair
value of $22,386,000 and cash of $515,000 for all the outstanding shares of
Celotek. In addition, the Company converted outstanding options to purchase
Celotek Common Stock into options to purchase 307,500 shares of Common Stock of
the Company with an aggregate fair value of $2,329,000. The fair value of these
options were determined using the Black-Scholes option pricing model with the
following assumptions: expected life of 2.9 years, risk-free interest rate of
6.00%, volatility of 80% and no dividends during the expected term. The total
purchase price was $26,500,000, which included transaction costs of $ 1,270,000,
some of which was satisfied through the issuance of 33,728 shares of Cylink's
Common Stock.
In addition, 40,913 shares had been issued to employees of Celotek who are
now employed by Cylink. The shares vest if they continue employment for a period
of 12 months, failing which, the unvested shares will revert to Cylink and the
selling Celotek shareholders. The fair value ($545,000) of these shares is being
amortized to compensation over the vesting term.
Of the total shares issued under the agreement, 241,572 shares of common
stock were held in escrow for a period of one year from the closing as
collateral for general representations and warranties made by Celotek under the
agreement. Any adjustment to the shares held in escrow upon release will result
in a change to previously recorded goodwill.
33
Assets acquired and liabilities assumed in the acquisition were as follows
(in thousands):
Current assets (including cash and cash equivalents of $253) $ 2,429
Property and equipment 1,059
Current technology 12,077
Acquired technology 3,681
Goodwill 7,225
Other intangibles 1,403
Current liabilities (1,189)
Long-term debt assumed (185)
----------
$ 26,500
==========
The allocation of the purchase price to the respective intangible assets
was based on management's estimates of the after-tax cash flows. This allocation
gave explicit consideration to the Securities and Exchange Commission's view on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Management's estimates gave consideration to the following: (i) the employment
of a fair market value premise excluding any Company-specific considerations
that could result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets; (iii)
the determination that none of the technology development had been completed at
the time of the acquisition; and (iv) the allocation to in-process research and
development based on a calculation that considered the present value of the
operating income that would have been generated by the in process research and
development project that is attributable to the acquired technology if
successfully completed.
The Company allocated $3.681 million to acquired in-process research and
development that had not reached technological feasibility as of the date of the
transaction. The acquired in-process research and development was approximately
80% complete towards development of a reduced cost asynchronous transfer mode
encryptor. The primary remaining efforts associated with the development of the
technology included several key areas. The key areas were completing the
hardware and electronics necessary to make the product functional and shock and
heat testing. The Company incurred approximately 27 person months of additional
development since acquisition and completed the initial development of the
technology in November 2000.
The values assigned to acquired in process research and development was
determined by estimating the costs to develop the purchased in-process
technology into a commercially viable product, estimating the resulting net cash
flows from the product and discounting the net cash flows to their present
value. The revenue projections used to value the acquired in-process research
and development was based on estimates of relevant market sizes, growth factors,
expected trends in technology and other factors. Operating expenses were
estimated based on historical results and anticipated profit margins.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations. Due to the nature of the forecast
and risks associated with the projected growth, profitability and the
developmental nature of the product an after-tax discount rate of 30% was used
to value the in process research and development.
The discount rate was commensurate with the stage of development and the
uncertainties in the economic estimates described above. If the acquired
in-process research and development product is not commercially successful, the
Company's business, operating results and financial condition may be materially
adversely affected in future periods. In addition, the value of other intangible
assets acquired may be impaired.
The following unaudited pro forma information shows the results of
operations for the years ended December 31, 2000 and 1999, respectively, as if
the Celotek acquisition had occurred at the beginning of the earliest period
presented and at the purchase price established in October 2000 (in thousands,
except per share amounts):
34
Year ended December 31,
2000 1999
---------- -------------
Total revenue $ 69,567 $ 60,647
Net loss $ (39,791) $ (22,372)
Loss per share - basic and diluted: $ (1.25) $ (0.73)
The pro forma results for the year ended December 31, 2000 exclude the
$3,681,000 charge for purchased in-process technology, as it is a non-recurring
charge. The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred if the acquisition had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results.
Security Design International
On July 21, 1999, Cylink acquired Virginia-based SDI, a security
consulting and professional services company that provide network vulnerability
assessments. Concurrent with the acquisition, Cylink entered into employment
contracts with four SDI shareholders. In connection with the acquisition and
employment agreements, Cylink (1) paid cash of $572,000 (including $122,000 of
transaction costs), (2) issued 306,402 shares of Cylink common shares valued at
$1.7 million into escrow, to be released in annual installments as the shares
vest over a three-year employment period, (3) issued options to purchase 150,000
of Cylink common shares at $3.84 per share, which vest over four years of
continued employment, and (4) agreed to pay bonuses of up to $1.925 million
contingent upon continued employment and the achievement of specified revenue
and profitability goals during the next three years. Deferred compensation
resulting from the issuance of the escrowed common shares and the stock options
totaled $2.034 million and is reported as a reduction to shareholders' equity,
to be amortized over the applicable vesting period. The acquisition was recorded
using the purchase method, and the goodwill arising from the transaction
($436,000) is being amortized over three years. The results of operations of SDI
are included in the accompanying consolidated financial statements from the date
of acquisition. Revenues from SDI were insignificant in comparison to Cylink's
consolidated revenues during 1999. Pro forma results of operations of SDI,
assuming the acquisition had occurred as of the beginning of 1998, are not
presented as the pro forma effects are insignificant.
5. Working Capital Loan
On September 29, 2000, Cylink entered into a loan and security agreement
with a bank under which it can borrow up to $10.0 million by way of revolving
advances. The loan is secured by all of Cylink's tangible assets. The revolving
loan provides for loan advances up to 80% of Cylink's eligible accounts
receivable, bears interest at a rate not exceeding the Bank's prime rate of
interest (9% as of December 31, 2000) or 2.5% above LIBOR and is due September
29, 2001. There have been no advances made under the loan since its inception.
In conjunction with the acquisition of Celotek, Cylink obtained an
equipment line of credit for up to $2 million. This line matures December 1,
2002 and bears interest at the prime rate plus 1%. As of December 31, 2000,
borrowings under the equipment line were $277,931.
Both these facilities require the Company to maintain certain liquidity
and profitability covenants, with which the Company was not in compliance.
Accordingly all amounts outstanding at December 31, 2000 have been classified as
short term.
35
6. Details of Balance Sheet Components
December 31,
--------------------
2000 1999
-------- --------
(in thousands)
Inventories:
Raw materials $ 5,708 $ 2,412
Work in process and subassemblies 2,768 1,610
Finished goods 2,265 2,723
-------- --------
$ 10,741 $ 6,745
======== ========
Property and equipment:
Machinery and equipment $ 11,237 $ 10,262
Software 2,646 2,414
Furniture and fixtures 1,996 2,327
Land and building 814 814
Leasehold improvements 3,618 3,252
-------- --------
20,311 19,069
Less: accumulated depreciation and amortization (10,070) (9,031)
-------- --------
$ 10,241 $ 10,038
======== ========
Accrued liabilities:
Compensation and benefits $ 5,411 $ 3,623
Royalties 159 124
Employee severance costs 731 852
Distributor commissions 140 362
Legal and Accounting costs 558 1,270
Warranty costs 555 759
Other 1,792 2,092
-------- --------
$ 9,346 $ 9,082
======== ========
36
7. Income Taxes
Income tax provision (benefit) for income from continuing operations
consists of the following:
Year ended December 31,
2000 1999 1998
------- ------- -------
(in thousands)
Current:
Federal $(1,096) $ 36 $(4,506)
State (2,071) 6 (1,722)
Foreign -- 4 48
------- ------- -------
$(3,167) $ 46 $(6,180)
======= ======= =======
Deferred:
Federal $ 1,496 $ (34) $(3,233)
State 2,071 (6) 258
Foreign -- 168 --
------- ------- -------
3,567 128 (2,975)
------- ------- -------
$ 400 $ 174 $(9,155)
======= ======= =======
Deferred tax assets (liabilities) comprise the following:
December 31,
----------------------
2000 1999
-------- --------
(in thousands)
Assets:
Net operating loss and credit carryforwards $ 15,615 $ 8,000
Unrealized capital loss 1,315 1,160
Bad debt reserve 132 --
Inventory reserves and basis differences 2,171 --
Accrued expenses 1,870 820
Warranty reserve 285 270
Product reserves 867 --
Other 272 736
-------- --------
Total deferred tax assets 22,527 10,986
-------- --------
Liabilities:
Depreciation -- (150)
Other liabilities -- (140)
-------- --------
Total deferred tax liabilities -- (290)
Valuation allowance (21,727) (6,329)
-------- --------
Net deferred tax assets $ 800 $ 4,367
======== ========
37
Net deferred tax assets at December 31, 2000 and 1999 are based on the
Company's estimated available carryback capacity. The Company recorded a
valuation allowance against the remainder of its deferred tax assets.
At December 31, 2000, the Company has net operating loss (NOL)
carryforwards of approximately $22,213,000 and $19,788,000 for federal and state
income tax purposes, respectively. The federal NOL carryforwards expire through
2020, while the state NOL carryforwards expire through 2005.
At December 31, 2000, the Company has federal and state research credit
carryforwards of approximately $3,186,00 and $2,467,000, respectively. The
federal credits expire through 2020 and the state credits have no expiration.
In addition, the Company has state manufacturing credit carryforwards of
approximately $358,000, which expire through 2010.
The provision (benefit) for income taxes for continuing operations
reconciles to the amount computed by applying the United States federal
statutory rate to income before taxes as follows:
Year ended December 31,
------------------------------
2000 1999 1998
----- ----- -----
U.S. federal statutory income tax rate (35.0) % (35.0) % (35.0) %
State taxes, net of federal tax benefit (5.7) (4.7) (3.2)
Research and development tax credits (1.8) (4.4) (10.1)
Change in valuation allowance 37.6 23.8 2.4
Foreign losses not benefitted 7.6 15.2 5.2
Other (1.7) 6.1 6.2
----- ----- -----
Effective Tax Rate 1.0 % 1.0% (34.5)%
===== ===== =====
8. Preferred stock
In connection with the Company's initial public offering in 1996, the
Board of Directors authorized the issuance of up to 5,000,000 shares of
undesignated preferred stock and the Board has the authority to issue the
undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. No preferred stock had been
issued as of December 31, 2000.
9. Stock option plans
The Company has two stock option plans: the 1994 Flexible Stock Incentive
Plan which was the successor plan to the 1987 plan ("1994 Plan") and the
Cylink/ARL 1997 Stock Option Plan ("1997 Plan"). The 1994 Plan provides for the
grant of incentive stock options and nonqualified stock options to executives,
employees and consultants to purchase up to 8,050,000 Common Shares. Stock
options may be granted at prices not less than 100% and 85% for incentive and
nonqualified stock options, respectively, of the fair market value of the stock
on the date of grant. Through December 31, 2000, all nonqualified stock options
have been granted at 100% of the fair market value of the stock on the date of
grant. Options granted under the 1994 Plan are exercisable at such times and
under such conditions as determined by the Board of Directors, and generally
vest over four years. Options generally expire six years from the date of grant.
The Company adopted the 1997 Plan in conjunction with the acquisition of
Algorithmic Research Ltd, or ARL, in 1997. The 1997 Plan provides for the grant
of nonqualified stock options to the employees and consultants of ARL to
purchase up to 410,000 of Cylink Common Shares.
38
Option activity is summarized as follows:
Weighted
Shares Average
Available Options Exercise
for grant Outstanding Price
---------- ----------- ---------
(thousands of shares)
Balance at January 1, 1998 (1,443,000 shares 1,553 5,265 $ 8.52
exercisable at a weighted average exercise
price of $4.50 )
Approved 2,100
Granted at market price (4,974) 4,975 5.55
Exercised -- (420) 4.27
Canceled 3,720 (3,720) 10.25
---------- ------
Balance at December 31, 1998 (1,746,000 shares 2,399 6,100 5.58
exercisable at a weighted average exercise
price of $6.49 )
Approved --
Granted at market price (2,848) 2,847 6.35
Granted below market price (150) 150 3.84
Exercised -- (446) 2.03
Canceled 1,752 (1,752) 8.36
---------- ------
Balance at December 31, 1999 (2,268,570 shares 1,153 6,899 $ 5.19
exercisable at a weighted average exercise
price of $5.10)
Approved 1,200
Granted at market price (3,036) 3,036 8.61
Granted below market price (59) 59 16.98
Exercised -- (978) 5.63
Canceled 1,470 (1,470) 6.20
---------- ------
Balance at December 31, 2000 728 7,546 $ 6.39
========== ======
On November 30, 2000, the Company granted options to purchase 1,276,300
shares of common stock at an exercise price of $3.44. These options have a
six-year term and vest over two years from the date of issuance. On December 11
and 14, 1998, the Company canceled options to purchase 2,346,999 shares of
common stock with exercise prices ranging from $2.00 to $23.50 per share
previously granted to employees and reissued all such options at prices ranging
from $4.25 to $4.625 per share, representing the fair market values on the dates
of reissuance. The issued options have a six-year term and vest over three years
from the date of reissuance.
39
Significant option groups outstanding at December 31, 2000, and related
weighted average exercise price and contractual life information are as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Outstanding Exercise Price
--------------- ----------- ---------- -------------- ----------- --------------
$ 0.01 to $ 3.44 1,921,000 5.6 $ 2.99 545,000 $ 2.18
$ 3.52 to $4.25 2,499,000 4.3 4.07 1,309,000 4.10
$4.50 to $12.88 1,917,000 5.2 7.70 931,000 7.09
$ 13.75 to $17.00 1,209,000 5.3 14.49 134,000 14.42
--------- ---------
7,546,000 5.0 $ 6.39 2,919,000 $ 5.17
========= =========
Pro forma stock compensation disclosures
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted at market price during 2000, 1999, and 1998 was $5.92,
$3.01,and $3.80 respectively. The estimated grant date fair value disclosed by
the Company is calculated using the Black-Scholes model. The Black-Scholes
model, as well as other currently accepted option valuation models, was
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option awards under
the 1994 Plan:
2000 1999 1998
---- ---- ----
Expected life (years) 2.54 2.90 3.10
Risk-free interest rate 6.43 % 5.39 % 4.55 %
Volatility 120.00 % 80.00 % 80.00 %
Dividend yield 0.00 % 0.00 % 0.00 %
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted, the Company's net
income (loss) and net income (loss) per share would have been changed to the pro
forma amounts below for the years ended December 31, 2000, 1999 and 1998 (in
thousands, except for per share amounts):
40
Years ended December 31
-----------------------------------------
2000 1999 1998
---- ---- ----
Net income (loss) As reported $ (35,388) $ (14,573) $ 5,161
Pro forma (43,587) (21,568) 1,714
Net income (loss) per share - As reported $ (1.15) $ (0.50) $ 0.18
- (basic and diluted) Pro forma (1.42) (0.74) 0.06
10. Employee Stock Purchase Plan
In January 2000, Cylink adopted an Employee Stock Purchase Plan that makes
available 200,000 shares of the Company's common stock for full time employees
of the Company to purchase at a discount to the open market price through a
payroll deduction plan. Employee contributions were limited to 12% of their base
compensation during the initial five-month offering period and 10% of their base
compensation during each subsequent six-month offering period, subject to an
overall limitation of $25,000 per year. Employee contributions that are
accumulated during the offering period are used to purchase Cylink Common Stock
at the end of the offering period at a 15% discount to the lower of the Cylink
market prices at the first day and the last day of the offering period.
11. Notes Receivable From Employees or Former Employees
During 1997, 1998 and 1999, the Company made loans to certain of its
officers towards the purchase of their principal residences. Some of these
officers are no longer employed by the Company. The notes are generally interest
free and are secured by deeds of trust on the related residences. The Company
has imputed interest on the notes based on an assumed interest rate of 8% per
annum. One of the notes, with a face amount of $1.4 million, was collected in
full in December 2000. The remaining notes are carried at their discounted
value, which aggregated $2.3 million at December 31, 2000. As of December 31,
2000, the remaining unamortized discount on the notes was $.4 million. The notes
mature as follows: $1.0 million in 2002; $1.1 million in 2003; and $.6 million
in 2004.
12. Contingencies
Between November 6, 1998 and December 14, 1998, several securities class
action complaints were filed against Cylink and certain of its current and
former directors and officers in federal courts in California. These complaints
alleged, among other things, that Cylink issued financial statements that were
materially false and misleading and that the defendants knew or should have
known that these financial statements caused Cylink's common stock price to rise
artificially. The actions variously alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and SEC Rule
10b-5 promulgated there under, and Section 20 of the Exchange Act.
The securities class action lawsuits have been ordered consolidated into a
single action pending in the United States District Court for the Northern
District of California captioned In Re Cylink Securities Litigation, No.
C98-4292 (VRW). Plaintiffs' consolidated complaint was dismissed by the Court in
November 2000. Cylink has moved to dismiss plaintiff's first amended complaint,
and the motion is currently pending before the Court. Cylink believes it has
meritorious defenses to this action and intends to defend itself vigorously.
However, it is not feasible to predict or determine the final outcome of these
proceedings, and if the outcome is unfavorable, Cylink's business, financial
condition, cash flows and results of operations could be materially adversely
affected.
On September 27, 2000, the Company entered into a settlement with the SEC
under which the SEC enjoined Cylink from violating certain of the SEC's
regulations without requiring Cylink to admit the occurrence of any such
violations and without imposing any fines or penalties.
41
There is currently an action proceeding in the United States District
Court for the Northern District of California, captioned Securities and Exchange
Commission vs. John Daws, Thomas Butler and Mark Folit, No. C -00-2099, in which
the SEC seeks to enjoin violations of the SEC's regulations and impose civil
penalties and disgorgement of certain benefits realized by these individuals
while formerly employed by Cylink. Although neither Cylink nor any of its
current officers are parties to this proceeding, two of the defendants in this
action have demanded indemnification by Cylink for the costs of their defense.
Although Cylink has placed its insurance carriers on notice of the SEC's recent
action, the extent of Cylink's continuing obligations to these defendants, if
any, has not been determined. At this time, the Company believes its insurance
coverage is adequate for any indemnity obligations it may legally have to these
defendants, and intends to defend itself vigorously with respect to any claims
that exceed Cylink's obligations under the law. However, in the event Cylink's
insurance coverage for these claims is inadequate or unavailable for any reason,
Cylink's financial condition, cash flows and results of operations could be
adversely affected.
13. Geographic Information
The Company operates in one reportable segment: network security. Revenue
from continuing operations and long-lived assets, classified by the major
geographic areas in which the Company operates, were as follows:
Year ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Revenue: (in thousands)
Sales to unaffiliated customers:
From United States to:
Customers in United States $41,567 $33,375 $25,334
Customers in Central and
South America 1,384 2,883 1,752
Customers in Europe 4,379 6,612 3,855
Customers in Asia 5,537 4,925 1,303
From Europe to customers in Europe 7,758 5,662 6,855
From Israel to:
Customers in North America 107 112 --
Customers in Central and
South America 314 828 --
Customers in Europe 3,544 3,759 1,710
Customers in Asia 3,517 1,499 1,194
Other -- -- 757
------- ------- -------
$68,107 $59,655 $42,760
======= ======= =======
Net sales are attributable to countries based upon shipment destination and
service location.
December 31,
2000 1999
-------- -------
(in thousands)
Long-lived assets:
United States $ 29,070 $ 8,456
Europe 455 510
Israel 1,453 4,260
-------- -------
30,978 13,226
======== =======
42
14. Lease Commitments
The Company leases its headquarters and manufacturing facility and sales
offices under various noncancelable operating leases. These leases expire at
various dates through August 2009 and certain of the leases are renewable for an
additional five years. In addition to the minimum lease payments, the Company is
responsible for insurance, repairs and certain other operating costs under the
terms of the leases.
Under the terms of an operating lease, the Company is required to maintain
a restricted cash deposit with a financial institution to be used as collateral
against future minimum lease allocations, until the Company reaches some defined
profitability goals.
Future minimum lease payments under all noncancelable operating leases are
as follows (in thousands):
Operating
Year ending December 31, Leases
---------
2001 $ 3,751
2002 3,553
2003 3,296
2004. 3,204
2005 3,283
Subsequent to 2005 12,771
---------
Total minimum payments $ 29,858
=========
Rent expense under operating leases totaled $4,553,000, $3,347,000 and
$1,473,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
43
15. Selected Quarterly Financial Data (Unaudited)
The following table shows selected unaudited financial data for the four
quarters of 1999 and 2000.
(in thousands except for share amounts)
March 28, June 27, Sept. 26, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
Total Revenues $ 11,885 $ 15,209 $ 15,092 $ 17,469
Gross profit 7,773 10,440 10,935 11,348
Operating loss (4,492) (3,701) (3,796) (6,804)
Net loss (4,065) (3,054) (992) (6,462)
Basic and diluted net loss per share $ (0.14) $ (0.10) $ (0.03) $ (0.23)
Shares used in computation of basic
and diluted net loss per share 29,117 29,127 29,180 29,444
April 2, July 2, Oct 1, Dec. 31,
2000 2000 2000 2000
-------- -------- -------- --------
Total Revenues $ 17,738 $ 18,005 $ 17,192 $ 15,172
Gross profit 11,277 11,572 11,019 6,926
Operating loss (6,561) (6,540) (10,818) (12,140)
Net loss (6,255) (6,093) (10,708) (12,332)
Basic and diluted net loss per share $ (0.21) $ (0.20) $ (0.35) $ (0.39)
Shares used in computation of basic
and diluted net loss per share 30,051 30,511 31,007 31,515
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Reference is made to the information appearing under the caption "Changes
in Independent Public Accountants" on page 18 of the Registrant's Proxy
Statement, which information is hereby incorporated by reference.
44
PART III
Certain information required by Part III is omitted from this report
because we filed a definitive proxy statement within 120 days after the end of
our fiscal year pursuant to Regulation 14A for the Annual Meeting of
Shareholders to be held on May 16, 2001, and the information included therein is
incorporated by reference herein to the extent detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors is
incorporated by reference to the information appearing under the caption
"Election of Directors" including subcaptions thereof, in Cylink's Proxy
Statement. The information required by this Item concerning Cylink's executive
officers is set forth in Part I hereof under the caption "Executive Officers of
the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appearing under the caption
"Executive Compensation and Other Information" in Cylink's Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appearing under the caption
"Security Ownership of Certain Beneficial Owners and Management" in Cylink's
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item appearing under the caption "Certain
Transactions" in Cylink's Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Please see the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule, which
appear on page 22 of this Report on Form 10-K.
2. Financial Statement Schedule: Please see the accompanying
Index to Consolidated Financial Statements and Financial Statement Schedule
which appear on page 22 of this Report on Form 10-K.
3. Exhibits Index: The Exhibits listed in the accompanying
Index to Exhibits are filed or incorporated by reference as part of this
Annual Report 10-K.
(b) Reports on Form 8-K. The Company filed four reports on Form 8-K
during the fourth quarter ended December 31, 2000. Information regarding the
items reported is as follows:
o September 11, 2000. The Company announced the
completion of its previously announced acquisition of
Celotek Corporation.
o November 9, 2000. The Company announced that it was
reducing its workforce by approximately 12% as part
of its program to bring costs into line with
near-term revenue expectations.
45
o November 9, 2000. The Company announced that Roger A.
Barnes, Chief Financial Officer of the Company, was
leaving the Company to join another business, and
that R. Christopher Chillingworth, formerly the
Company's Controller, was being appointed Acting
Chief Financial Officer.
o November 28, 2000. The Company filed Amendment No. 1
to Current Report on Form 8-K filed on September 11,
2000 for the purpose of filing the financial
statements of Celotek required by Item 7(a) and the
pro forma financial information required by Item
7(b).
46
INDEX TO EXHIBITS
(Item 14(a))
Description of Exhibit
Exhibit
2.1 Stock Purchase Agreement, dated as of September 7, 1997,
between Registrant, A.R. Data Security Ltd. And Algorithmic
Research Ltd. (1), and Seller's Agreement, dated as of
September 8, 1997, among Registrant, A.R. Data Security Ltd.,
Algorithmic Research Ltd., Amos Fiat, Yossi Cohen, Yossi
Tulpan, Koor Capital Markets, and Telrad Holdings Ltd. (1)
2.2 Agreement and Plan of Reorganization by and between Cylink
Corporation and Celotek Corporation, dated as of July 27,
2000. (2)
2.3 Agreement and Plan of Reorganization by and among Cylink
Corporation, Star Acquisition Corporation and Security Design
International, Inc., dated as of June 25, 1999.
3.1 Amended and Restated Articles of Incorporation of the
Registrant and Certificate of Amendment thereto dated March 5,
1996. (3)
3.2 Bylaws, as amended. (3)
3.3 Certificates of Amendment of the Bylaws dated March 26, 1997.
(4)
4.1 Reference is made to Exhibits 3.1, 3.2, and 3.3.
4.2 Specimen certificate for Common Stock. (3)
10.1 Form of Indemnification Agreement between the Company and each
of its executive officers and directors. (3)
10.2 Employment Agreement between the Company and Fernand B.
Sarrat, dated as of November 6, 1996, and Severance and
Consulting Agreement entered into November 3, 1998. (4) (5)
10.3 Employment Agreement between the Company and William C.
Crowell dated December 18, 1997 (4)
10.4 Employment Agreement between the Company and Sarah Engel dated
February 14, 1997 (4)
10.5 Company's 1987 Non-Qualified Stock Option Plan, including
forms of agreements there under. (3) (4)
10.6 Company's 1994 Flexible Stock Incentive Plan, including forms
of agreements thereunder, and amendments thereto. (3) (4)
10.7 Employment Agreement between the Company and Roger Barnes
dated as of October 14, 1999, and as amended August 9, 2000.
47
10.8 Lease dated May 10, 1999 by and between Orchard Jay Investors,
LLC and David Brown as Landlord and Cylink Corporation, as
tenant, as amended August 5, 1999.
16.1 Letter from PriceWaterhouseCoopers, LLC regarding change in
Certifying Accountant. (6)
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to Page IV-2.
Financial Data Schedule. (7)
(1) Incorporated by reference from the Company's report on Form 8-K filed as of
September 23, 1997, and report on Form 8-K/A filed as of November 24, 1997.
On November 24, 1997, the Company filed a report on Form 8-K/A amending the
report on Form 8-K filed as of September 23, 1997, reporting under Items 2,
7, and 9 the Company's acquisition of ARL, by reporting under Item 7 the
consolidated financial statements of A.R. Data Security Ltd. and pro forma
financial information for the Company and ARL.
(2) Incorporated by reference from the Company's reports on Form 8-K filed as
of August 4, 2000 and September 11, 2000.
(3) Incorporated by reference from the Company's Registration Statement on Form
S-1 Registration No. 33-80719, which became effective February 15, 1996.
(4) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report on Form 10-K pursuant to Item 14(a).
(5) Incorporated by reference from the Company's report on Form 10-K filed as
of March 31, 1997 for the fiscal year ended December 31, 1996. Incorporated
by reference from the Company's report on Form 10-K filed as of March 31,
1997 for the fiscal year ended December 31, 1996.
(6) Incorporated by reference from the Company's report on Form 8-K filed as of
July 19, 1999.
(7) To be filed by amendment to this report on Form 10-K.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYLINK CORPORATION
Date: March 29, 2001 By: /s/ William P. Crowell
----------------------
William P. Crowell
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. Christopher Chillingworth and Robert
B. Fougner, and each of them, acting individually, as his or her
attorney-in-fact, each with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM P. CROWELL President, Chief executive Officer March 29, 2001
---------------------- (Principal Executive Officer) and
William P. Crowell Director
/s/ R. CHRISTOPHER CHILLINGWORTH Vice President of Finance and Chief Financial March 29, 2001
-------------------------------- Officer (Principal Financial and
R. Christopher Chillingworth Accounting Officer)
/s/ LEO A. GUTHART Chairman of the Board March 29, 2001
-------------------
Leo A. Guthart
/s/ ELWYN BERLEKAMP Director March 29, 2001
-------------------
Elwyn Berlekamp
/s/ PAUL GAUVREAU Director March 29, 2001
-----------------
Paul Gauvreau
/s/ WILLIAM W. HARRIS Director March 29, 2001
----------------------
William W. Harris
/s/ HOWARD L. MORGAN Director March 29, 2001
--------------------
Howard L. Morgan
49
SCHEDULE II
CYLINK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1999 and 2000
(in thousands)
Additions
Balance at Charged to Deductions Balance
Beginning Statement of from at end
of Year Operations Reserves of Year
Allowance for doubtful accounts:
Year ended December 31, 1998 $ 433 $ 874 $ 56 $ 1,251
Year ended December 31, 1999 1,251 525 835 941
Year ended December 31, 2000 941 874 316 1,499
50