UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2001
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
incorporation or organization) Identification No.)
3131 Jay Street
Santa Clara, California 95054
(Address of principal executive offices)
(408) 855-6000
(Registrant's telephone number, including area code)
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
------- --------
As of May 11, 2001, there were 32,707,677 shares of the Registrant's common
stock outstanding.
CYLINK CORPORATION
FORM 10-Q FOR THE QUARTER ENDED APRIL 1, 2001
INDEX
Page
----
Index 1
Part I Financial information
Item 1 Financial Statements
a) Condensed Consolidated Balance Sheets at April 1, 2001 and December 31, 2000 2
b) Condensed Consolidated Statements of Operations for the three months ended
April 1, 2001 and April 2, 2000 3
c) Condensed Consolidated Statement of Cashflows for the three months ended
April 1, 2001 and April 2, 2000 4
d) Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's discussion and analysis of financial condition and results of operations 7
Part II Other Information 19
Signature 20
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data; unaudited)
April 1, December 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 11,928 $ 15,250
Accounts receivable, net of allowances of $1,466 and $1,499 12,451 14,927
Inventories 9,653 10,741
Deferred income taxes 800 800
Other current assets 2,612 1,697
--------- ---------
Total current assets 37,444 43,415
Restricted cash 1,400 1,400
Property and equipment, net 9,545 10,241
Acquired technology, goodwill and other intangibles 20,076 20,707
Notes receivable from employees or former employees 2,321 2,310
Other assets 838 811
--------- ---------
$ 71,624 $ 78,884
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of lease obligations and equipment line of credit $ 253 $ 288
Accounts payable 3,765 5,137
Accrued liabilities 8,107 9,346
Income taxes payable 603 359
Deferred revenue 5,064 3,147
--------- ---------
Total current liabilities 17,792 18,277
--------- ---------
Capital lease obligations and equipment line of credit 77 86
Deferred revenue and other accruals, less current portion 1,370 1,368
--------- ---------
1,447 1,454
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued and outstanding
Common stock, $0.01 par value; 55,000,000 shares authorized;
32,698,000 and 32,681,000 shares issued and outstanding 327 327
Additional paid-in capital 158,812 158,805
Deferred compensation related to stock options (959) (1,231)
Accumulated other comprehensive income (loss) 69 (16)
Accumulated deficit (105,864) (98,732)
--------- ---------
Total shareholders' equity 52,385 59,153
--------- ---------
$ 71,624 $ 78,884
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
2
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
Three Months Ended
April 1, April 2,
2001 2000
-------- --------
Revenue $ 12,612 $ 17,378
Cost of revenue 4,345 6,101
-------- --------
Gross profit 8,267 11,277
-------- --------
Operating expenses:
Research and development, net 5,945 4,430
Selling and marketing 5,749 8,469
General and administrative 3,014 4,219
Amortization of purchased intangibles 862 720
-------- --------
Total operating expenses 15,570 17,838
-------- --------
Loss from operations (7,303) (6,561)
Other income (expense):
Interest income, net 190 287
Royalty and other income (expense), net (19) 27
-------- --------
171 314
-------- --------
Loss before income taxes (7,132) (6,247)
Provision for income taxes -- 8
-------- --------
Net loss $ (7,132) $ (6,255)
======== ========
Loss per share - basic & diluted $ (0.22) $ (0.21)
======== ========
Shares used in per share calculation - basic & diluted 32,262 30,051
======== ========
See accompanying notes to condensed consolidated financial statements.
3
CYLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three months ended
April 1, April 2,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (7,132) $ (6,255)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 825 811
Amortization 862 799
Deferred income taxes -- (4)
Amortization of imputed interest on note receivable -- (62)
Deferred compensation related to stock options 272 184
Changes in assets and liabilities (net of effects of
acquisition):
Accounts receivable 2,476 (1,269)
Inventories 1,088 (4,105)
Other assets (953) (742)
Accounts payable (1,372) 1,042
Accrued liabilities (1,239) 782
Income taxes payable 244 (35)
Deferred revenue 1,919 430
-------- --------
Net cash used in operating activities (3,010) (8,424)
Cash flows from investing activities:
Acquisition of property and equipment (129) (1,007)
Adjustments to acquisition price of Celotek Corporation (231) --
-------- --------
Net cash used in
investing activities (360) (1,007)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 7 4,111
Other (44) (7)
-------- --------
Net cash provided by (used in) financing activities (37) 4,104
-------- --------
Effect of exchange rate changes on
cash and cash equivalents 85 20
-------- --------
Net decrease in cash and cash equivalents (3,322) (5,307)
Cash and cash equivalents at beginning of period 15,250 33,170
-------- --------
Cash and cash equivalents at end of period $ 11,928 $ 27,863
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
4
CYLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
contain all adjustments, consisting only of normal recurring adjustments which,
in the opinion of management, are necessary to state fairly the consolidated
financial position, results of operations and cash flows of Cylink Corporation
("Cylink" or the "Company") for the periods presented. These financial
statements should be read in conjunction with the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000. Interim results of operations are not necessarily
indicative of the results to be expected for the full year.
Certain 2000 financial statement amounts were reclassified to conform with
2001 classifications. These reclassifications had no effect on net loss or
shareholders' equity as previously reported.
2. Accounting Changes
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. The statement
requires that all derivatives, whether designated in hedging relationships or
not, are to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, changes in the fair value of the derivative
and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are recorded in
other comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. The adoption of SFAS 133
did not result in a transition adjustment at January 1, 2001.
The Company uses derivative instruments, primarily forward exchange
contracts, to manage the foreign currency exchange rate risk associated with
certain assets and forecasted transactions which are denominated in currencies
other than the U.S. Dollar. The Company monitors its foreign currency exposures
regularly to maximize the overall effectiveness of its foreign currency hedge
positions, with the principal currency hedged being the British Pound. The
Company has not designated any of its forward exchange contracts as hedging
instruments under SFAS 133, and therefore the changes in fair value of these
forward contracts has been included in interest and other income in the quarter
ended April 1, 2001. The fair value of these instruments as of April 1, 2001 was
not significant.
3. Inventories
April 1, December 31,
2001 2000
------- -------
(in thousands)
Raw materials $ 5,390 $ 5,708
Work in process and subassemblies 2,011 2,768
Finished goods 2,252 2,265
------- -------
$ 9,653 $10,741
======= =======
4. Loss Per Share
Basic loss per share is based on the weighted-average number of common
shares outstanding, excluding shares in escrow. Diluted loss per share is based
on the weighted-average number of shares outstanding and dilutive potential
common shares outstanding, excluding contingent shares held in escrow. The
Company's only potentially dilutive securities are stock options. All
potentially dilutive securities have been excluded from the computation of
diluted loss per share, as their effect is anti-dilutive on the net loss for the
periods presented.
5
As of April 1, 2001 and April 2, 2000, the Company had 7,156,000 and
6,917,500 stock options outstanding with a weighted average exercise price of
$6.32 and $6.06, respectively. These options expire on various dates through
2008.
5. Comprehensive Loss
The components of comprehensive loss, consisting of the Company's reported
net loss and unrealized gains or losses in the translation of foreign
currencies, are as follows:
Three Months Ended
------------------
April 1, April 2,
2001 2000
------- -------
Net loss $(7,132) $(6,255)
Other comprehensive income 85 20
------- -------
Total comprehensive loss $(7,047) $(6,235)
======= =======
6. Contingencies
Cylink is currently engaged in litigation. See Part II, Item 1. "Legal
Proceedings."
7. 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 million by way of revolving
advances. The loan is secured by substantially all of Cylink's tangible assets.
The revolving loan provides for advances up to 80% of Cylink's eligible accounts
receivable, bears interest at a rate not exceeding the Bank's prime rate of
interest (8% as of April 1, 2001) or 2.5% above LIBOR and is due September 29,
2001. There have been no borrowings under the loan since its inception.
In conjunction with the acquisition of Celotek Corporation in August 2000,
Cylink assumed an equipment loan with an outstanding balance of $324,253. This
loan matures December 1, 2002 and bears interest at the prime rate plus 1%. As
of April 1, 2001, the outstanding balance under the equipment line was $243,122.
Both these facilities require the Company to maintain certain liquidity and
profitability covenants, with which the Company was not in compliance as of
April 1, 2001. Accordingly all amounts outstanding at April 1, 2001 have been
classified as short term. See Footnote 8 "Subsequent Events" for replacement of
this facility.
8. Subsequent Events
Financial Restructuring. On April 5, 2001, Cylink announced further expense
reduction actions, including a further reduction in its workforce by
approximately 8%, elimination of all management bonuses for 2001, and a "Planned
Hours Reduction" program requiring all employees to take an additional 20
designated days off during the remainder of 2001 either without pay or through
utilization of accrued vacation. The severance related costs associated with the
reduction will be recorded in the second quarter of 2001.
Divestiture. The Company announced the sale of its subsidiary, Security
Design International, effective April 9, 2001, in a private stock transaction.
No significant gain or loss is expected on the sale.
Working Capital Loan. In April 2001, the Company has obtained a loan
commitment of $7.5 million from the lender under the above referenced working
capital facility to replace that facility. This loan will be secured by all of
Cylink's tangible assets. The revolving loan provides for loan advances up to
85% of Cylink's eligible accounts receivable, bears interest at the Bank's prime
rate (8% as of April 1, 2001) of interest plus 1.75% and will be due April 30,
2002. The loan contains a tangible net worth covenant.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the unaudited
condensed financial statements and notes thereto included in Part I Item 1 of
this Report on Form 10-Q and the audited financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's 2001 Report on Form 10-K. This Report on
Form 10-Q includes statements that reflect Cylink's 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 generally 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 Cylink's predictions. For a description of these
risks see the reasons described in Item 2 "Risk Factors That May Affect Future
Results," and other sections of this Report on Form 10-Q. You should also
consult the risk factors listed from time to time in Cylink's Reports on Form
10-K, 10-Q, and 8-K.
All forward-looking statements included in this document are based on
information available to Cylink as of the date of this Report on Form 10-Q, and
Cylink assumes no obligation to update any such forward-looking statements, or
to update the reasons why actual results could differ from those projected in
the forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenue for the periods indicated:
Three months ended
------------------
April 1, April 2,
2001 2000
----- -----
Revenue 100.0% 100.0%
Cost of revenue 34.5 35.1
----- -----
Gross profit 65.5 64.9
----- -----
Operating expenses:
Research and development, net 47.1 25.5
Selling and marketing 45.6 48.7
General and administrative 23.9 24.3
Amortization of purchased intangibles 6.8 4.1
----- -----
Total operating expenses 123.4 102.6
----- -----
Loss from operations (57.9) (37.7)
Other income, net 1.4 1.8
----- -----
Loss before income taxes (56.5) (35.9)
Provision for income taxes -- --
----- -----
Net loss (56.5)% (35.9)%
===== =====
7
Revenue. Revenue decreased 27% from $17.4 million for the three months
ended April 2, 2000 to $12.6 million for the three months ended April 1, 2001.
The decrease is primarily due to a market slowdown. This decline was partially
offset by increased revenues from both customer support services and our PKI
business. International revenue was 39% and 41% of total revenue for the first
quarter of 2001 and 2000, respectively.
The Company's revenue is derived primarily from sales of its family 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, usually
twelve months. 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.
Gross Profit. Gross profit decreased from $11.3 million for the three
months ended April 2, 2000 to $8.3 million for the three months ended April 1,
2001. The decrease in dollars was primarily a result of the decrease in revenue.
As a percentage of sales, gross profit was approximately 65% and 66% for the
quarters ended April 2, 2000 and April 1, 2001, respectively. The increase in
gross profit as a percentage of revenue was due to margin improvements within
our ATM encryptor business resulting from our recent acquisition of Celotek
Corporation, PKI product margin improvements, and margin improvements within our
customer support and professional service businesses, offset by higher
provisions for inventory reserves due to lower product sales.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel related expenses, depreciation of
development equipment, facilities and supplies. Gross research and development
expenses increased 31% from $4.5 million for the three months ended April 2,
2000 to $5.9 million for the three months ended April 1, 2001. Gross research
and development expenses as a percentage of revenue were 26% for the first
quarter of 2000 and 47% for the first quarter 2001. The dollar increase resulted
from increased spending for development costs of new products, the acquisition
of Celotek ATM development team, offset by reduced spending and related
reimbursements for externally funded contracts. The increase in expense as a
percentage of revenue for the first quarter of 2001 is due to lower revenues for
the period coupled with increased investments in new product development.
From time to time the Company receives engineering funding for development
of projects to apply or enhance the Company's technology to a particular
customer's need. The amounts recognized under these research and development
contracts are offset against research and development expenses. Amounts
recognized under non-recurring engineering contracts totaled $0.1 million for
the first quarter of 2000 and $0.0 million for first quarter of 2001.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel expenses, including sales commissions and bonuses, and expenses for
advertising, public relations, seminars and trade shows. Selling and marketing
expenses decreased 32% from $8.5 million for the three months ended April 2,
2000 to $5.7 million for the three months ended April 1, 2001. Selling and
marketing expenses as a percentage of revenue were 49% and 46% for the first
quarter of 2000 and 2001, respectively. Sales expenses decreased for the first
quarter of 2001 compared to the first quarter of 2000 primarily due to lower
commission spending driven by decreased revenues, lower headcount spending
driven by the reduction in force actions taken during the fourth quarter of
2000, and lower marketing and bonus spending due to the implementation of cost
savings initiatives. Selling and marketing expenses, expressed as a percentage
of revenue, decreased as a result of the above spending reductions which were
greater than the percentage revenue declines for the same period.
8
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs, recruitment expenses, information
systems costs, and audit, legal and other professional service fees. General and
administrative expenses decreased 29% from $4.2 million for the three months
ended April 2, 2000 to $3.0 million for the three months ended April 1, 2001.
General and administrative expenses as a percentage of revenue were 24% for the
first quarter of both 2000 and 2001. The dollar decrease in the first quarter of
2001 versus the first quarter of 2000 was primarily due to lower legal spending,
lower headcount spending driven by the reduction in force actions taken during
the fourth quarter of 2000, and lower bonus spending due to the implementation
of cost savings initiatives. General and Administrative expenses as a percentage
of revenue were flat due proportional decreases in both spending and revenue.
Amortization of Goodwill and Other Intangibles. Amortization relating to
goodwill and other intangibles increased 20% from $0.7 million for the first
three months ended April 2, 2000 to $0.9 million for the three months ended
April 1, 2001. The dollar increase in the first quarter of 2001 versus the first
quarter of 2000 was primarily due to the acquisition of Celotek Corporation in
the third quarter of 2000, offset in part by reduced amortization of intangibles
related to the acquisition of Algorithmic Research, Ltd ("ARL") in September
1997 and continued amortization of the acquisition of S.D.I. in the third
quarter of 1999.
Provision for Income Taxes. No significant provision for or benefit from
income taxes was recognized in the quarter ended April 1, 2001 as the Company
incurred a net operating loss for income tax purposes and the tax benefit
therefrom was offset by an increase in the valuation allowance on the deferred
tax asset.
Other Income (Expense), Net. Other income (expense), net consists primarily
of interest income and interest expense, foreign exchange gains or losses, and
royalty income. Other income, net decreased from $0.3 million for the first
three months of 2000 to $0.2 million for the first three months of 2001,
principally due to interest income on decreased cash and cash equivalents and
reduced royalty and other income.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2001, the Company had cash and cash equivalents of $11.9
million, working capital of $19.7 million and minimal long-term obligations. For
the three months ended April 1, 2001, the Company recorded a net loss of $7.1
million. Net cash used in operating activities for the first three months of
2001 was $3.0 million consisting primarily of the loss from operations partially
offset by a decrease in working capital requirements which included a decrease
in accounts receivable of $2.5 million, a decrease in inventories of $1.1
million, an increase in deferred revenue of $1.9 million, partially offset by a
decrease in accounts payable and accrued liabilities of $2.6 million and an
increase in other assets of $1.0 million. The decrease in accounts receivable
was due to lower than average shipments during the quarter. The decrease in
inventories and the decrease in accounts payable were the result of stricter
purchasing controls. The decrease in accrued liabilities was due principally to
decreased commission, bonus, and legal liabilities. Net cash used in operating
activities for the first three months of 2000 was $8.4 million consisting
primarily of the loss from operations of $6.3 million and an increase in working
capital requirements which included an increase in inventory of $4.1 million, an
increase in accounts receivable of $1.3 million, offset in part by an increase
in accounts payable and accrued liabilities of $1.8 million.
Cash used in investing activities for the three months ended April 1, 2001
and April 2, 2000 was $0.4 million and $1.0 million, respectively, primarily to
fund the acquisition of property, plant and equipment and corporate
acquisitions.
Cash provided by financing activities for the three months ended April 1,
2001 and April 2, 2000 was $0.0 million and $4.1 million, respectively,
resulting from proceeds from the sale of 17,000 shares and 564,000 share of
stock, respectively, pursuant to the exercise of stock options.
The Company is currently engaged in litigation. See Part II, Item 1 "Legal
Proceedings." Management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
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
has renegotiated a $7.5 million revolving line of credit with its bank in order
to obtain more favorable
9
covenants. The renegotiated line of credit will 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. 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.
10
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
We have a history of losses and expect this to continue for the foreseeable
future.
We have incurred significant net losses in the first quarter of 2001 and in
prior years. The Company had an accumulated deficit of $106 million as of April
1, 2001. 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. Our restructuring
plans may not succeed, or may not be sufficient to allow us to achieve
break-even.
The Company believes that its principal sources of liquidity, which include
cash and cash equivalents of $11.9 million as of April 1, 2001 and prospective
borrowing via the Company's working capital loan, will satisfy the Company's
current anticipated working capital and capital expenditure requirements through
at least the next twelve months. In addition, the Company has a credit facility
that provides for up to $7.5 million of borrowings, dependent upon the amount of
eligible domestic accounts receivable, as defined in the agreement. The Company
has renegotiated its credit facility in order to obtain more favorable
covenants. If the Company fails to satisfy these covenants, however, the line of
credit will not be available to fund our operations if it is needed.
During the fourth quarter of 2000 and the first quarter of 2001, 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
for the rest of 2001. However, there can be no assurance that the Company will
be able to continue reducing costs at a pace that reflects reductions in
revenues, and 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 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 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;
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;
11
o failure to grow our customer base in accordance with market
expectations;
o disruption in our operations caused by reductions in our 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.
Pending Litigation
See Part II, Item 1. "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 affected. 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
12
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;
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 Thales e-Security, Inc (formerly 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.
13
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.
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 Mr. 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 Mr. 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 Sales, 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 and Vice
President of Sales, it is uncertain whether and how quickly we will fill the
remaining executive 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 up to
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 in
our field is quite limited, and we compete with other companies, academic
institutions, government entities and other organizations for skilled and
experienced engineers. 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, the recent
reduction in our workforce, and fluctuations in our stock price, may 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.
14
Any inability to protect our intellectual property could reduce our
competitive advantage, divert management attention, 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 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
15
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.
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
16
customers with our own management solution. We have no guarantee that this
supplier will be willing or able to continue to supply products in a timely way.
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.
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 retroactively revise our estimate
of the value of IPR&D, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of April 1, 2001, we held a total of $11.9 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
17
increase immediately and uniformly by 10 percent from levels as of April 1,
2001, 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 April 1, 2001, we had no fixed rate
obligations except for capitalized leases and long-term debt of approximately
$330,000. As such, the fair value of our fixed rate obligations is not subject
to a material adverse impact from changes in interest rates.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 1998, Cylink filed amended Forms 10-Q for the first and second quarters
of 1998 and an amended Form 10K for 1997, reflecting restated financial results
for those quarters, and for the fourth quarter of 1997. 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 allege, among other things, that
Cylink's previously issued financial statements 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 allege violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended, and SEC Rule 10b-5
promulgated thereunder, 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 recently filed an amended consolidated complaint and
our motion to dismiss the complaint is pending before the Court.
Cylink believes it has meritorious defenses to these actions 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 were to be
unfavorable, Cylink's business, financial condition, cash flows and results of
operations could be materially adversely affected.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise, for the quarter ended April 1, 2001.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Index:
None
(b) Reports on Form 8-K:
None
19
SIGNATURE
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.
Date: May 15, 2001 CYLINK CORPORATION
By: /s/ R. Christopher Chillingworth
--------------------------------
R. Christopher Chillingworth
Vice President of Finance
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
20