Cylink sees "substantial" losses

After swapping chief executives and announcing it would drastically restate earnings for the last two quarters, network security firm Cylink today said it will move more rapidly from its proprietary technologies to Internet standards.

"We have made some recent decisions to narrow our focus a little," said acting CEO William Crowell, a former National Security Agency official who joined the firm in January to direct product development. "We need to have a much stronger position in the IP space."

Crowell replaces president and chief executive Fernand Sarrat, who resigned yesterday. The company said Tom Butler, former vice president of sales and marketing, has resigned effective October 30 to pursue other interests. John Daws, former chief financial officer and vice president of business development, is no longer an employee.

"My relationship with the Cylink team has been rewarding and I look forward to working with them in a consulting capacity," Sarrat said in a statement. "Bill Crowell is an outstanding security expert and executive, and one of the finest people I have ever worked with. I look forward to our continued association."

Sarrat is the apparent victim of a drastic restatement of Cylink's revenues in the first two quarters of 1998 after the company's auditor questioned its revenue-recognition practices.

As a result, Cylink now expects to report substantial operating losses in each of the first three quarters of 1998. The company expects to issue restated results for the first two quarters in about three weeks, when it also will report third-quarter financial results.

The preliminary review indicates an overstatement of first- and second-quarter revenue by nearly 50 percent, about $5.0 million and $6.7 million, respectively, which would result in restated revenue of $10.8 million for the quarter ended March 29 and $11.3 million for the quarter ended June 28.

That will wipe out profits reported in the two earlier quarters. The company had reported first-quarter profits from continuing operations of $1.1 million, or 4 cents per share, on operating income of $1.5 million, and second-quarter net income of $1.7 million, or 6 cents per share, on operating income of $2.1 million.

Expected revenue for the third quarter, ended September 27, is about $12.1 million.

Cylink does not expect a material impact on reported 1997 results. Shares fell 0.5938 today to close at 3.6562.

Crowell emphasized that the restatements will not affect Cylink's cash position, and gave no indications of layoffs among the company's 320 employees.

Cylink's chief business is in link encryption hardware, high-speed devices sold primarily to financial institutions around the world for sending financial data over private networks. In September 1997, it purchased an Israeli company, Algorithmic Research, which is in the smart card business. >

Cylink also has a major contract with the U.S. Postal Service to set up a certificate authority to issue electronic IDs. Crowell indicated the company hopes to move further into the certificate authority or public key infrastructure market.

"We have put ourselves on a course of fundamental growth, but we are not going to come out of the starting gate creating expectations that can't be met," Crowell said.

Reuters contributed to this report.