SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
CYLINK CORPORATION
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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<PAGE>
CYLINK CORPORATION
Notice of Annual Meeting of Shareholders
To Be Held May 22, 1998
To the Shareholders of Cylink Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Cylink
Corporation, a California corporation (the "Company"), will be held at the
Sheraton Four Points Hotel, 1100 N. Mathilda Avenue, Sunnyvale, CA 94089, at
3:00 p.m., local time, on May 22, 1998, for the following purposes:
1. ELECTION OF DIRECTORS. To elect three directors for a term ending in
1999, three directors for a term ending in 2000, and three directors for a
term ending in 2001.
2. APPROVAL AND RATIFICATION OF AMENDMENTS TO THE CYLINK CORPORATION
1994 FLEXIBLE STOCK INCENTIVE PLAN. To ratify and approve amendments to the
Cylink Corporation 1994 Flexible Stock Incentive Plan, as amended (the
"1994 Plan") to (i) increase the number of shares of Common Stock reserved
for issuance thereunder by 2,100,000 shares and (ii) provide that as of the
first business day of each calendar year beginning with January 1, 1999,
the maximum aggregate number of shares of Common Stock reserved for
issuance under the 1994 Plan will be increased, in the discretion of the
Board of Directors, by up to 4% of the number of shares outstanding as of
December 31 of the immediately preceding calendar year.
3. RATIFICATION AND APPROVAL OF THE APPOINTMENT OF INDEPENDENT AUDITORS.
To ratify and approve the appointment of Price Waterhouse LLP as the
independent auditors for the Company for the fiscal year ending December
31, 1998.
4. OTHER BUSINESS. To transact such other business as may properly come
before the Annual Meeting of Shareholders and any adjournment or
postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement which is attached hereto and made a part hereof.
The Board of Directors has fixed the close of business on April 1, 1998 as
the record date for determining the shareholders entitled to notice of and to
vote at the 1998 Annual Meeting of Shareholders and any adjournment or
postponement thereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING OF SHAREHOLDERS IN
PERSON, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE PROVIDED TO ENSURE YOUR
REPRESENTATION AND THE PRESENCE OF A QUORUM AT THE ANNUAL MEETING. IF YOU SEND
IN YOUR PROXY CARD AND THEN DECIDE TO ATTEND THE ANNUAL MEETING TO VOTE YOUR
SHARES IN PERSON, YOU MAY STILL DO SO. YOUR PROXY IS REVOCABLE IN ACCORDANCE
WITH THE PROCEDURES SET FORTH IN THE PROXY STATEMENT.
Order of the Board of Directors,
/s/ Fernand B. Sarrat
Fernand B. Sarrat
President and Chief Executive Officer
Sunnyvale, California
April 23, 1998
<PAGE>
Mailed to Shareholders on or about April 23, 1998
CYLINK CORPORATION
910 Hermosa Court
Sunnyvale, California 94086
PROXY STATEMENT
General Information
This Proxy Statement is furnished to the shareholders of Cylink
Corporation, a California corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company (the "Board" or "Board of
Directors") of proxies in the accompanying form for use in voting at the 1998
Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held
on May 22, 1998, at the Sheraton Four Points Hotel, 1100 N. Mathilda Avenue,
Sunnyvale, CA 94089, at 3:00 p.m., local time, and any adjournment or
postponement thereof. The shares represented by the proxies received, properly
marked, dated, executed and not revoked will be voted at the Annual Meeting.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is exercised by delivering to the Company (to
the attention of Robert B. Fougner, Esq., the Company's Secretary) a written
notice of revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person.
Solicitation and Voting Procedures
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing and
mailing proxy materials for the Annual Meeting and reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation
personally, by telephone or by facsimile through its officers, directors and
regular employees, none of whom will receive additional compensation for
assisting with such solicitation.
The close of business on April 1, 1998 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of
the Company entitled to notice of and to vote at the Annual Meeting. As of the
close of business on the Record Date, the Company had approximately 28,852,942
shares of Common Stock outstanding and entitled to vote. Each outstanding share
of Common Stock on the Record Date is entitled to one vote on all matters.
In the election of directors, the three candidates in each class receiving
the highest number of affirmative votes will be elected as directors. Proposals
2 and 3 each require for approval (i) the affirmative vote of a majority of the
shares "represented and voting" and (ii) the affirmative vote of a majority of
the required quorum. The required quorum for the transaction of business at the
Annual meeting is a majority of the shares of Common Stock issued and
outstanding on the Record Date (the "Quorum"). Shares that are voted "FOR",
"AGAINST" or "ABSTAIN" in a matter are treated as being present at the meeting
for purposes of establishing the Quorum, but only shares voted "FOR" or
"AGAINST" are treated as shares "represented and voting" at the Annual Meeting
(the "Votes Cast") with respect to such matter. Accordingly, abstentions and
broker non-votes will be counted for purposes of determining the presence or
absence of the Quorum for the transaction of business, but will not be counted
for purposes of determining the number of Votes Cast with respect to a
proposal.
1
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Upon the closing of the Company's initial public offering of its Common
Stock in February, 1996, the Company's Articles of Incorporation were amended
to provide that, as soon as legally permissible, the Board of Directors will be
divided into three classes of Directors with each class serving a staggered
three-year term. Consistent with California law, nine Directors are to be
elected at the Annual Meeting: three Directors will be elected to a three year
term expiring in 2001 (class 3 Directors), three Directors will be elected to a
two year term expiring in 2000 (class 2 Directors), and three Directors will be
elected to a one year term expiring in 1999 (class 1 Directors). The Board of
Directors has nominated the nine persons named below to serve as Directors
until the term of each Director class has expired and their respective
successors are elected. Each of the nominees has consented, if elected as a
Director of the Company, to serve until his term expires. In the event that any
nominee of the Company is unable or declines to serve as a Director at the time
of the Annual Meeting, the proxies will be voted for any nominee who shall be
designated by the present Board of Directors to fill the vacancy. In the event
that additional persons are nominated for election as Directors, the proxy
holders intend to vote all proxies received by them in such a manner as will
assure the election of as many of the nominees listed below as possible, and,
in such event, the specific nominees to be voted for will be determined by the
proxy holders. The Board has no reason to believe that the persons named below
will be unable or unwilling to serve as a Director, if elected. Each of the
three nominees for Director in each class who receives the greatest number of
votes will be elected.
Dr. Jimmy Omura, a Director since 1984, intends to resign from the Board
following its next scheduled meeting on April 28, 1998 and will not seek
re-election. Mr. Yossi Tulpan of Algorithmic Research, Ltd. is being nominated
to the seat held by Dr. Omura.
<TABLE>
Set forth below are the names, ages and certain biographical information
relating to the Director nominees.
<CAPTION>
Director Term
Name of Nominee Class Age Position with Company Since Expires
- ----------------------------- ------- ----- ------------------------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Leo A. Guthart(2)(3) ........ 3 60 Chairman of the Board 1984 2001
William J. Perry(4) ......... 3 70 Director 1997 2001
James H. Simons(2)(3) ....... 3 59 Director 1984 2001
William W. Harris(1)(4) ..... 2 58 Director 1995 2000
Howard L. Morgan(1)(4) ...... 2 52 Director 1995 2000
Fernand B. Sarrat(3) ........ 2 47 President, Chief Executive Officer, 1996 2000
Director
Elwyn Berlekamp(1) .......... 1 57 Director 1995 1999
King W.W. Harris(2) ......... 1 54 Director 1995 1999
Yossi Tulpan ................ 1 41 General Manager, -- 1999
Algorithmic Research, Ltd.
<FN>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Executive Committee
(4) Member of Nominating Committee
</FN>
</TABLE>
Dr. Guthart has served as a Director since the Company's inception in
1984. Since 1990, he has served as the Vice Chairman of Pittway Corporation and
as the Chairman of the Ademco division of Pittway Corporation (a principal
shareholder of the Company). Dr. Guthart received an A.B. in Physics from
Harvard College and an M.B.A. and D.B.A. in Finance from Harvard Business
School. Dr. Guthart also serves as a Director of Pittway Corporation and
AptarGroup, Inc. and is a Trustee of the Acorn Investment Trust.
Dr. William J. Perry became a Director of the Company in May 1997. Dr.
Perry was the 19th Secretary of Defense for the United States of America,
serving from February 1994 to January 1997. He
2
<PAGE>
also served as the Deputy Secretary of Defense from 1993 until 1994 and Under
Secretary of Defense for Research and Engineering from 1977 until 1981. Dr.
Perry received both a B.S. and M.S. from Stanford University and a Ph.D. from
Penn State, all in mathematics. He is a member of the National Academy of
Engineering and a fellow of the American Academy of Arts and Sciences. He is
currently the Michael and Barbara Berberian Professor at Stanford University,
with a joint appointment in the Department of Engineering-Economic
Systems/Operations Research and the Institute for International Studies. He
serves on the boards of United Technologies, Hambrecht & Quist, the Boeing
Company, and Yurie Systems, Inc.
Dr. Simons became a Director of the Company in 1984. Since 1982, he has
served as the President and Chairman of Renaissance Technologies Corp. Dr.
Simons received a B.S. in Mathematics from the Massachusetts Institute of
Technology and a Ph.D. in Mathematics from the University of California,
Berkeley. Dr. Simons also serves as a Director on the Board of Franklin
Electronic Publishers, Inc., Numar Corp., Segue Software and Kentec Information
Systems.
Dr. William W. Harris became a Director of the Company in December 1995.
Dr. Harris has been a private investor and the Treasurer of KidsPac, a
political action committee for more than the past five years. He received a
B.A. in Psychology from Wesleyan University and a Ph.D. in Urban Studies from
the Massachusetts Institute of Technology. Dr. Harris also serves as a Director
of Pittway Corporation (a principal shareholder of the Company) and AptarGroup,
Inc.
Dr. Morgan served as a Director from 1985 to 1990 and became a Director
again in October 1995. He has served since June 1989 as the President of
ArcaGroup, Inc. a consulting and investment management company. Dr. Morgan
received a B.S. in Physics from City College of New York and a Ph.D in
Operations Research from Cornell University. Dr. Morgan also serves as a
Director of Franklin Electronic Publishers, Inc., Infonautics, Inc., Kentek
Information Systems, Inc., MetaCreations Corporation, Neoware Systems, Inc.,
Quarterdeck Corporation, Segue Software, Inc. and Unitronix Corporation.
Mr. Sarrat became the President, Chief Executive Officer and a Director of
the Company in November, 1996. Prior to joining the Company, Mr. Sarrat was
with IBM Corporation for over 20 years, most recently as General Manager of
Networked Computing Marketing and Services, and held such other positions as
General Manager of the Networked Application Services Division, the Assistant
General Manager of Marketing and Business Development, and General Manager of
Marketing and Services in the Midwest. Mr. Sarrat received a B.A. in economics
and psychology from Stanford University in 1972 and an M.B.A. from the
University of Pennsylvania, Wharton, in marketing in 1974.
Dr. Berlekamp co-founded the Company and served as a Director from 1985 to
1990. He became a Director again in October 1995. Since 1971, Dr. Berlekamp has
been a Professor of Mathematics at the University of California, Berkeley and a
visiting professor of Electrical Engineering and Computer Science at the
Massachusetts Institute of Technology. Dr. Berlekamp received a B.S., M.S. and
Ph.D. in Electrical Engineering from the Massachusetts Institute of Technology.
Mr. King W.W. Harris became a Director of the Company in December 1995. He
has been President of Pittway Corporation (a principal shareholder of the
Company) since 1984 and Chief Executive Officer of Pittway Corporation since
1987. Mr. Harris received a B.A. in Economics from Harvard College and an
M.B.A. from Harvard Business School. Mr. Harris also serves as a director of
Aptar Group, Inc.
Mr. Yossi Tulpan is a founder and the Managing Director of Algorithmic
Research, Ltd. Prior to founding Algorithmic Research, Ltd., Mr. Tulpan spent
five years in the Israeli Air Force as a system programmer. He holds a B.S. in
mathematics from Tel Aviv University and an M.S. in Computer Science from the
Weizmann Institute of Science.
THE BOARD RECOMMENDS A VOTE FOR
THE ELECTION OF THE NOMINEES NAMED ABOVE
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or executive
officers of the Company, except that Dr. William W. Harris and Mr. King W.W.
Harris are first cousins.
3
<PAGE>
Meetings and Committees of the Board of Directors
During the fiscal year ended December 31, 1997, the Board met four times
in person and held two telephonic meetings. Each Director attended no fewer
than 75% of all the meetings held by the Board, while he was a member, and all
committees of which he was a member.
The Board has four committees, the Audit Committee, the Compensation
Committee, the Executive Committee and the Nominating Committee.
The Audit Committee, which held two meetings in the fiscal year ended
December 31, 1997, consisted of Drs. Harris, Morgan and Berlekamp. The Audit
Committee reviews and supervises the Company's financial controls, including
selection of the Company's auditors, meeting with the officers of the Company
regarding the Company's financial controls, acting upon recommendations of
auditors and taking such further action as the Audit Committee deems necessary
to complete an audit of the books and accounts of the Company, as well as other
matters which may come before it or as directed by the Board.
The Compensation Committee, which held two meetings in the fiscal year
ended December 31, 1997, consists of Drs. Simons and Guthart, and Mr. King W.W.
Harris. The Compensation Committee reviews and approves the compensation and
benefits for the Company's chief executive officer, supervises administration
of the Company's 1994 Plan and performs such other duties as may from time to
time be determined by the Board.
The Nominating Committee, which held one meeting in 1997, consists of Drs.
Harris, Morgan and Perry. The Nominating Committee is responsible for
soliciting recommendations for candidates for the Board of Directors,
developing and reviewing background information for candidates and making
recommendations to the Board with respect to candidates. Any shareholder
wishing to propose a nominee should submit a recommendation in writing to the
Company's Secretary, Robert B. Fougner, Esq., indicating the nominee's
qualifications and other relevant biographical information.
Compensation of Directors
Upon becoming a member of the Board, directors who are not affiliates of
the Company ("Non-Employee Directors") receive options to purchase 2,000 shares
of Common Stock, and thereafter receive an annual option grant (the "Annual
Option Grants") to purchase 2,000 shares of Common Stock. However, in
consideration of a grant of options to purchase 8,000 shares of Common Stock,
each Non-Employee Director in office on December 13, 1995, agreed to forgo any
Annual Option Grants until after the annual shareholders' meeting in the year
2000. Non-Employee Directors who are elected between annual meetings will
receive a ratable Annual Option Grant. Non-Employee Directors are also eligible
to receive discretionary awards under the 1994 Plan. The Company's Non-Employee
Directors receive a $1,000 fee for each Board meeting attended and $1,000 for
each committee meeting attended that is not held in conjunction with a Board
meeting. All Non-Employee Directors are reimbursed for expenses incurred in
connection with attending meetings of the Board. Employee directors of the
Company do not receive compensation for their services as directors.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1998, for
(i) each person who is known by the Company to beneficially own more than 5% of
the Company's Common Stock, (ii) each of the Company's directors and nominees,
(iii) each of the officers appearing in the Summary Compensation Table below,
and (iv) all directors and executive officers as a group.
4
<PAGE>
<CAPTION>
Shares Beneficially
Owned(1)
Directors, Nominees For Director, --------------------------
Executive Officers and 5% Shareholders Number Percent(2)
- -------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Leo A. Guthart(3) ........................................................ 8,940,650 31.0%
King W.W. Harris(4) ...................................................... 8,610,650 29.8%
William W. Harris(5) ..................................................... 8,610,650 29.8%
Pittway Corporation(6) ................................................... 8,606,085 29.8%
Kopp Investment Advisors, Inc.(7) ........................................ 4,471,570 15.5%
James H. Simons(8) ....................................................... 1,753,170 6.1%
Bermuda Trust Company, as Trustee of the Lord Jim Trust(9) ............... 1,748,605 6.1%
Yossi Tulpan ............................................................. 745,969 2.6%
Jimmy K. Omura(10) ....................................................... 745,863 2.6%
Fernand B. Sarrat(11) .................................................... 283,333 1.0%
Elwyn Berlekamp(12) ...................................................... 282,429 1.0%
Peter J. Slocum(13) ...................................................... 62,500 *
Howard L. Morgan(14) ..................................................... 56,565 *
John H. Daws(15) ......................................................... 53,750 *
John V. Kalb(16) ......................................................... 53,333 *
Thomas L. Butler(17) ..................................................... 40,000 *
William J. Perry(18) ..................................................... 11,456 *
All executive officers and Directors as a group (16 persons)(19) ......... 12,457,316 43.2%
<FN>
- ------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of February 28, 1998
are deemed outstanding. To the Company's knowledge, except as set forth in
the footnotes to this table and subject to applicable community property
laws, each person named in the table has sole voting and investment power
with respect to the shares set forth opposite such person's name.
(2) Percentage beneficially owned is based on 28,852,942 shares outstanding as
of February 28, 1998.
(3) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Dr. Guthart is a Vice Chairman. Dr. Guthart disclaims beneficial
ownership of such shares. Also includes 34,565 shares subject to options
exercisable within 60 days of February 28, 1998.
(4) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Mr. Harris is the President and Chief Executive Officer. Mr. Harris
disclaims beneficial ownership of such shares. Also includes 4,565 shares
subject to options exercisable within 60 days of February 28, 1998.
(5) Includes 8,606,085 shares beneficially owned by Pittway Corporation, of
which Dr. Harris is a Director. Dr. Harris disclaims beneficial ownership
of such shares. Also includes 4,565 shares subject to options exercisable
within 60 days of February 28, 1998.
(6) The address of Pittway Corporation is 200 South Wacker Drive, Suite E,
Chicago, IL 60606-5802.
(7) Based on a Schedule 13GA filed February 9, 1998, Kopp Investment Advisors,
Inc. has sole dispositive power with respect to 400,000 shares of the
Company's Common Stock, shared dispositive power with respect to 4,071,570
shares of the Company's Common Stock, and sole voting power with respect to
400,000 shares of the Company's Common Stock. The address of Kopp
Investment Advisors, Inc. is 6600 France Avenue So., Suite 672, Edina, MN
55435.
(8) Includes (a) 1,748,605 shares owned by Bermuda Trust Company, as Trustee of
the Lord Jim Trust (a trust of which Dr. Simons and the members of his
family are the beneficiaries), and (b) 4,565 shares subject to options
exercisable within 60 days of February 28, 1998.
(Footnotes continued on following page)
5
<PAGE>
(Footnotes continued from previous page)
(9) Bermuda Trust Company, as Trustee of the Lord Jim Trust, holds 1,748,605
shares of the Company's Common Stock in a trust of which Dr. James H.
Simons, a Director of the Company, and members of his immediate family are
the beneficiaries. The address of Bermuda Trust Company is Murdoch & Co.,
c/o Bermuda Trust Company Limited, Attn.: Susan Gibbons, Compass Point, 9
Bermudiana Road, Hamilton, HM11, Bermuda.
(10) Includes 68,670 shares subject to options exercisable within 60 days of
February 28, 1998.
(11) Includes 283,333 shares subject to options exercisable within 60 days of
February 28, 1998.
(12) Includes 4,565 shares subject to options exercisable within 60 days of
February 28, 1998.
(13) Includes 62,500 shares subject to options exercisable within 60 days of
February 28, 1998
(14) Includes 4,565 shares subject to options exercisable within 60 days of
February 28, 1998.
(15) Includes 53,750 shares subject to options exercisable within 60 days of
February 28, 1998
(16) Includes 53,333 shares subject to options exercisable within 60 days of
February 28, 1998.
(17) Includes 40,000 shares subject to options exercisable within 60 days of
February 28, 1998.
(18) Includes 11,456 shares subject to options exercisable within 60 days of
February 28, 1998.
(19) Includes 10,354,085 shares indirectly held by Directors of the Company and
766,174 shares subject to options exercisable within 60 days of February
28, 1998. Drs. Guthart, Harris and Mr. Harris disclaim beneficial ownership
of the shares owned by Pittway Corporation.
</FN>
</TABLE>
PROPOSAL NO. 2
APPROVAL AND RATIFICATION OF AMENDMENTS TO THE CYLINK CORPORATION
1994 FLEXIBLE STOCK INCENTIVE PLAN, AS AMENDED
General
The Company's shareholders are being asked to approve amendments to the
Company's 1994 Plan. The proposed amendments to the 1994 Plan will (i) increase
the number of shares of Common Stock reserved for issuance thereunder by
2,100,000 shares, and (ii) provide that as of the first business day of each
calendar year beginning with January 1, 1999, the maximum aggregate number of
shares of Common Stock reserved for issuance under the Plan will be increased,
in the discretion of the Board, by up to 4% of the number of shares outstanding
as of December 31 of the immediately preceding calendar year.
The amendments to the 1994 Plan increasing the number of shares reserved
for issuance thereunder will enable the Company to grant awards as needed to
attract and retain employees. The 1994 Plan is intended to enable the Company
to enhance its ability to provide key employees with meaningful awards and
incentives commensurate with their contributions and competitive with those
offered by other employers, and to increase shareholder value by further
aligning the interests of key employees with the interests of the Company's
shareholders. The Board of Directors believes that the Company's long term
success is dependent upon the ability of the Company to attract and retain
superior individuals who, by virtue of their ability and qualifications, make
important contributions to the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF THE AMENDMENTS TO THE 1994 PLAN
The following summary of the 1994 Plan, including the proposed amendments,
is subject in its entirety to the specific language of the 1994 Plan, a copy of
which is available to any shareholder upon request.
General Description
The 1994 Plan was approved by the Board of Directors and shareholders in
February 1994. In January 1995, the Board of Directors and the shareholders
approved an amendment to the 1994 Plan to increase the number of shares
available for grant thereunder from 1,250,000 to 2,750,000. In November 1996,
the Board of Directors and the shareholders approved an amendment to the 1994
Plan to increase the number of shares available for grant from 2,750,000 to
3,950,000. In May 1997 the shareholders
6
<PAGE>
approved an amendment to the 1994 Plan to increase the number of shares
available for grant from 3,950,000 to 5,950,000. In January 1998, the Board of
Directors approved an amendment to the 1994 Plan, subject to shareholder
approval, to increase the number of shares available for grant from 5,950,000
to 8,050,000.
The 1994 Plan permits the grant of "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") only to employees of the Company or any parent or subsidiary
corporation of the Company. Awards other than incentive stock options may be
granted to employees, directors and consultants. As of April 1, 1998, the
number of employees, directors and consultants eligible to receive grants under
the 1994 Plan was approximately 346 persons.
The 1994 Plan provides for the grant of (i) shares, (ii) an option, a
stock appreciation right ("SARs") or similar right with an exercise or
conversion privilege at a fixed or variable price related to the Common Stock
and/or the passage of time, the occurrence of one or more events, or the
satisfaction of performance criteria or other conditions, or (iii) any other
security with the value derived from the value of the Common Stock of the
Company or other securities issued by a related entity (collectively, the
"Awards"). Such Awards include, without limitation, options, SARs, sales or
bonuses of restricted stock, dividend equivalent rights ("DERs"), performance
units ("Performance Units") or performance shares ("Performance Shares"). Under
the proposed amendments to the 1994 Plan, the maximum aggregate number of
shares available for grant as stock bonuses will be 200,000 shares.
Amendment to Increase Overall Limit. Under the 1994 Plan, the number of
shares available for grant on December 31, 1997, was zero. In anticipation of
shareholder approval of this Proposal No. 2 to increase the maximum number of
shares available for grant from 5,950,000 to 8,050,000, options to purchase an
additional 318,653 shares have been set aside for grants to existing
non-officer employees of the Company. If Proposal No. 2 is not approved by the
shareholders, these additional options will not be granted.
Amendment to Authorize Annual Increase. The proposed amendments to the
1994 Plan provide that as of the first business day of each calendar year
beginning with January 1, 1999, the maximum aggregate number of shares of
Common Stock reserved for issuance under the 1994 Plan will be increased, in
the discretion of the Board, by an amount which is no greater than 4% of the
number of shares outstanding as of December 31 of the immediately preceding
calendar year. The Board of Directors recommends this provision to provide a
means by which the Compensation Committee can plan on an annual basis for an
allocation of awards sufficient to meet the Company's anticipated requirements
for attracting and retaining employees. The amount of the proposed annual
increase was based on surveys by compensation consultants, Watson Wyatt and
Radford Associates, on the compensation practices of other organizations which
compete with the Company for the hiring and retention of its employees. The
Compensation Committee also has imposed a limitation of 200,000 shares on the
aggregate amount of stock bonuses which may be granted under the 1994 Plan.
Discretionary Grants to Non-Employee Directors. The 1994 Plan is
administered, with respect to grants to directors, officers, consultants, and
other employees, by the Administrator of the 1994 Plan, which comprises one or
more members of the Compensation Committee of the Board, and its designees. The
Committee is constituted in such a manner as to satisfy applicable laws,
including Rule 16b-3. Consistent with the amendments to Rule 16b-3, the 1994
Plan allows for discretionary grants to Non-Employee Directors.
Individual Limit. The maximum number of shares with respect to which
options and SARs may be granted to an employee of the Company during the term
of the 1994 Plan, as amended, is 1,000,000 shares per individual.
The Board may at any time amend, suspend or terminate the 1994 Plan. To
the extent necessary to comply with applicable provisions of federal securities
laws, state corporate and securities laws, the Code, the rules of any
applicable stock exchange or national market system, and the rules of any
foreign jurisdiction applicable to Awards granted to residents therein, the
Company will obtain shareholder approval of any amendment to the 1994 Plan in
such a manner and to such a degree as required. Under
7
<PAGE>
the 1994 Plan, the Board must obtain shareholder approval to (i) materially
increase the benefits accruing to participants under the 1994 Plan; (ii)
materially increase the number of shares available under the 1994 Plan; or
(iii) materially modify the eligibility requirements for participation in the
1994 Plan or the class of employees eligible to receive Awards under the 1994
Plan. The Compensation Committee of the Board or the Administrator alone can
affect other changes to the 1994 Plan without shareholder approval.
Other Terms. Stock options granted under the 1994 Plan may be either
incentive stock options under the provisions of Section 422 of the Code, or
non-qualified stock options. Incentive stock options may be granted only to
employees of the Company or any parent or subsidiary corporation of the
Company. Awards other than incentive stock options may be granted to employees,
directors and consultants. Under the 1994 Plan, Awards may be granted to such
employees, directors or consultants who are residing in foreign jurisdictions
as the Administrator may determine from time to time.
The 1994 Plan authorizes the Administrator to select the employees,
directors and consultants of the Company to whom Awards may be granted and to
determine the terms and conditions of any Award; however the term of an
incentive stock option may not be for more than 10 years (or 5 years in the
case of incentive stock options granted to any grantee who owns stock
representing more than 10% of the combined voting power of the Company or any
parent or subsidiary corporation of the Company). The 1994 Plan authorizes the
Administrator to grant Awards at an exercise price determined by the
Administrator. In the case of incentive stock options, such price cannot be
less than 100% (or 110%, in the case of incentive stock options granted to any
grantee who owns stock representing more than 10% of the combined voting power
of the Company or any parent or subsidiary corporation of the Company) of the
fair market value of the Common Stock on the date the option is granted. The
exercise price is generally payable in cash or, in certain circumstances, with
a promissory note, with such documentation as the Administrator and the broker,
if applicable, shall require to effect an exercise of an Award and delivery to
the Company of the sale or loan proceeds required to pay the exercise price, or
with shares of Common Stock. The aggregate fair market value of the Common
Stock with respect to any incentive stock options that are exercisable for the
first time by an eligible employee in any calendar year may not exceed
$100,000.
The Awards may be granted subject to vesting schedules and restrictions on
transfer and repurchase or forfeiture rights in favor of the Company as
specified in the agreements to be issued under the 1994 Plan. The Administrator
has the authority to accelerate the vesting schedule of Awards so that they
become fully vested, exercisable, and released from any restrictions on
transfer and repurchase or forfeiture rights in the event of a Corporate
Transaction, a Change in Control or a Subsidiary Disposition, each as defined
in the 1994 Plan. Effective upon the consummation of the Corporate Transaction,
all outstanding Awards under the Plan will terminate unless assumed by the
successor company or its parent. In the event of a Change in Control or a
Subsidiary Disposition, each Award shall remain exercisable until the
expiration or sooner termination of the Award term. Such accelerated vesting
and release from restrictions on transfer and repurchase or forfeiture rights
is automatic and not subject to Administrator discretion in the case of options
and restricted stock issued to Non-Employee Directors under the formula award
provisions of the 1994 Plan. The 1994 Plan also permits the Administrator to
include a provision whereby the grantee may elect at any time while an
employee, director or consultant to exercise any part or all of the Award prior
to full vesting of the Award.
Under the 1994 Plan, incentive stock options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of the grantee only by the grantee. However, the 1994 Plan permits the
designation of beneficiaries by holders of incentive stock options. Other
Awards shall be transferable to the extent provided in the Award agreement.
Under the 1994 Plan, the Administrator may establish one or more programs
under the 1994 Plan to permit selected grantees the opportunity to elect to
defer receipt of consideration payable under an Award. The Administrator also
may establish under the 1994 Plan separate programs for the grant of particular
forms of Awards to one or more classes of grantees.
8
<PAGE>
Certain Federal Tax Consequences
The following summarizes only the federal income tax consequences of stock
options and shares of restricted stock granted under the 1994 Plan. State and
local tax consequences may differ.
The grant of a non-qualified stock option under the 1994 Plan will not
result in any federal income tax consequences to the optionee or to the
Company. Upon exercise of a non-qualified stock option, the optionee is subject
to income taxes at the rate applicable to ordinary compensation income on the
difference between the option exercise price and the fair market value of the
shares on the date of exercise. This income is subject to withholding for
federal income and employment tax purposes. The Company is entitled to an
income tax deduction in the amount of the income recognized by the optionee.
Any gain or loss on the optionee's subsequent disposition of the shares of
Common Stock will receive long or short-term capital gain or loss treatment,
depending on whether the shares are held for more than one year following
exercise. The Company does not receive a tax deduction for any such gain.
Capital gains currently are taxed at the same rates as ordinary income, except
that the maximum marginal rate at which ordinary income is taxed to individuals
is currently 39.6% and the maximum rate at which long-term capital gains are
taxed is 28%. The maximum rate at which long-term capital gains are taxed falls
to 20% for most types of property held for more than eighteen months.
The grant of an incentive stock option under the 1994 Plan will not result
in any federal income tax consequences to the optionee or to the Company. An
optionee recognizes no federal taxable income upon exercising an incentive stock
option ("ISO") (subject to the alternative minimum tax rules discussed below),
and the Company receives no deduction at the time of exercise. In the event of a
disposition of stock acquired upon exercise of an ISO, the tax consequences
depend upon how long the optionee has held the shares of Common Stock. If the
optionee does not dispose of the shares within two years after the ISO was
granted, nor within one year after the ISO was exercised and shares were
purchased, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the shares and the exercise price.
The Company is not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding periods,
he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on the disposition and the exercise price, or (ii) the difference between the
fair market value of the stock on the exercise date and the exercise price. Any
gain in excess of the amount taxed as ordinary income will be treated as a long
or short-term capital gain, depending on whether the stock was held for more
than one year. The Company, in the year of the disqualifying disposition, is
entitled to a deduction equal to the amount of ordinary income recognized by the
optionee.
The "spread" under an ISO--i.e., the difference between the fair market
value of the shares at exercise and the exercise price--is classified as an item
of adjustment in the year of exercise for purposes of the alternative minimum
tax.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock
and the fair market value of the shares on the date that the restrictions
lapse. This income is subject to withholding for federal income and employment
tax purposes. The Company is entitled to an income tax deduction in the amount
of the income recognized by the recipient. Any gain or loss on the recipient's
subsequent disposition of the shares will receive long or short-term capital
gain or loss treatment depending on whether the shares are held for more than
one year and depending on how long the stock has been held since the
restrictions lapsed. The Company does not receive a tax deduction for any such
gain. Recipients of restricted stock may make an election under Internal
Revenue Code Section 83(b) ("Section 83(b) Election") to recognize as ordinary
compensation income in the year that such restricted stock is granted the
amount equal to the spread between the amount paid for such stock and the fair
market value on date of the issuance of the stock. If such an election is made,
the recipient recognizes no further amounts of compensation income upon the
lapse of any restrictions and any gain or loss on subsequent disposition will
be long or short-term capital gain. The Section 83(b) Election must be made
within thirty days from the time the restricted stock is issued to the
recipient.
9
<PAGE>
Amended Plan Benefits
In anticipation of shareholder approval of this Proposal No. 2 to increase
the maximum number of shares available for grant from 5,950,000 to 8,050,000,
options to purchase an additional 318,653 shares have been set aside for grants
to the group composed of employees that are not executive officers. Except as
stated above, no other Director, Named Executive Officer, officer or employee of
the Company has been granted or otherwise set aside options under the 1994 Plan
subject to shareholder approval of the amendments to the 1994 Plan. The benefits
to be received pursuant to the 1994 Plan by the Company's Directors, officers
and employees are not determinable at this time. If Proposal No. 2 is not
approved by the shareholders, these additional options will not be granted.
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Price Waterhouse LLP has served as the Company's independent auditors
since 1994 and has been appointed by the Board to continue as the Company's
independent auditors for the Company's fiscal year ending December 31, 1998. In
the event that ratification of this selection of auditors is not approved by a
majority of the shares of Common Stock voting at the Annual Meeting in person
or by proxy, management will review its future selection of auditors. A
representative of Price Waterhouse LLP is expected to be present at the Annual
Meeting. The representative will have an opportunity to make a statement and to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1998.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
<TABLE>
The following table sets forth certain information concerning compensation
of (i) the Company's Chief Executive Officer, and (ii) the four other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers"):
<CAPTION>
Long -Term
Annual Compensation Compensation
------------------------------------ -------------
Securities
Underlying All Other
Name and Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation($)
- --------------------------------- ------ ----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Fernand B. Sarrat,(2) ........... 1997 $300,000 $100,000 -- $ 7,308(3)
President, Chief Executive 1996 32,308 500 1,000,000
Officer and Director
Thomas L. Butler(4), ............ 1997 146,154 155,000 200,000 --
Senior Vice President, Sales and
Marketing
John H. Daws,(5) ................ 1997 155,001 70,000 75,000 --
Vice President and Chief 1996 143,462 25,500 25,000
Financial Officer 1995 39,500 -- 50,000
Peter J. Slocum(6), ............. 1997 163,154 82,231 250,000 --
Vice President,
Engineering
John V. Kalb(7), ................ 1997 159,479 70,000 -- --
Vice President,
Business Development
<FN>
(Footnotes continued on following page)
10
<PAGE>
(Footnotes continued from previous page)
- ------------
(1) Includes bonus amounts earned in fiscal year indicated and paid in the
subsequent fiscal year.
(2) Mr. Sarrat commenced employment with the Company on November 6, 1996. His
annualized salary for 1996 was $300,000.
(3) Constitutes payment of premiums for life insurance.
(4) Mr. Butler commenced employment with the Company on March 31, 1997. His
annualized salary for 1997 was $200,001.
(5) Mr. Daws commenced employment with the Company on September 5, 1995. His
annualized salary for 1995 was $130,000.
(6) Mr. Slocum commenced employment with the Company on February 1, 1997. His
annualized salary for 1997 was $185,001.
(7) Mr. Kalb commenced employment with the Company on January 6, 1997. His
annualized salary for 1997 was $170,000.
</FN>
</TABLE>
Employment Agreements
The Company has entered into an employment agreement (the "Sarrat
Agreement") dated November 6, 1996 with Fernand B. Sarrat, the Company's
President and Chief Executive Officer. Under the terms of the Sarrat Agreement,
Mr. Sarrat is employed for an annual salary of $300,000 and a minimum annual
performance bonus of $100,000. Pursuant to the terms of the Sarrat Agreement,
the Company has made a loan to Mr. Sarrat in the amount of approximately
$2,000,000 (the "Loan") to purchase a primary residence in California
commensurate with his prior residence in Westport, Connecticut. The Loan will
be interest free for the period of his employment and secured by a deed of
trust on Mr. Sarrat's principal residence. Under the Sarrat Agreement, Mr.
Sarrat received a grant of options covering 1,000,000 shares of the Company's
Common Stock which options vest over a period of five years from the date of
his employment. Under the Sarrat Agreement, Mr. Sarrat was entitled to payment
on December 31, 2000, of a special bonus in the amount of $2,000,000, which he
agreed to defer in accordance with a schedule based on the amount of the
Company's annual earnings in return for the Company's agreement to renegotiate
the terms of the Loan, which agreement is still pending.
Option Grants in Last Fiscal Year
<TABLE>
The following table provides certain information with respect to stock
options granted to the Named Executive Officers during the fiscal year ended
December 31, 1997. In addition, as required by the Securities and Exchange
Commission rules, the table sets forth the potential realizable value over the
term of the option (the period from the date of grant to the expiration date)
based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts are based on certain assumed rates of appreciation and
do not represent the Company's estimate of future stock value. Actual gains, if
any, on stock option exercises will be dependent on the future performance of
the Common Stock.
<CAPTION>
Individual Grants (1)
--------------------------------------------------------------
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Exercise Annual Rate of Stock
Underlying Granted to Price Price Appreciation for
Options Employees in Per Share Expiration Option Term(5)
Name Granted (#) Fiscal Year (2) ($/Sh)(3) Date (4) 5% ($) 10% ($)
- --------------------------- ------------- ----------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat ......... -- -- -- -- -- --
Thomas L. Butler .......... 200,000 8.4% $ 8.25 03/31/07 $1,038,000 $2,630,000
John H. Daws .............. 75,000 3.1% 11.625 02/07/07 549,000 1,389,750
Peter J. Slocum ........... 250,000 10.5% 11.875 01/10/07 1,866,250 4,731,250
John V. Kalb .............. -- -- -- -- -- --
<FN>
(Footnotes continued on following page)
11
<PAGE>
(Footnotes continued from previous page)
- ------------
(1) The option grants provide for monthly vesting over five years. The options
may not be exercised unless, and until, the Named Executive Officer remains
in the Company's employment for one year. The vested options are
exercisable up to ten years from the date of grant.
(2) Based on a total of options granted to employees of the Company in 1997,
including the Named Executive Officers.
(3) All options were granted at an exercise price equal to the fair market
value based on the closing market value of a share of the Company's Common
Stock on the Nasdaq National Market on the date the options were granted.
(4) The options granted to individuals owning less than 10% of the outstanding
shares of the Company's Common Stock have a term of ten years subject to
earlier termination upon the occurrence of certain events related to
termination of employment. Options granted to individuals owning 10% or
more of the shares of the Company's outstanding Common Stock have a term of
five years.
(5) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option, and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. There can be no assurance that the amounts
reflected in this table will be achieved.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
The following table sets forth certain information with respect to stock
options exercised by the Named Executive Officers during fiscal year 1997,
including the aggregate value of gains on the date of exercise. In addition,
the table sets forth the number of shares covered by stock options as of
December 31, 1997, and the value of "in-the-money" stock options, which
represent the positive spread between the exercise price of a stock option and
the market price of the shares subject to such option on December 31, 1997.
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at December 31, 1996 In-the-Money Options
(#) at December 31, 1996 ($)(2)
----------------------------- ----------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- -------------- ----------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Fernand B. Sarrat ......... -- -- 216,667 783,333 $ 0 $ 0
Thomas L. Butler .......... -- -- 0 200,000 0 300,000
John H. Daws .............. -- -- 44,167 105,833 174,375 213,125
Peter J. Slocum ........... -- -- 0 250,000 0 0
John V. Kalb .............. -- -- 40,000 160,000 0 0
<FN>
- ------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option on the date of exercise and the
exercise price of the Named Executive Officers' respective options.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 ($9.75 per share)
and the exercise price of the Named Executive Officers' respective options.
</FN>
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
This section is not "soliciting material," is not deemed "filed" with the
Securities and Exchange Commission and is not incorporated by reference in any
filing of the Company under the Securities Act of 1933, as amended, or the
Securities and Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general language to the contrary.
12
<PAGE>
The Compensation Committee of the Board was formed in December 1995 and
consists of Drs. Simons and Guthart, and Mr. King W.W. Harris. Decisions
concerning the compensation of the Company's Chief Executive Officer are made
by the Compensation Committee and are reviewed periodically by the full Board
(excluding any interested director). Decisions concerning the compensation of
the Company's remaining executive officers are made by the Chief Executive
Officer in consultation with members of the Compensation Committee. Policies
concerning the terms and administration of the 1994 Plan are also determined by
the Compensation Committee.
Executive Officer Compensation Programs
The objectives of the executive officer compensation programs are to
attract, retain, motivate and reward key personnel who possess the necessary
leadership and management skills, through competitive base salary, annual cash
bonus incentives, long-term incentive compensation in the form of stock
options, and various benefits, including medical and life insurance plans.
The executive compensation policies of the Compensation Committee are
intended to combine competitive levels of compensation and rewards for above
average performance and to align relative compensation with the achievements of
key business objectives, optimal satisfaction of customers, and maximization of
shareholder value. The Compensation Committee believes that stock ownership by
management is beneficial in aligning management and shareholder interests,
thereby enhancing shareholder value.
Base Salaries. Salaries for the Company's executive officers are
determined primarily on the basis of the executive officer's responsibility,
general salary practices of peer companies and the officer's individual
qualifications and experience. Among other sources of information, the
Compensation Committee and the Chief Executive Officer rely on reports from
Radford Associates concerning competitive compensation practices in the
Company's geographical region. The base salaries are reviewed annually and may
be adjusted in accordance with certain criteria which include individual
performance, the functions performed by the executive officer, the scope of the
executive officer's on-going duties, general changes in the compensation peer
group in which the Company competes for executive talent, and the Company's
financial performance generally. The weight given each such factor may vary
from individual to individual.
Incentive Bonuses. The Compensation Committee and the Chief Executive
Officer believe that a cash incentive bonus plan can serve to motivate the
Company's executive officers and management to address annual performance
goals, using more immediate measures for performance than those reflected in
the appreciation in value of stock options. The bonus amounts are based upon a
subjective consideration of factors including such officer's level of
responsibility, individual performance, contributions to the Company's success
and the Company's financial performance generally.
Stock Option Grants. Stock options are granted to executive officers and
other employees under the 1994 Plan. Because of the direct relationship between
the value of an option and the stock price, the Compensation Committee believes
that options motivate executive officers to manage the Company in a manner that
is consistent with shareholder interests. Stock option grants are intended to
focus the attention of the recipient on the Company's long-term performance
which the Company believes results in improved shareholder value, and to retain
the services of the executive officers in a competitive job market by providing
significant long-term earning potential. To this end, stock options generally
vest and become fully exercisable over a five-year period. However, the
Compensation Committee continues to evaluate and consider revisions to the
various terms and conditions of the Company's option agreements, specifically
with respect to the duration of the option agreements, and the basis for
issuing and vesting of awards. The principal factors considered in granting
stock options to executive officers of the Company are prior performance, level
of responsibility, other compensation and the executive officer's ability to
influence the Company's long-term growth and profitability. However, the 1994
Plan does not provide any quantitative method for weighting these factors, and
a decision to grant an award is primarily based upon a subjective evaluation of
the past as well as future anticipated performance.
Deductibility of Compensation. Section 162(m) of the Internal Revenue Code
("IRC") disallows a deduction by the Company for certain compensation exceeding
$1 million paid to any named executive
13
<PAGE>
officer, excluding, among other things, certain performance based compensation.
Because the compensation figures for the Named Executive Officers have not
approached the limitation, the Compensation Committee has not had to use any of
the available exemptions from the deduction limit. However, the 1994 Plan is
designed to qualify any compensation realized by Named Executive Officers from
the exercise of an option as performance based compensation. The Compensation
Committee remains aware of the existence of the IRC Section 162(m) limitations,
and the available exemptions, and will address the issue of deductibility when
and if circumstances warrant the use of such exemptions in addition to the
exemption contemplated under the 1994 Plan.
Chief Executive Officer Compensation
The compensation of the Chief Executive Officer is reviewed annually on
the same basis as discussed above for all executive officers. Mr. Sarrat's base
salary for the fiscal year ended December 31, 1997 was $300,000. In addition,
Ms. Sarrat is entitled to a minimum annual bonus of $100,000. Mr. Sarrat's base
salary was established in part by comparing the base salaries of chief
executive officers at other companies of similar size and the compensation
proposals by competing candidates for the position of Chief Executive Officer.
Mr. Sarrat's base salary was also established in part by comparing the base
salaries of chief executive officers at other companies of similar size. Mr.
Sarrat's base salary was at the approximate median of the base salary range for
Presidents/Chief Executive Officers of comparative companies. Mr. Sarrat was
granted an interest-free loan in the amount of $2,000,000 for the purchase of a
primary residence in Northern California (the "Loan") in order to accommodate
his relocation from his current residence in Connecticut to the Company's place
of business where housing costs are significantly greater. Under the Sarrat
Agreement, Mr. Sarrat was entitled to payment on December 31, 2000, of a
special bonus in the amount of $2,000,000, which he agreed to defer in return
for the Company's agreement to renegotiate the terms of the Loan and the
conditions for payment of the special bonus. No other revisions or increases in
base compensation are currently contemplated in the Sarrat Agreement.
MEMBERS OF THE COMPENSATION COMMITTEE
Leo A. Guthart
James H. Simons
King W.W. Harris
14
<PAGE>
MANAGEMENT
<TABLE>
The following table sets forth certain information concerning the
executive officers of the Company(1):
<CAPTION>
Name Age Position
- ----------------------------- ----- -------------------------------------------------
<S> <C> <C>
Thomas L. Butler ............ 50 Senior Vice President Sales and Marketing
Reed B. Byrum ............... 49 Vice President, Communications
William P. Crowell .......... 57 Vice President, Product Development and Strategy
John H. Daws ................ 54 Vice President and Chief Financial Officer
Sarah L. Engel .............. 54 Vice President, Human Resources and
Organizational Development
Robert B. Fougner ........... 46 Secretary and General Counsel
John V. Kalb ................ 50 Vice President, Business Development
Paul Massie ................. 43 Vice President, Information Systems
Peter J. Slocum ............. 42 Vice President, Engineering
<FN>
- ----------------
(1) In addition to Mr. Sarrat, who is described in Proposal No. 1.
</FN>
</TABLE>
Mr. Butler joined the Company in April 1997 as Senior Vice President of
Sales and Marketing. Prior to joining the Company he served as group vice
president of sales and marketing for electronic commerce for Sterling Software.
Prior to his work at Sterling Software, he was a senior vice president of sales
and marketing at Bank Automation Systems.
Mr. Byrum joined the Company as Vice President, Communications in January
1998. Prior to joining the Company, Mr. Byrum held positions or provided
services to GE Capital, Measurex, Gannett, N.E.T., The Johns Hopkins
University, and Ruder Finn & Rotman.
Mr. Crowell joined the Company as Vice President, Product Development and
Strategy in January 1998. Prior to joining the Company, 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. Daws joined the Company as Vice President and Chief Financial Officer
in September 1995. From April 1992 to August 1995, he was Vice President and
Chief Financial Officer of Crosspoint Solutions, Inc., a software and
semiconductor company, and from June 1988 to December 1991 he was Vice
President, Finance of Rolm Computer Corporation, a software and computer
company and a subsidiary of Loral Corporation.
Ms. Engel joined the Company as Vice President, Human Resources and
Organizational Development in February 1997. Before joining the Company she was
an independent consultant specializing in strategic planning, human resources
and organizational development with such clients as Ford Motor Company, The
Coca-Cola Company, Exxon Corporation and Harcourt General, Inc.
Mr. Fougner has been Secretary and General Counsel since joining the
Company in December 1989. Prior to joining the Company, he was a partner in the
New York law firm of Hill, Betts & Nash.
Mr. Kalb joined the Company as Vice President, Business Development in
January 1997. Prior to joining the Company, he was with IBM Corporation for
over 25 years, most recently as Vice President of Electronic Commerce, Internet
Division, responsible for marketing, software development and operations
relating to IBM's offerings for enabling commerce over the Internet.
Mr. Massie joined the Company as Vice President, Business Systems in June
1997. Prior to joining the Company he was with Bay Networks where he was the
director of information systems. He has also served as director of computing
for Sun Microsystems, Inc. and as director of computer systems and
telecommunications for Sterling Software.
Mr. Slocum joined the Company as Vice President, Engineering 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 served as Director of Engineering for
15
<PAGE>
Silicon Graphics, Inc., a computing systems company, from July 1992 to July
1993 and MIPS Computer Systems, Inc. (merged with Silicon Graphics, Inc. in
July 1992) from August 1990 to July 1992.
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
shareholder return on the Company's Common Stock from February 15, 1996, the
date of the Company's initial public offering, through the end of the Company's
fiscal year ended December 31, 1997, with the percentage change in the
cumulative total return for the NASDAQ Stock Market (U.S. & Foreign) Index
(also known as the NASDAQ Composite Index) and the Hambrecht & Quist Technology
Index. The comparison assumes an investment of $100 on February 15, 1996 in the
Company's Common Stock and in each of the foregoing indices and assumes
reinvestment of dividends. The stock performance shown on the graph below is
not necessarily indicative of future price performance.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
Cumulative Total Return
-------------------------------
2/15/96 12/96 12/97
Cylink Corp CYLK 100 87 65
NASDAQ STOCK MARKET (U.S. & FORIEGN) INAF 100 118 144
HAMBRECHT & QUIST TECHNOLOGY IHQT 100 118 138
16
<PAGE>
SHAREHOLDER PROPOSALS
To be considered for presentation to the annual meeting of the Company's
shareholders to be held in 1999, a shareholder proposal must be received by
Robert B. Fougner, Esq., Secretary, Cylink Corporation, 910 Hermosa Court,
Sunnyvale, California 94086, no later than December 23, 1998.
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance
Section16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock (collectively, "Reporting Persons") to file reports of ownership and
changes in ownership of the Company's Common Stock. Reporting Persons are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such reports received or written representations from
certain Reporting Persons, the Company believes that, apart from Dr. Elwyn
Berlekamp, a Director who had two transactions during the fiscal year ended
December 31, 1997 which should have been reported on a Form 4 and have been
corrected by filing a Form 5, all Reporting Persons complied with all
applicable filing requirements.
Other Matters
The Board of Directors knows of no other business which will be presented
at the Annual Meeting. If any other business is properly brought before the
Annual Meeting, it is intended that proxies in the enclosed form will be voted
in respect thereof in accordance with the judgments of the persons voting the
proxies.
It is important that the proxies be returned promptly and that your shares
be represented. Shareholders are urged to mark, date, execute and promptly
return the accompanying proxy card in the enclosed envelope.
By Order of the Board of Directors,
s/s Fernand B. Sarrat
Fernand B. Sarrat
President and Chief Executive Officer
April 23, 1998
Sunnyvale, California
17
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1486-PS-98
<PAGE>
Appendix A
CYLINK CORPORATION
1994 FLEXIBLE STOCK INCENTIVE PLAN
(amended and restated as of January 30, 1998)
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(1.) "Administrator" means the Board or any of the Committees
appointed to administer the Plan. All references to the "Committee" in any Award
Agreement shall be deemed to refer to the Administrator.
(2.) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. All
references to "Affiliate" in any Award Agreement issued prior to this April 2,
1997 amendment and restatement of the Plan shall be deemed to refer to a Parent
or a Subsidiary.
(3.) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(4.) "Award" means the grant of an Option, Restricted Stock, SAR,
Dividend Equivalent Right, Performance Unit, Performance Share, or other right
or benefit under the Plan.
(5.) "Award Agreement" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(6.) "Board" means the Board of Directors of the Company.
(7.) "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(1.) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's shareholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such shareholders accept, or
(2.) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(8.) "Code" means the Internal Revenue Code of 1986, as amended.
(9.) "Committee" means any committee appointed by the Board to
administer the Plan.
(10.) "Common Stock" means the common stock of the Company.
(11.) "Company" means Cylink Corporation, a California corporation.
(12.) "Consultant" means any person who is engaged by the Company or
any Related Entity to render consulting or advisory services as an independent
contractor and is compensated for such services.
(13.) "Continuing Directors" means members of the Board who either (i)
have been Board members continuously for a period of at least thirty-six (36)
months or (ii) have been Board members for less than thirty-six (36) months and
were elected or nominated for election as Board members by at least a majority
of the Board members described in clause (i) who were still in office at the
time such election or nomination was approved by the Board.
(14.) "Continuous Status as an Employee, Director or Consultant" means
that the provision of services to the Company or a Related Entity in any
capacity of Employee, Director or Consultant, is not interrupted or terminated.
Continuous Status as an Employee, Director or Consultant shall not be considered
interrupted in the case of (i) any approved leave of absence or (ii) transfers
between locations of the Company or among the Company, any Related Entity, or
any successor in any capacity of Employee, Director or Consultant. An approved
leave of absence shall include sick leave, military leave, or any other
authorized personal leave. For purposes of Incentive Stock Options, no such
leave may exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract.
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(15.) "Corporate Transaction" means any of the following
shareholder-approved transactions to which the Company is a party:
(1.) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
(2.) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
(3.) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
(16.) "Covered Employee" means an Employee who is a "covered employee"
under Section 162(m)(3) of the Code.
(17.) "Director" means a member of the Board.
(18.) "Dividend Equivalent Right" means a right entitling the Grantee
to compensation measured by dividends paid with respect to Common Stock.
(19.) "Employee" means any person, including an Officer or Director,
who is an employee of the Company or any Related Entity. The payment of a
director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.
(20.) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(21.) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(1.) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing price for a Share for the last market
trading day prior to the time of the determination (or, if no closing price was
reported on that date, on the last trading date on which a closing price was
reported) on the stock exchange determined by the Administrator to be the
primary market for the Common Stock or the Nasdaq National Market, whichever is
applicable or (B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked prices of a
Share on the Nasdaq Small Cap Market for the day prior to the time of the
determination (or, if no such prices were
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
reported on that date, on the last date on which such prices were reported), in
each case, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(2.) In the absence of an established market of the type
described in (i), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith.
(22.) "Grantee" means an Employee, Director or Consultant who receives
an Award under the Plan.
(23.) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(24.) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(25.) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(26.) "Option" means a stock option granted pursuant to the Plan.
(27.) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(28.) "Performance - Based Compensation" means compensation qualifying
as "performance-based compensation" under Section 162(m) of the Code.
(29.) "Performance Shares" means Shares or an award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(30.) "Performance Units" means an award which may be earned in whole
or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(31.) "Plan" means this 1994 Flexible Stock Incentive Plan, as amended
and restated.
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(32.) "Related Entity" means any Parent, Subsidiary and any business,
corporation, partnership, limited liability company or other entity in which the
Company, a Parent or a Subsidiary holds an ownership interest, directly or
indirectly.
(33.) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(34.) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor thereto.
(35.) "SAR" means a stock appreciation right entitling the Grantee to
Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(36.) "Share" means a share of the Common Stock.
(37.) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(38.) "Subsidiary Disposition" means the disposition by the Company of
its equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the Company's
sale or distribution of substantially all of the outstanding capital stock of
such subsidiary corporation.
3. Stock Subject to the Plan.
(1.) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards (including
Incentive Stock Options) is 8,050,000 Shares, and commencing with the first
business day of each calendar year thereafter beginning with January 1, 1999,
such maximum aggregate number of Shares shall be increased by a number
determined by the Compensation Committee of the Board of Directors, in an amount
which shall not exceed four percent (4%) of the number of Shares outstanding as
of December 31 of the immediately preceding calendar year. Notwithstanding the
foregoing, subject to the provisions of Section 10, below, the maximum aggregate
number of Shares available for grant of Incentive Stock Options shall be
8,050,000 Shares, the maximum aggregate number of Shares available for grant as
stock bonuses shall be 200,000 Shares, and such numbers shall not be subject to
annual adjustment as described above. The Shares to be
5
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
issued pursuant to Awards may be authorized, but unissued, or reacquired Common
Stock.
(2.) If an Award expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Award exchange program, or
if any unissued Shares are retained by the Company upon exercise of an Award in
order to satisfy the exercise price for such Award or any withholding taxes due
with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant to an
Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(1.) Plan Administrator.
(1.) Administration with Respect to Directors and Officers. With
respect to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or (B)
a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
(2.) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(3.) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
6
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(4.) Administration Errors. In the event an Award is granted in a
manner inconsistent with the provisions of this subsection (a), such Award shall
be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
(2.) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(1.) to select the Employees, Directors and Consultants to whom
Awards may be granted from time to time hereunder;
(2.) to determine whether and to what extent Awards are granted
hereunder;
(3.) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(4.) to approve forms of Award Agreement for use under the Plan;
(5.) to determine the terms and conditions of any Award granted
hereunder;
(6.) to amend the terms of any outstanding Award granted under
the Plan, including a reduction in the exercise price (or base amount on which
appreciation is measured) of any Award to reflect a reduction in the Fair Market
Value of the Common Stock since the grant date of the Award, provided that any
amendment that would adversely affect the Grantee's rights under an outstanding
Award shall not be made without the Grantee's written consent;
(7.) to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan;
(8.) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
7
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(9.) to take such other action, not inconsistent with the terms
of the Plan, as the Administrator deems appropriate.
(3.) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be conclusive and binding on all
persons.
5. Eligibility. Awards other than Incentive Stock Options may be granted
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. Terms and Conditions of Awards.
(1.) Type of Awards. The Administrator is authorized under the Plan to
award any type of arrangement to an Employee, Director or Consultant that is not
inconsistent with the provisions of the Plan and that by its terms involves or
might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right
with an exercise or conversion privilege at a fixed or variable price related to
the Common Stock and/or the passage of time, the occurrence of one or more
events, or the satisfaction of performance criteria or other conditions, or
(iii) any other security with the value derived from the value of the Common
Stock or other securities issued by a Related Entity. Such awards include,
without limitation, Options, SARs, sales or bonuses of Restricted Stock,
Dividend Equivalent Rights, Performance Units or Performance Shares, and an
Award may consist of one such security or benefit, or two or more of them in any
combination or alternative.
(2.) Designation of Award. Each Award shall be designated in the Award
Agreement. In the case of an Option, the Option shall be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of Shares
subject to Options designated as Incentive Stock Options which become
exercisable for the first time by a Grantee during any calendar year (under all
plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess
Options, to the extent of the Shares covered thereby in excess of the foregoing
limitation, shall be treated as Non-Qualified Stock Options. For this purpose,
Incentive Stock Options shall be taken into account in the order in which they
were granted, and the Fair Market Value of the Shares shall be determined as of
the date the Option with respect to such Shares is granted.
(3.) Conditions of Award. Subject to the terms of the Plan, the
Administrator
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
shall determine the provisions, terms, and conditions of each Award including,
but not limited to, the Award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment (cash, Shares, or other
consideration) upon settlement of the Award, payment contingencies, and
satisfaction of any performance criteria. The performance criteria established
by the Administrator may be based on any one of, or combination of, increase in
share price, earnings per share, total shareholder return, return on equity,
return on assets, return on investment, net operating income, cash flow,
revenue, economic value added, personal management objectives, or other measure
of performance selected by the Administrator. Partial achievement of the
specified criteria may result in a payment or vesting corresponding to the
degree of achievement as specified in the Award Agreement.
(4.) Deferral of Award Payment. The Administrator may establish one or
more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.
(5.) Award Exchange Programs. The Administrator may establish one or
more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(6.) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(7.) Individual Option and SAR Limit. The maximum number of Shares
with respect to which Options and SARs may be granted to any Employee under the
Plan shall be 1,000,000 Shares. The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization
pursuant to Section 10, below. To the extent required by Section 162(m) of the
Code or the regulations thereunder, in applying the foregoing limitation with
respect to an Employee, if any Option or SAR is canceled, the canceled Option or
SAR shall continue to count against the maximum number of Shares with respect to
which Options and SARs may be granted to the Employee. For this purpose, the
repricing of an Option
9
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(or in the case of a SAR, the base amount on which the stock appreciation is
calculated is reduced to reflect a reduction in the Fair Market Value of the
Common Stock) shall be treated as the cancellation of the existing Option or SAR
and the grant of a new Option or SAR.
(8.) Early Exercise. The Award may, but need not, include a provision
whereby the Grantee may elect at any time while an Employee, Director or
Consultant to exercise any part or all of the Award prior to full vesting of the
Award. Any unvested Shares received pursuant to such exercise may be subject to
a repurchase right in favor of the Company or to any other restriction the
Administrator determines to be appropriate.
(9.) Term of Award. The term of each Award shall be the term stated in
the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Award Agreement.
(10.) Transferability of Awards. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's Incentive
Stock Option in the event of the Grantee's death on a beneficiary designation
form provided by the Administrator. Other Awards shall be transferable to the
extent provided in the Award Agreement.
(11.) Time of Granting Awards. The date of grant of an Award shall for
all purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(1.) Exercise or Purchase Price. The exercise or purchase price, if
any, for an Award shall be as follows:
(1.) In the case of an Incentive Stock Option:
(1) granted to an Employee who, at the time of the grant of
10
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
such Incentive Stock Option owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant.
(2) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(2.) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than eighty-five percent (85%) of the Fair
Market Value per Share on the date of grant.
(3.) In the case of the sale of Shares:
(1) granted to a person who, at the time of the grant of
such Award, or at the time the purchase is consummated, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company, the per Share purchase price shall be not less than one hundred percent
(100%) of the Fair Market Value per share on the date of grant.
(2) granted to any person other than a person described in
the preceding paragraph, the per Share purchase price shall be not less than
eighty-five percent (85%) of the Fair Market Value per Share on the date of
grant.
(4.) In the case of Awards intended to qualify as
Performance-Based Compensation, the exercise or purchase price, if any, shall be
not less than one hundred percent (100%) of the Fair Market Value per Share on
the date of grant.
(5.) In the case of other Awards, such price as is determined by
the Administrator.
(2.) Consideration. Subject to Applicable Laws, the consideration to
be paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator (and,
in the case of an Incentive Stock Option, shall be determined at the time of
grant). In addition to any other types of consideration the Administrator may
determine, the Administrator is authorized to accept as consideration for Shares
issued under the Plan the following:
(1.) cash;
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
(2.) check;
(3.) delivery of Grantee's promissory note with such
recourse, interest, security, and redemption provisions as the Administrator
determines as appropriate;
(4.) surrender of Shares or delivery of a properly executed
form of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(5.) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(6.) any combination of the foregoing methods of payment.
(3.) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(4.) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
8. Exercise of Award.
(1.) Procedure for Exercise; Rights as a Shareholder.
(1.) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and
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Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
specified in the Award Agreement.
(2.) An Award shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Award by the person entitled to exercise the Award and full payment for the
Shares with respect to which the Award is exercised has been received by the
Company. Until the issuance (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate evidencing such Shares, no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to Shares subject
to an Award, notwithstanding the exercise of an Option or other Award. The
Company shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Award. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in the Award Agreement or Section 10, below.
(2.) Exercise of Award Following Termination of Employment, Director
or Consulting Relationship.
(1.) An Award may not be exercised after the termination date of
such Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Status as an Employee, Director or
Consultant only to the extent provided in the Award Agreement.
(2.) Where the Award Agreement permits a Grantee to exercise an
Award following the termination of the Grantee's Continuous Status as an
Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award, whichever occurs first.
(3.) Any Award designated as an Incentive Stock Option to the
extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Status as an Employee, Director or Consultant shall convert automatically to a
Non-Qualified Stock Option and thereafter shall be exercisable as such to the
extent exercisable by its terms for the period specified in the Award Agreement.
(3.) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Award previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Grantee at the time that such offer is made.
13
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
9. Conditions Upon Issuance of Shares.
(1.) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(2.) As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
Except as may be provided in an Award Agreement:
(1.) Effective upon the consummation of a Corporate Transaction, all
outstanding Awards under the Plan shall terminate unless assumed by the
successor company or its Parent as provided below. For the purposes of this
subsection, the Award shall be considered assumed if, following the Corporate
Transaction, the Award confers, for each Share subject to the Award immediately
prior to the Corporate Transaction, (i) the consideration (whether stock, cash,
or other securities or property) received in the Corporate Transaction by
holders of Common Stock for each Share subject to the Award held on the
effective date of the Corporate Transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares), or (ii) the right to purchase such
consideration in the case of an Option or similar Award; provided, however, that
if such consideration received in the Corporate Transaction was not solely
common stock of the
14
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
successor corporation or its Parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received upon the
exercise or exchange of the Award for each Share subject to the Award to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the Corporate Transaction.
(2.) In the event of a Change in Control (other than a Change in
Control which also is a Corporate Transaction), each Award which is at the time
outstanding under the Plan shall remain exercisable until the expiration or
sooner termination of the applicable Award term.
(3.) In the event of a Subsidiary Disposition, each Award with respect
to those Grantees who are at the time engaged primarily in Continuous Status as
an Employee or Consultant with the subsidiary corporation involved in such
Subsidiary Disposition which is at the time outstanding under the Plan shall
remain so exercisable until the expiration or sooner termination of the Award
term.
(4.) The portion of any Incentive Stock Option accelerated under the
terms of the Award Agreement in connection with a Corporate Transaction, Change
in Control or Subsidiary Disposition shall remain exercisable as an Incentive
Stock Option under the Code only to the extent the $100,000 dollar limitation of
Section 422(d) of the Code is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated excess portion of such Option shall be exercisable
as a Non-Qualified Stock Option.
12. Term of Plan. The Plan shall terminate with respect to the grant of
Incentive Stock Options on January 28, 2004, unless sooner terminated.
13. Amendment, Suspension or Termination of the Plan.
(1.) The Board may at any time amend, suspend or terminate the Plan.
To the extent necessary to comply with Applicable Laws, the Company shall obtain
shareholder approval of any Plan amendment in such a manner and to such a degree
as required.
(2.) No Award may be granted during any suspension of the Plan or
after termination of the Plan.
(3.) Any amendment, suspension or termination of the Plan shall not
affect Awards already granted, and such Awards shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
15
<PAGE>
Cylink Corporation
1994 Flexible Stock Incentive Plan
Amended and Restated as of January 30, 1998
14. Reservation of Shares.
(1.) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(2.) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon any
Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Shareholder Approval. The Plan became effective when adopted by the
Board on February 1, 1994, and was approved by the Company's shareholders on
April 4, 1994. On January 26, 1995, and in November, 1995, the Board adopted and
approved an amendment and restatement, respectively, of the Plan that was
approved by the Company's shareholders on January 15, 1996. On April 2, 1997,
the Board again adopted and approved an amendment and restatement of the Plan
which was approved by the Shareholders on May 22, 1997.On January 30, 1998 the
Board adopted and approved an increase of 2,100,000 shares available for
issuance of awards under the Plan, and to adopt a formula for determining the
maximum aggregate number of shares added to the Plan each year beginning with
1999 (collectively, the "Amendments"), subject to shareholder approval of the
Amendments. Awards may be granted in reliance on the share increase and the
formula increase, but no Award issued in reliance on such increases shall become
exercisable unless and until the Amendments shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained, then the
Awards previously granted in reliance on the Amendments shall terminate.
16
<PAGE>
PROXY
CYLINK CORPORATION
910 Hermosa Court
Sunnyvale, CA 94086
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING ON MAY 22, 1998.
Johm H. Daws and Robert B. Fougner, or either of them, each with the
power of substitution, are hereby authorized to represent and vote the shares
of the undersigned, with all the powers which the undersigned would possess if
personally present, at the Annual Meeting of Shareholders of Cylink Corporation
(the "Company"), to be held on Thursday, May 22, 1998 at the Sheraton Four
Points Hotel, 1100 North Mathilda Avenue, Sunnyvale, California, and any
adjournment or postponement thereof.
Election as Class 1, Class 2 or Class 3 directors of the nine nominees
listed below to serve until the 1999, 2000 or 2001 Annual Meetings as indicated
below, and until their successors are elected and qualified.
Class 1 - to serve until the 1999 Annual Meeting: Elwyn Berlekamp, King W. W.
Harris and Yossi Tulpan
Class 2 - to serve until the 2000 Annual Meeting: Fernand B. Sarrat, Howard L.
Morgan and William W. Harris
Class 3 - to serve until the 2001 Annual Meeting: Leo A. Guthart, William J.
Perry and James H. Simons
- ----------- -----------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- ----------- -----------
<PAGE>
[X] Plese mark
votes as in
this example.
<TABLE>
<CAPTION>
Shares represented by this proxy will be voted as directed by the shareholder. If no such directions are indicated, the Proxies
will have authority to vote FOR the election of all directors, and FOR items 2 and 3.
The Board of Directors recommends a vote FOR the election of Directors and FOR proposals 2 and 3.
<S> <C>
2. To ratify and approve amendments to
the Cylink Corporation 1994 Flexible FOR AGAINST ABSTAIN
1. Election of Directors (see reverse): Stock Incentive Plan (the "Plan"), as [ ] [ ] [ ]
amended, to (i)increase the number of
FOR WITHHELD shares of Common Stock reserved for
[ ] [ ] issuance thereunder by 2,100,000
shares and (ii) provide that as of the first business day of
MARK HERE each calendar year beginning with January 1, 1999, the maximum
[ ]______________________________________ FOR ADDRESS [ ] aggregate number of shares of Common Stock reserved for
For all nominees except as noted above CHANGE AND issuance under the Plan will be increased, in the discretion of
NOTE BELOW the Board of Directors, by up to 4% of the number of shares
outstanding as of December 31 of the immediately preceding
calendar year.
3. To ratify and approve the appointment
of Price Waterhouse LLP as the FOR AGAINST ABSTAIN
Company's independent auditors for [ ] [ ] [ ]
the fiscal year ending December 31,
1998.
4. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the
Annual Meeting.
PLESE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED REPLY ENVELOPE.
Plese sign exactly as your name appears herein. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as
such.
Signature:____________________________________ Date:___________ Signature:____________________________________ Date:___________
</TABLE>
