<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 24, 1997
YURIE SYSTEMS, INCORPORATED
(Exact name of Registrant as specified in its charter)
State or other jurisdiction of incorporation: Delaware
Commission File No.: 0-36413
I.R.S. Employer Identification No.: 52-1778987
Address of principal executive offices: 8301 Professional Place
Landover, MD 20785-2237
Registrant's telephone number, including area code: (301) 352-4600
Former name or former address, if changed since last report: Not applicable
<PAGE>
References in this report on Form 8-K to "Yurie," or the "Company" refer to
Yurie Systems, Inc.
Item 5. Other Events.
-------------
On November 3, 1997, the Company announced plans to acquire privately-held
Data Labs, Inc., a Delaware corporation, ("Data Labs"), based in Maryland that
manufactures and markets branch office ATM access products. The Company had
signed a letter of intent on October 28, 1997 to acquire Data Labs. On November
15, 1997, the letter of intent expired by its terms. The Company and Data Labs
have continued acquisition discussions. Consummation of the acquisition is
subject to the execution of a definitive merger agreement, as well as approval
by the boards of directors of Data Labs and Yurie, and the stockholders of Data
Labs, and Data Labs' obtaining certain consents and waivers. There can be no
assurance that the transaction will be consummated.
The following historical financial statements of Data Labs and pro forma
financial information of the Company are being filed to reflect the Company's
probable acquisition of Data Labs:
(a) Financial statements of Data Labs as of December 31, 1995 and 1996
and for the nine month periods ending September 30, 1996 and 1997.
(b) Unaudited pro forma financial information of the Company as of
December 31, 1995 and 1996 and for the nine month periods ending September 30,
1996 and 1997.
Forward Looking Statements
- --------------------------
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain Statements included in this Report on Form
8-K are forward-looking. Such forward-looking statements are based on the
Company's current expectations and are subject to a number of risks and
uncertainties that could cause the
<PAGE>
Company's actual future results and financial position to differ significantly
from results expressed or implied in any forward-looking statements made by, or
on behalf of, the Company. The Company assumes no obligation to update any
forward-looking statements contained herein or that made be made from time to
time by, or on behalf of, the Company. Information presented in this Form 8-K
should be read in conjunction with the Company's Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q filed with the Securities and Exchange
Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
YURIE SYSTEMS, INC.
By: /s/ Harry D'Andrea
------------------------------------
Name: Harry D'Andrea
Title: Chief Financial Officer and
Treasurer
Dated: November 24, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedules
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
--------------- ------------- ------------- ---------------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,766,548 $ 318,142 $ - $ 23,084,690
Restricted cash 1,000,000 - 1,000,000
Short term investments 21,883,297 - 21,883,297
Accounts receivable 10,071,495 41,696 (77,284) (1) 10,035,907
Interest receivable 302,483 - 302,483
Inventory 4,687,665 291,027 (5,400) (1) 4,973,292
Deferred income taxes 950,988 - 195,000 (3) 2,286,431
1,140,443 (2)
Prepaid expenses 414,407 - 414,407
--------------- ------------- ------------- ---------------
Total current assets 62,076,883 650,865 1,252,759 63,980,507
PROPERTY AND EQUIPMENT, net 6,075,448 211,289 6,286,737
OTHER ASSETS 141,372 4,174 145,546
--------------- ------------- ------------- ---------------
TOTAL ASSETS $ 68,293,703 $ 866,328 $ 1,252,759 $ 70,412,790
=============== ============= ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,511,166 $ 140,000 $ (79,390) (1) $ 2,571,776
Accrued liabilities 5,225,022 310,904 500,000 (3) 6,035,926
Unearned revenue 41,250 - 41,250
Equipment loan - 300,000 300,000
--------------- ------------- ------------- ---------------
Total current liabilities 7,777,438 750,904 420,610 8,948,952
ACCRUED RENT 390,621 - 390,621
DEFERRED INCOME TAXES 326,463 - 326,463
CAPITAL LEASE OBLIGATIONS - 25,745 25,745
STOCKHOLDERS' EQUITY:
Preferred Stock - 3,130,000 (3,130,000) (5) -
Common Stock 249,100 3,270 314 (5) 252,684
Treasury Stock (461,166) - (461,166)
Additional paid-in capital 51,097,181 2,063 3,129,686 (5) 54,228,930
Retained earnings 8,914,066 (3,045,654) 832,149 (4) 6,700,561
--------------- ------------- ------------- ---------------
Total stockholders' equity 59,799,181 89,679 832,149 60,721,009
--------------- ------------- ------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,293,703 $ 866,328 $ 1,252,759 $ 70,412,790
=============== ============= ============= ===============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Yurie Data -----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 30,436,798 $ 265,918 $ (170,582) (1) $ 30,532,134
Service revenue 2,913,927 -- 2,913,927
Other revenue -- -- --
------------ ------------ ------------ ------------
Total Revenues 33,350,725 265,918 (170,582) 33,446,061
Cost of Revenues:
Cost of product revenue 11,023,160 158,128 (191,538) (1) 10,989,750
Cost of service revenue 2,152,620 -- 2,152,620
------------ ------------ ------------ ------------
Total Cost of Revenues 13,175,780 158,128 (191,538) 13,142,370
Gross Profit 20,174,945 107,790 20,956 20,303,691
Operating Expenses:
General and administrative 4,121,988 605,947 4,727,935
Sales and marketing 3,686,102 750,675 4,436,777
Research and development 5,339,509 767,753 6,107,262
------------ ------------ ------------ ------------
Total Operating Expenses 13,147,599 2,124,375 -- 15,271,974
Income (Loss) from Operations 7,027,346 (2,016,585) 20,956 5,031,717
Other Income (Expense) 1,130,253 29,200 1,159,453
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 8,157,599 (1,987,385) 20,956 6,191,170
Tax Provision 3,177,000 -- (701,947) (2) 2,475,053
------------ ------------ ------------ ------------
Net Income (Loss) $ 4,980,599 $ (1,987,385) $ 722,903 $ 3,716,117
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.19 $ 0.14
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
26,346,737 26,705,149
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ----------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 13,023,251 $ 995 $ -- $ 13,024,246
Service revenue 1,622,614 37,260 1,659,874
Other revenue 391,667 -- 391,667
------------ ------------ ------------ ------------
Total Revenues 15,037,532 38,255 -- 15,075,787
Cost of Revenues:
Cost of product revenue 4,536,284 -- -- 4,536,284
Cost of service revenue 1,094,741 19,250 1,113,991
------------ ------------ ------------ ------------
Total Cost of Revenues 5,631,025 19,250 -- 5,650,275
Gross Profit 9,406,507 19,005 -- 9,425,512
Operating Expenses:
General and administrative 1,733,013 221,841 1,954,854
Sales and marketing 790,256 130,098 920,354
Research and development 2,379,923 323,409 2,703,332
------------ ------------ ------------ ------------
Total Operating Expenses 4,903,192 675,348 -- 5,578,540
Income (Loss) from Operations 4,503,315 (656,343) -- 3,846,972
Other Income (Expense) 62,064 4,677 66,741
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 4,565,379 (651,666) -- 3,913,713
Tax Provision 1,826,152 -- (254,150) (2) 1,572,002
------------ ------------ ------------ ------------
Net Income (Loss) $ 2,739,227 $ (651,666) $ 254,150 $ 2,341,711
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.13 $ 0.11
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,750,808 22,109,220
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Yurie Data ------------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Product revenue $ 18,728,525 $ 75,058 $ (65,890) (1) $ 18,737,693
Service revenue 2,490,563 37,260 2,527,823
Other revenue 391,667 - 391,667
------------ ------------ ------------ ------------
Total Revenues 21,610,755 112,318 (65,890) 21,657,183
Cost of Revenues:
Cost of product revenue 6,783,520 62,216 (39,534) (1) 6,806,202
Cost of service revenue 1,635,427 30,885 1,666,312
------------ ------------ ------------ ------------
Total Cost of Revenues 8,418,947 93,101 (39,534) 8,472,514
Gross Profit 13,191,808 19,217 (26,356) 13,184,669
Operating Expenses:
General and administrative 2,699,606 280,714 2,980,320
Sales and marketing 1,547,120 332,899 1,880,019
Research and development 3,846,654 581,156 4,427,810
------------ ------------ ------------ ------------
Total Operating Expenses 8,093,380 1,194,769 - 9,288,149
Income (Loss) from Operations 5,098,428 (1,175,552) (26,356) 3,896,520
Other Income (Expense) 83,375 7,259 90,634
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 5,181,803 (1,168,293) (26,356) 3,987,154
Tax Provision 2,029,395 - (465,913) (2) 1,563,482
------------ ------------ ------------ ------------
Net Income (Loss) $ 3,152,408 $ (1,168,293) $ 439,557 $ 2,423,672
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.14 $ 0.11
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,811,082 22,169,494
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
Yurie Data -------------------------------
Systems, Inc. Labs, Inc. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product revenue $ 2,869,937 $ 9,945 $ -- $ 2,879,882
Service revenue 1,992,669 641,247 2,633,916
Other revenue 1,108,333 -- 1,108,333
------------ ------------ ------------ ------------
Total Revenues 5,970,939 651,192 -- 6,622,131
Cost of Revenues:
Cost of product revenue 1,326,702 2,264 -- 1,328,966
Cost of service revenue 1,184,093 146,009 1,330,102
------------ ------------ ------------ ------------
Total Cost of Revenues 2,510,795 148,273 -- 2,659,068
Gross Profit 3,460,144 502,919 -- 3,963,063
Operating Expenses:
General and administrative 1,588,154 282,485 1,870,639
Sales and marketing -- 4,701 4,701
Research and development 427,815 134,782 562,597
------------ ------------ ------------ ------------
Total Operating Expenses 2,015,969 421,968 -- 2,437,937
Income from Operations 1,444,175 80,951 -- 1,525,126
Other Income (Expense) 13,341 (15,117) (1,776)
------------ ------------ ------------ ------------
Income Before Income Taxes 1,457,516 65,834 -- 1,523,350
Tax Provision 560,661 14,024 574,685
------------ ------------ ------------ ------------
Net Income $ 896,855 $ 51,810 $ -- $ 948,665
============ ============ ============ ============
NET INCOME PER COMMON SHARE: $ 0.04 $ 0.04
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
21,710,064 22,068,476
============ ============
</TABLE>
See notes to pro forma combined financial statements.
<PAGE>
YURIE SYSTEMS, INC.
Notes to Unaudited Pro Forma Combined Financial Data
Note 1: The pro forma financial data reflects the issuance of
358,412 shares of Yurie Systems, Inc. common stock for an
aggregate of 8,029,700 shares of preferred and common stock of
Data Labs (including warrants, vested options and 206,500
unvested options representing 50% of the unvested options of
Data Labs) in connection with the merger.
Note 2: The adjustments to the pro forma combined financial data are as
follows:
(1) To eliminate intercompany sales and/or record related gross profit
upon realization.
(2) To eliminate the valuation allowance attributable to the net
operating loss carryforwards.
(3) To record the accrual of costs incurred to consummate the Merger.
(4) To record current period effect of pro forma adjustments on net
income and recognize carryover effect of prior period pro forma
adjustments.
(5) To record the exchange of stock.
Note 3: The pro forma statements of income exclude the estimated non-
recurring merger costs of approximately $500,000.
<PAGE>
Data Labs, Inc.
Balance Sheets
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,016,252 $ 22,756
Accounts receivable 74,084 62,898
Prepaid expenses and other assets 17,319 3,672
----------- -----------
Total current assets 2,107,655 89,326
Furniture and equipment 209,970 47,372
----------- -----------
Total assets $ 2,317,625 $ 136,698
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 110,015 $ --
Accrued expenses and other current liabilities 93,587 23,425
----------- -----------
Total current liabilities 203,602 23,425
Capital lease obligations, net of current portion 38,210 --
----------- -----------
Total liabilities 241,812 23,425
Commitments and contingencies (Note 5)
Stockholders' equity:
Series A - Preferred stock, $.001 par value, 3,200,000 shares authorized,
3,130,000 and none issued or outstanding in 1996 and 1995, respectively,
entitled to $1 per share liquidation preference ($3,130,000 in the
aggregate)
3,130,000 --
Series A1 - Preferred stock, $.001 par value, 3,200,000 authorized, none issued or
outstanding -- --
Common stock, $.001 par value, 10,000,000 shares authorized, 3,257,534 and
3,249,200 issued and outstanding in 1996 and 1995, respectively 3,258 3,249
Additional paid-in capital 824 --
Accumulated deficit (1,058,269) 110,024
----------- -----------
2,075,813 113,273
----------- -----------
Total liabilities and stockholders' equity $ 2,317,625 $ 136,698
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
Data Labs, Inc.
Statements of Operations
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Product sales $ 75,058 $ 9,945
Contract 37,260 641,247
----------- -----------
Total revenues 112,318 651,192
Operating expenses:
Costs of revenues 93,101 148,273
Sales and marketing 332,899 4,701
General and administrative 280,714 282,485
Research and development 581,156 134,782
----------- -----------
Total operating expenses 1,287,870 570,241
Other (income) expense (7,259) 15,117
----------- -----------
Income (loss) before provision for income taxes (1,168,293) 65,834
Provision for income taxes -- 14,024
----------- -----------
Net income (loss) $(1,168,293) $ 51,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
------------------------
Additional
Preferred Paid-in Accumulated
Stock Shares Amount Capital Deficit Total
----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- 3,249,200 $ 3,249 $ -- $ 58,214 $ 61,463
Net income -- -- -- -- 51,810 51,810
----------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 -- 3,249,200 3,249 -- 110,024 113,273
Exercise of stock options -- 8,334 9 824 -- 833
Preferred stock issuance 3,130,000 -- -- -- -- 3,130,000
Net loss -- -- -- -- (1,168,293) (1,168,293)
----------- --------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 3,130,000 3,257,534 $ 3,258 $ 824 $(1,058,269) $ 2,075,813
=========== ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,168,293) $51,810
Adjustments to reconcile net (loss) income to net cash flows provided by
operating activities-
Depreciation 37,015 15,833
Changes in assets and liabilities:
Accounts receivable (11,186) (62,898)
Prepaid expenses and other assets (13,647) 29,803
Accounts payable 110,015 -
Accrued expenses and other current liabilities 53,542 23,425
----------- -------
(992,554) 57,973
----------- -------
Cash flows used in investing activities:
Purchase of furniture and equipment (144,783) (36,886)
----------- -------
Cash flows from financing activities:
Preferred stock issuance 3,130,000 -
Common stock issuance 833 -
----------- -------
3,130,833 -
----------- -------
Net increase in cash and cash equivalents 1,993,496 21,087
Cash and cash equivalents, beginning of year 22,756 1,669
----------- -------
Cash and cash equivalents, end of year $ 2,016,252 $22,756
=========== =======
Supplemental disclosure:
Cash paid during the year for income taxes - 14,024
Supplemental schedule of noncash investing and financing activities:
In 1996, the Company entered into capital leases totaling $55,000 for
equipment
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Data Labs, Inc.
Notes to Financial Statements
As of December 31, 1996 and 1995
1. The Company:
Business
Data Labs, Inc. (the "Company") designs, manufactures and markets
telecommunications and data communications networking products. These products
enable network administrators to preserve existing network infrastructures and
meet current technology needs while still allowing for future expansion. The
Company currently markets and sells their products to network service providers,
equipment vendors and end users.
The Company is in the early stages of developing the market for its products.
Certain products proposed to be offered by the Company have not been fully
developed and will require additional research and development. There can be no
assurance that the Company's research and development activities will result in
the development of additional products that can be marketed in a commercially
successful manner, or that any such products will be able to compete with other
products that may be marketed at the time the Company's products become
available. The Company is dependent on the principal members of its technical
and management staff, and the loss of any of their services may impede the
achievement of certain of the Company's product development activities.
The continued development of the Company's products and markets will require
substantial additional capital. There can be no assurance that the Company will
be able to obtain additional financing when needed, if at all, or on terms
acceptable to the Company.
Recapitalization of Common Stock
The Company, a Maryland corporation, elected to change its capital structure in
June 1996 and reincorporate into Data Labs, Inc., a Delaware corporation (the
"Recapitalization"). Pursuant to the Recapitalization and amended certificate of
incorporation, the Company exchanged existing outstanding common stock for
3,249,200 shares of $.001 par value common stock completing a 50 to 1 stock
split. All amounts have been restated to reflect the 50 to 1 stock split and
change in par value.
2. Summary of Significant Accounting Policies:
Revenue Recognition
Revenue relating to product sales is generally recognized upon shipment. Revenue
under product development contracts is recognized on a percentage-of-completion
basis.
<PAGE>
-2-
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of 90
days or less as cash equivalents. Cash equivalents at December 31, 1996, consist
primarily of U.S. Treasury bills and certificates of deposit. All investments
are classified as held-to-maturity securities and, accordingly, are carried at
cost.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company had concentrations of cash in a single bank in the form of demand
deposits and certificates of deposit totaling approximately $980,000 at December
31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Furniture and Equipment
Furniture and fixtures, computers, and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, generally three to five years.
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures $ 13,838 $ 9,494
Computers and equipment 261,109 65,840
--------- ---------
274,947 75,334
Less- Accumulated depreciation (64,977) (27,962)
--------- ---------
Total $ 209,970 $ 47,372
========= =========
</TABLE>
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was adopted by the Company for fiscal year
ending December 31, 1996. The adoption did not have a material effect on the
Company's financial position.
<PAGE>
-3-
3. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Salaries $37,512 $ 7,317
Vacation 38,265 16,108
Current portion of capital lease obligation 16,620 --
Other 1,190 --
------- -------
Total $93,587 $23,425
======= =======
</TABLE>
4. Income Taxes:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under the
provisions of SFAS No. 109, deferred tax assets and liabilities are recognized
for the estimated future tax consequences of temporary differences and income
tax credits. Temporary differences are primarily the result of the differences
between the tax basis of assets and liabilities and their financial reporting
amounts. Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates applicable to the future years in which deferred tax assets
or liabilities are expected to be settled or realized. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $1.1 million for Federal income tax reporting purposes. The amount
of U.S. net operating loss carryforwards available to be issued in any given
year may be limited in the event of significant changes in ownership of the
Company.
SFAS No. 109 requires that the tax benefit of financial reporting net operating
losses and tax credits be recorded as an asset to the extent that management
assesses the utilization of such net operating losses and tax credits to be
"more likely than not." As of December 31, 1996, the Company's net deferred tax
assets were approximately $400,000 and a valuation reserve was recorded against
the entire amount.
5. Commitments and Contingencies:
The Company is obligated under an operating lease for space in its office
building and capital lease obligations for equipment. The lease term expires in
March 1999 and May 2000, respectively.
<PAGE>
-4-
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1997 $110,535
1998 113,355
1999 41,346
2000 4,970
---------
Total $270,206
=========
</TABLE>
Rent expense charged to operations during the years ended December 31, 1996 and
1995, was $55,612 and $36,589, respectively.
6. Stock Option Plan:
During 1996, the Company adopted a stock option plan (the "Plan") and reserved
2,100,800 shares for issuance. The Board of Directors administers the Plan and
determines the price, vesting, and other terms upon which awards shall be made.
All options have been granted with an exercise price equal to the fair market
value of the Company's common stock on date of grant as determined by the Board
of Directors. Options granted under the Company's plan generally expire three
months after termination of employment or five to ten years after date of grant.
A summary of option transactions during 1996 is as follows.
<TABLE>
<CAPTION>
Option
Weighted Price
Number of Average Per
Stock Options Exercise Price Share
------------- -------------- -------
<S> <C> <C> <C>
Outstanding at January 1, 1996 - - -
Options granted 837,000 $.10 - $.11 $.10 - $.11
Options exercised (8,334) $.10 $.10
----------- ----------- -----------
Outstanding at December 31, 1996 828,666 $.10 - $.11 $.10 - $.11
=========== =========== ===========
Exercisable at December 31, 1996 357,502 $.10 $.10 - $.11
Unexercisable at December 31, 1996 471,164 $.10 $.10 - $.11
</TABLE>
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Net loss, on a pro forma basis assuming
that the Company had determined compensation cost consistent with SFAS No. 123,
would have been increased by $55,000 to $1,223,293 in 1996.
The fair value for options was estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 1996: risk free
interest rates of 6.33 percent during the period, no expected dividend yields,
no volatility in the expected market price of the Company's common stock and the
estimated life of the option is the contractual term of the option. The weighted
average fair value of options granted during 1996 was $.05.
<PAGE>
-5-
7. Preferred Stock:
In July 1996, the Company amended it's certificate of incorporation to authorize
two new classes of Convertible, Redeemable, and Voting preferred stock
("Preferred Stock"). Preferred Stock can be issued in two series, A and A1.
Dividends are not cumulative and are paid at the rate of $.10 per share, per
annum, if declared by the Board of Directors. No series A1 Preferred Stock has
been issued.
In 1996, the Company issued 3,130,000 shares of Series A preferred stock for $1
per share. The Preferred Stock is redeemable any time after June 30, 2001, upon
written request of not less than sixty-five percent of the outstanding preferred
stockholders. The redemption shall be paid in cash equal to the original issue
price per share ($1) plus any declared but unpaid dividends. The declared and
unpaid dividends accrue interest at the rate of 10 percent compounded annually.
Each share of the Preferred Stock is convertible into common stock at any time
prior to the fifth day before redemption of the Preferred Stock at a 1 to 1
ratio. The Preferred Stock automatically converts to common stock upon a firm
commitment of an underwritten public offering, at not less than $5.00 per share
or $10,000,000 in aggregate proceeds. Conversion to common stock can also occur
upon written request of 65 percent of the outstanding preferred stockholders.
In the event of liquidation, dissolution, or winding up of the Company, the
holders of each share of Preferred Stock are entitled to redeem their shares for
$1 for each outstanding share of Preferred Stock.
The Preferred Stock and other shareholder agreements provide for certain
registration rights, preemptive rights with respect to future issuances of
equity securities and rights of first refusal and co-sale in the event that the
stockholders sell their shares.
Warrants
In connection with the issuance of the series A preferred stock the Company
issued 900,000 warrants to purchase common stock at $.10 a share. The warrants
have a 10 year term.
8. Stock Purchase Agreements:
The Company has in place several contingent stock purchase agreements whereby
the Company reserves the right to repurchase shares of common stock from key
employees upon termination of employment. The amount of shares that the Company
can repurchase decreases ratably over a four year period. In the event of
voluntary termination or termination for cause by the Company the purchase price
is $.002 per share, the employee's original purchase price. If termination is
for any other reason the purchase price will be the fair market value at the
date of termination.
<PAGE>
-6-
9. Line of Credit:
In October 1996, the Company entered into a line-of-credit agreement for
$400,000 that matures on April 5, 1998. The line of credit accrues interest at a
rate of prime plus 1-1/2 percent. There were no borrowings outstanding at
December 31, 1996.
<PAGE>
Data Labs, Inc.
Balance Sheets
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Assets
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 318,142 $ 2,016,252
Accounts receivable 41,696 74,084
Inventory 291,027 -
Prepaid expenses and other current assets - 17,319
------------- -------------
Total current assets 650,865 2,107,655
Furniture and equipment 211,289 209,970
Deposits 4,174 -
------------- -------------
Total assets $ 866,328 $ 2,317,625
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 140,000 $ 110,015
Accrued expenses and other current liabilities 310,904 93,587
Line of credit 300,000 -
------------- -------------
Total current liabilities 750,904 203,602
Capital lease obligations, net of current portion 25,745 38,210
------------- -------------
Total liabilities 776,649 241,812
Commitments and Contigencies
Stockholders' equity:
Series A-Preferred stock $.001 par value,
3,200,000 shares authorized, 3,130,000
outstanding as of September 30, 1997
and December 31, 1996 3,130,000 3,130,000
Series A1-Preferred stock, $.001 par value,
3,200,000 authorized, none issued or
outstanding - -
Common stock, $.001 par value, 10,000 shares
authorized, 3,270,035 and 3,257,534 issued
and outstanding as of September 30, 1997
and December 31, 1996, respectively 3,270 3,258
Additional paid-in capital 2,063 824
Accumulated deficit (3,045,654) (1,058,269)
------------- -------------
89,679 2,075,813
------------- -------------
Total liabilities and stockholders'
equity $ 866,328 $ 2,317,625
============= =============
</TABLE>
<PAGE>
Data Labs, Inc.
Statements of Operations
For the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Product sales $ 265,918 $ 995
Contract 37,260
------------- ------------
Total revenues 265,918 38,255
Operating Expenses
Costs of revenues 158,128 19,250
Sales and marketing 750,675 130,098
General and administrative 605,947 221,841
Research and development 767,753 323,409
------------- ------------
Total operating expenses 2,282,503 694,598
Other income, net (29,200) (4,677)
------------- ------------
Net loss $(1,987,385) $ (651,666)
============= ============
</TABLE>
<PAGE>
Data Labs, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,987,385) $ (592,957)
Adjustments to reconcile net loss to net cash flows
provided by operating activities-
Depreciation 39,093 12,317
Changes in assets and liabilities:
Accounts receivable 32,388 62,898
Inventory (291,027) -
Prepaid expenses and other current assets 17,319 (4,096)
Deposits (4,174)
Accounts payable 29,985 34,902
Accrued expenses 217,317 75,555
-------------- ---------------
(1,946,484) (411,381)
-------------- ---------------
Cash flows used in investing activities:
Purchase of furniture and equipment (40,412) (51,539)
-------------- ---------------
Cash flows from financing activities:
Preferred stock issuance - 3,055,000
Common stock issuance 1,251 -
Proceeds from line of credit 300,000 -
Payments of capital lease obligation (12,465) -
-------------- ---------------
288,786 3,055,000
-------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,698,110) 2,592,080
Cash and cash equivalents, beginning of period 2,016,252 22,756
-------------- ---------------
Cash and cash equivalents, end of period $ 318,142 $ 2,614,836
============== ===============
Supplemental disclosure:
Cash paid during the period for interest 11,200 -
============== ===============
</TABLE>
