FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to Commission File Number: 0-23110
DIGITAL LINK CORPORATION
(Exact name of registrant as specified in its charter)
California 77-0067742
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
217 Humboldt Court, Sunnyvale, California 94089
(Address of principal executive offices, including zip
code)
(408) 745-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Sections 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
The number of shares outstanding of the registrant's
common stock at November 13, 1996 was 9,167,905.
DIGITAL LINK CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION:
ITEM 1 - Financial Statements Page
Consolidated Balance Sheets as of September 30, 1996 3
and December 31, 1995
Consolidated Statements of Income for the quarters 4
and nine months ended September 30, 1996 and
September 30, 1995
Consolidated Statements of Cash Flows for 5
the nine months ended September 30, 1996 and
September 30, 1995
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and 9
Analysis of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 2 - Changes in Securities 19
ITEM 3 - Defaults Upon Senior Securities 19
ITEM 4 - Submission of Matters to a Vote of 19
Security Holder
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 19
SIGNATURE(S) 21
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
September 30, December 31,
1996 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,644 $ 2,639
Short-term marketable securities 15,243 16,726
Accounts receivable, net 5,901 7,690
Inventories, net 5,604 4,603
Prepaid and other current assets 2,847 2,807
Total current assets 31,239 34,465
Property and equipment at cost, net 1,839 1,608
Long-term marketable securities 25,739 18,244
Other assets 696 438
TOTAL ASSETS $59,513 54,755
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,917 $ 1,371
Accrued payroll expense 1,748 1,433
Other accrued expenses 3,768 2,751
Income taxes payable 1,289 1,427
Total current liabilities 8,722 6,982
SHAREHOLDERS' EQUITY:
Common stock, no par value:
Authorized: 25,000,000 shares;
Issued and outstanding: 9,161,530
shares in 1996 and 9,000,500 shares
in 1995 29,778 29,283
Unrealized gain on marketable securities 189 555
Retained earnings 20,824 17,935
Total shareholders' equity 50,791 47,773
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $59,513 $54,755
The accompanying notes are an integral part of these
consolidated financial statements.
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DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $14,127 $12,500 $36,355 $34,324
Cost of sales 5,666 4,687 14,869 12,471
Gross profit 8,461 7,813 21,486 21,853
EXPENSES:
Research and development 2,749 2,405 7,135 6,923
Selling, general and
administrative 4,206 3,550 11,934 10,400
Total expenses 6,955 5,955 19,069 17,323
Operating income 1,506 1,858 2,417 4,530
Other income 625 573 1,832 1,706
Income before provision for
income taxes 2,131 2,431 4,249 6,236
Provision for income taxes 650 753 1,359 1,933
NET INCOME $1,481 $1,678 $2,890 $4,303
NET INCOME PER SHARE $ 0.16 $ 0.18 $ 0.31 $ 0.45
Shares used in computing per
share amounts 9,451 9,483 9,417 9,470
The accompanying notes are an integral part of these
consolidated financial statements.
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DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 2,890 $4,303
Adjustments to reconcile net income to
net cash flows provided by operating
activities:
Depreciation and amortization 898 1,204
Provision (reduction in provision) for
doubtful accounts (282) 130
Provision for excess and obsolete
inventories 357 123
Changes in assets and liabilities:
Accounts receivable 2,071 (1,286)
Inventories (1,357) (1,329)
Prepaid and other assets (298) (426)
Accounts payable 546 (417)
Accrued payroll and other accrued
expenses 1,332 176
Income taxes payable (138) 2,004
Net cash flows provided by
operating activities 6,019 4,482
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (31,971) (27,749)
Maturities of marketable securities 25,593 21,176
Acquisition of property and equipment (1,131) (1,088)
Net cash flows used in investing
activities (7,509) (7,661)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and employee stock
purchases 495 496
Net cash flows provided by
financing activities 495 496
Net decrease in cash and cash
equivalents (995) (2,683)
Cash and cash equivalents at beginning
of year 2,639 4,638
Cash and cash equivalents at end of
period $ 1,644 $1,955
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for income
taxes $ 1,443 $ 405
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities
carried at market $ (366) $ 515
The accompanying notes are an integral part of these
consolidated financial statements.
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DIGITAL LINK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements
have been prepared by the Company without audit in
accordance with generally accepted accounting
principles for interim financial
information and pursuant to rules and
regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments (consisting of
only normal recurring adjustments) considered necessary
for a fair representation have been included.
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K,
which was filed with the Securities and Exchange
Commission on March 28, 1996.
The year-end balance sheet at December 31, 1995 was
derived from audited financial statements, but does
not include all disclosures required by
generally accepted accounting principles.
Operating results for the nine months ended
September 30, 1996 may not necessarily be indicative of the
results to be expected for any other interim period or for
the full year.
2. COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted
average number of common and dilutive common
equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock
options using the treasury stock method for all
periods presented.
3. INVENTORIES
Inventories are valued at the lower of cost
(determined using the first-in, first-out
method) or market. Inventories
consisted of (in thousands):
September 30, 1996 December 31, 1995
(Unaudited)
Raw materials $ 2,210 $1,838
Work-in-process 2,226 1,965
Finished goods 1,168 800
$ 5,604 $4,603
4. CONTINGENCY
Certain third parties have expressed their belief
that certain of the Company's products may infringe
patents held by them and have suggested that the Company
acquire licenses to such patents. The Company believes
that licenses, to the extent required, will be available;
however, no assurance can be given that the terms of any
offered licenses would be favorable to the Company.
Management, after review and consultation with counsel,
believes that the ultimate
resolution of these allegations are uncertain and there
can be no assurance that these assertions will be
resolved without costly litigation or in a manner that
is not adverse to the Company. Accordingly, while
the Company has accrued certain amounts for these
matters, the ultimate resolution of these matters
could result in payments in excess of the amounts
accrued in the accompanying financial statements and
require royalty payments in the future which could
adversely impact gross margins.
As discussed under "Legal Proceedings" in Part II
hereof, in April 1996, a class action complaint was
filed against the Company and certain of its
officers and directors in the Santa Clara Superior
Court of the State of California, alleging
violations of the California Corporations Code and
California Civil Code. In October 1996, a similar
parallel lawsuit against the Company and the same
individuals in the State Court action was filed in
the United States District Court for the Northern
District of California alleging violations of the
federal securities laws. The class period in both
of these lawsuits runs from September 12, 1994
through December 29, 1995, and both complaints allege
that the defendants concealed and/or misrepresented
material adverse information about the Company
and that the individual defendants sold shares of
the Company's stock based upon material nonpublic
information. The complaints seek unspecified monetary
damages. The Company believes that both actions are
without merit and intends to defend both actions
vigorously. However, litigation is subject to inherent
uncertainties and, thus, there can be no assurance
that these lawsuits will be resolved favorably to
the Company or that they will not have a material adverse
affect on the Company's financial condition and results
of operations. Accordingly, no provision for any
liability that may result upon adjudication has
been made on the accompanying financial statements.
5. CHANGE IN DEPRECIATION METHOD
Effective January 1, 1996, the Company adopted the
straightline method of depreciation for all property
and equipment placed in service after that date.
Property and equipment placed in service prior to
January 1, 1996 continue to be depreciated using the
double-declining balance method.
The estimated useful lives under either method ranges
from 3 to 5 years. Management believes that the
change from the double-declining balance method to
the straight-line method provides a better matching
of costs and revenues over the lives of its
property and equipment and conforms
to predominant industry practice. Use of the
straight line method of depreciation on assets placed
in service in 1996 versus the double-declining
balance method resulted in no material difference
on the pre-tax income or net income in the nine
months ended September 30, 1996.
6. RECENT ACCOUNTING PRONOUNCEMENT
During October 1995, the Financial Accounting
Standards Board issued Statement No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of
accounting for stock-based compensation plans.
The Company intends to continue to account for
employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS
123 is effective for fiscal years beginning after
December 15, 1995 and will require certain
additional disclosures in the financial statements
for the year ending December 31, 1996.
DIGITAL LINK CORPORATION
ITEM 2. Management's Discussion And Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Except for the historical statements contained herein, this
Form 10-Q contains forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These forward looking statements
involve a number of risks and uncertainties, such as
the impact of competitive products and pricing, the loss
of, or differences in actual from anticipated levels of
purchases from the Company's major customers, the
Company's timely development of new products, including its
W/ATM GateWay product, and their acceptance by the market,
and other risks which are described throughout the
Company's reports filed with the Securities and Exchange
Commission, including its Form 10K for the year ended
December 31, 1995, and within this "Management's
Discussion and Analysis of Financial Condition and Results
of Operations," including under the title "Other Factors
That May Affect Future Operating Results." The actual
results that the Company achieves may differ materially
from any forward looking statements due to such
risks and uncertainties. The Company has identified by an
asterisk (*) various paragraphs within this "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," which contain such forward looking
statements. Actual results could differ materially from
such forward looking statements as a result of the
factors discussed in such paragraphs and those factors
discussed in the sections referenced above and in other
sections of this and other documents filed with the
Securities and Exchange Commission. In
addition, when used in this Form 10-Q, words such as
"believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward
looking statements, but are not the exclusive means of
identifying such statements. The Company undertakes no
obligation to revise any forward looking statements in
order to reflect events or circumstances that may arise
after the date of this report.
Net Sales
Net sales for the third quarter of 1996 increased
13% to $14,127,000 from $12,500,000 for the same period of
the prior year. Net sales for the nine months ended
September 30, 1996 increased 6% to $36,355,000 from
$34,324,000 for the same period of the prior year.
These increases were primarily attributable to an
increase in unit sales of both narrowband (i.e.,
transmission rates up to T1/E1) products in the Encore
product family and domestic broadband (i.e., transmission
rates in excess of T1/E1) products. These increases were
offset in part by decreased unit sales of the
Company's broadband SMDS access products primarily sold
in Europe and decreased average selling prices on
certain of the Company's narrowband and broadband
products.
*The Company believes that the decrease in sales of
broadband SMDS access products is due in part to the
continuing effects of earlier delays in Europe, and in
particular in the United Kingdom, in the deployment of
SMDS networks due to technical problems within the
networks and to earlier market confusion among Frame
Relay, SMDS and ATM technologies. The Company
anticipates that it will continue to experience the
effects of these earlier conditions through at least the
remainder of 1996, which would result in lower levels of
annual sales of its broadband SMDS access products in
1996 as compared to annual sales in 1995.
*Narrowband sales in absolute dollars increased by
13% and remained flat as a percentage of net sales at 53%
in the third quarter of 1996, as compared to the third
quarter of 1995. Broadband sales increased in absolute
dollars by 13% and remained flat as a percentage of net
sales at 47% in the third quarter of 1996 as compared to
the third quarter of 1995. For the third quarter of
1996, as compared to the same quarter last year,
narrowband sales and broadband sales as a percentage of net
sales remained flat notwithstanding lower sales in Europe
of broadband products which were offset by higher
broadband sales to certain domestic carrier customers and
Internet Service Providers (ISPs). Narrowband sales in
absolute dollars increased by 22% and increased as a
percentage of net sales to 59% for the nine months ended
September 30, 1996, as compared to 51% for the first nine
months of 1995. Broadband sales decreased in absolute
dollars by 11% and decreased as a percentage of net sales to 41%
for the first nine months of 1996, as compared to 49% for the
first nine months of the prior year. For the first nine
months of 1996, as compared to the first nine months of
1995, broadband sales as a percentage of net sales
decreased as a result of lower SMDS net sales in
Europe, which was slightly offset by higher broadband
sales to certain domestic carrier customers and ISPs.
The Company anticipates that the mix of products sold may
change to include a higher percentage of narrowband
products which would adversely affect the Company's gross
margins.
*International sales represented 18% of net sales in the
third quarter of 1996 as compared to 21% in the third
quarter of 1995, and 15% of net sales for the nine months
ended September 30, 1996 as compared to 30% for the same
period of the prior year. The decreases for the quarter
and nine month periods ending September 30, 1996 were
primarily due to a decrease in unit sales of SMDS products
in Europe. For the reasons discussed
above, the Company anticipates that international sales
will remain at similar levels during the remainder of
1996, as compared to 1995, which would result in a
decrease in international sales as a percentage of net
sales for 1996. International sales are subject to
inherent risks, including difficulties in homologating
products in other countries, difficulties in staffing and
managing foreign operations, greater difficulty in accounts
receivable collection, unexpected changes in regulatory
requirements and tariffs, and potentially adverse tax
consequences, which may in the future contribute to
fluctuations in the Company's business
and operating results.
*During the third quarter of 1996, sales to MCI accounted
for 16% of the Company's net sales. During the first
nine months of 1996, MCI and BBN Planet Corporation
accounted for 16% and 15%, respectively of the Company's
net sales. The Company anticipates that sales to BBN
Planet Corporation will decrease as a percentage of net
sales in the fourth quarter of 1996 as a result of
fluctuations in activities associated with the build out
of its Internet infrastructure. A significant portion
of the Company's business is derived from substantial
orders placed by large end users and telephone companies,
and the timing of such orders could cause material
fluctuations in the Company's business and operating
results. For example, in the fourth quarter of 1995,
the Company had lower operating results than expected due
in part to a weaker than expected demand from certain
domestic carrier customers, as well as the slow down of
sales of its SMDS access products.
During the third quarter of 1996, net sales through direct
sales, value added resellers (VARs), and OEMs were 53%,
38%, and 9%, respectively, compared to 55%, 33%, and 12%
in the third quarter of 1995. Net sales through direct
sales, VARs, and OEMs for the nine months ending
September 30, 1996, were 59%, 32%, and 9%, respectively,
compared to 48%, 32%, and 20% for the same period of
1995. These increases in the percentage of direct sales were
primarily a result of selling directly to BBN Planet Corporation
during 1996 compared to 1995 when sales to BBN Planet Corporation
were made through a VAR. The decreases in the percentage of OEM
sales were primarily a result of decreased sales in SMDS
access products primarily sold in Europe.
Gross Profit
Gross profit increased 8% in the third quarter of
1996 to $8,461,000 from $7,813,000 for the same period of
the prior year. Gross margin decreased to 59.9% of net
sales in the third quarter of 1996 as compared to 62.5% in
the third quarter of 1995. This decrease in gross margin
was primarily due to price reductions made since the
second half of 1995 with respect to some of the Company's
access products. Gross profit decreased 2% in the nine
months ended September 30, 1996 to $21,486,000 from
$21,853,000 for the same period of the prior year. Gross
margin decreased to 59.1% of net sales for the first nine
months of 1996 as compared to 63.7% for the same period of
the prior year. This decrease in gross margin reflects the
above referenced price reductions and a shift in the mix
of products sold to include more narrowband products,
which generally have lower gross margins than broadband
products. The Company anticipates that this increased
pricing pressure will continue during at least the
remainder of 1996.
*Gross margins may vary significantly from quarter to
quarter depending on factors such as competitive pricing
pressures, changes in the mix of products sold and the
channels through which they are distributed, the timing
of orders and the timing of new product introductions
by the Company. A significant portion of the Company's
business is very price competitive, which has in the past
and will in the future require the Company to lower its
prices, resulting in fluctuations in the Company's business
and operating results. For example, periodically
throughout 1995, and the first nine months of 1996, the
Company reduced the prices on some of its access products
to address competitive pricing pressures, which adversely
affected the Company's gross margins during 1995 and 1996. In
addition, the Company anticipates that the mix of products
sold may change to include a higher percentage of
narrowband products which generally have lower gross margins
and would therefore adversely affect the Company's overall gross
margins.
Research and Development
Research and development ("R&D") expenses increased
14% to $2,749,000 in the third quarter of 1996 from
$2,405,000 in the third quarter of 1995. This
increase was due primarily to an increase in consulting
fees primarily related to the Company's W/ATM GateWay product,
offset by a decrease in personnel-related expenses and
professional services. As a percentage of net sales, R&D
expenses were 19.5% in the third quarter of 1996 as compared to
19.2% in the third quarter of 1995. This slight
increase as a percentage of net sales is primarily due
to the faster rate of growth in consulting fees during the
third quarter of 1996 relative to the rate of growth in
net sales during the same period of the prior year.
R&D expenses increased 3% to $7,135,000 in the nine
months ended September 30, 1996 from $6,923,000 for
the same period of the prior year. As a percentage
of net sales, R&D expenses were 19.6% for the first
nine months of 1996 as compared to 20.2% for the same period
of the prior year. The absolute dollar increase for the
nine-month period is primarily attributable to higher
consulting fees related to the Company's W/ATM GateWay
product, offset by a decrease in professional services,
material costs for prototype products, and personnel-related
expenses. The decrease as a percentage of net sales was primarily
the result of operating efficiencies from higher sales
volume during the period.
*The Company anticipates that its R&D expenses in the
fourth quarter of 1996, especially consulting expenses
related to its W/ATM GateWay product, will increase in
absolute dollars and may increase as a percentage of net
sales as compared to the third quarter of 1996, subject
to, among other factors set forth or referenced in "Net
Sales" above and "Other Factors That May Affect Future
Operating Results" below, the Company's ability to
accelerate or defer operating expenses, achieve revenue
levels and hire new personnel during the remainder of 1996.
*All of the Company's R&D expenditures to date have been
expensed as incurred. In the future, the Company may be
required to capitalize a portion of its software development
costs pursuant to Statement of Financial Accounting
Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased or Otherwise Marketed."
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses
increased 18% in the third quarter of 1996 to $4,206,000
from $3,550,000 for the same period of the prior year. As
a percentage of net sales, SG&A expenses were 29.8% in
the third quarter of 1996 as compared to 28.4% in the third
quarter of 1995. These increases were primarily due to higher
personnel-related expenses, primarily within the sales and
marketing organizations, an increase in promotional
activities and higher evaluation product expenses. SG&A
expenses increased 15% for the nine months ended September
30, 1996 to $11,934,000 from $10,400,000 for the same
period of the prior year. As a percentage of net sales,
SG&A expenses were 32.8% for the first nine months of 1996
as compared to 30.3% for the same period of the prior
year. These increases were primarily a result of higher
personnel related expenses, primarily within the sales and
marketing organization, and higher evaluation product and
promotional expenses.
*The Company has in the past hired more of its SG&A
personnel and incurred increased expenses related to
trade shows and other promotional activities during the
first half of the year. Accordingly, SG&A expenses as a
percentage of net sales are generally higher during the
first half of the year, and the Company anticipates
that this will be true for the remainder of 1996. The
Company anticipates that its SG&A expenses will
increase in absolute dollars during the fourth quarter of
1996 as compared to the third quarter of 1996 as a result, in
part, of increases in legal expenses associated with its
defense of the recently filed class action lawsuits
against the Company. However, any such decrease is subject
to, among other factors set forth or referenced in "Net Sales"
above and "Other Factors That May Affect Future Operating Results"
below, the Company's ability to accelerate or defer
operating expenses and achieve revenue levels during such
periods.
Other Income
Net other income increased 9% in the third quarter of
1996 to $625,000 from $573,000 for the same period of the
prior year. For the nine months ended September 30, 1996,
net other income increased 7% to $1,832,000 from $1,706,000
for the same period of the prior year. These increases
were primarily due to higher interest income from
higher cash and marketable securities balances.
Provision for Income Taxes
The Company's effective tax rate decreased to 30.5% for the
third quarter of 1996 compared to 31.0% for the same period
last year. This decrease is due primarily to the use of
the Company's R&D tax credit. The Company's effective
tax rate increased to 32.0% for the nine months ended
September 30, 1996 compared to 31.0% for the same period
last year. This increase is due to lower foreign sales
and lower R&D tax credit. The Company anticipates that
its effective tax rate during the fourth quarter of 1996
will remain at levels similar to that experienced in the
third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $22.5 million and cash,
cash equivalents and marketable securities of $42.6
million at September 30, 1996. Net cash provided by operating
activities was $6.0 million for the first nine months of
1996, primarily as a result of a net income before
depreciation and amortization, a decrease in accounts
receivable and an increase in accrued payroll and other
accrued expenses, offset to some extent by an increase
in inventories. This compares to net cash provided by
operating activities of $4.5 million for the first nine
months of 1995, primarily as a result of net income before
depreciation and amortization and an increase in income
taxes payable, offset by an increase in accounts receivable
and inventories. Cash used in investing activities during the
first nine months of 1996 was primarily from net purchases of
marketable securities and, to a lesser extent, leasehold
improvements and capital equipment additions of
$1,131,000 in cash flow as compared to $1,088,000 in the
first nine months of 1995. In October 1996, the Company
approved the repurchase of up to 500,000 shares of common
stock for cash from time-to-time at market prices and as
market and business conditions warrant, in open market,
negotiated, or block transactions. Net cash provided by
financing activities was $495,000 in the first nine
months of 1996 from the exercise of stock options and
issuance under the employee stock purchase plan, as
compared to $496,000 in the first nine months of
1995.
*The Company believes that existing cash and cash flows
from operations will be sufficient to meet its
anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As indicated above, there are a number of factors that may
affect the Company's future operating results.
*The Company believes that changes in the product mix sold
toward narrowband products that yield lower gross margins
have in the past and could in the future affect
operating results. Other factors that may cause
fluctuations in the Company's operating results include
the gain or loss of significant customers, the timing of
new product introductions by the Company and its
competitors, seasonal capital spending patterns of large
domestic customers, completion of the build out of carrier
and ISP infrastructures, changes in sales volumes through the
Company's distribution channels, market acceptance of
new or enhanced versions of the Company's products,
availability and cost of components from the Company's
suppliers (some of which are in short supply and are
key to new product development), and economic conditions
generally or in various geographic areas. In addition, the
Company's expense levels are based in part on its
expectations of future revenue. The Company typically
operates with limited order backlog, and a substantial
majority of its revenues in each quarter result from
orders booked in that quarter. The Company has
occasionally recognized a substantial portion of its
revenues in a given quarter from sales booked and shipped
in the last month of that quarter. If revenue levels are
below expectations, the Company may be unable to adjust
spending in a timely manner which could adversely
affect operating results.
*The market for the Company's products is highly
competitive. The Company expects competition to increase
in the future from existing competitors and from other
companies that may enter the Company's existing or
future markets. The Company anticipates that it will face
competition from internetworking equipment and other
telecommunications equipment manufacturers, certain of whom
are including a direct WAN interface in their products.
For example, in 1995, the Company signed an OEM agreement
with Cisco Systems, Inc. ("Cisco") pursuant to which the
Company supplies DSU cards for inclusion in one of
Cisco's key product lines. Increased sales to Cisco or
other internetworking equipment and telecommunications
equipment manufacturers could adversely affect the
Company's gross margins, as sales to OEMs generally have
higher discounts than sales to end users. Further, to the
extent that internetworking equipment, such as
routers, and telecommunications equipment, such as switches,
successfully develop a direct WAN interface for inclusion
in their products, overall demand for the Company's
products would be reduced, which would have a material adverse
affect on the Company's business and operating results. As
discussed above, increased competition has also placed increasing
pressures on the pricing of the Company's products,
which has resulted in lower operating results. The
Company anticipates that this increased pricing pressure
will continue during at least the remainder of 1996.
*The Company's future prospects will depend in part
on its ability to enhance the functionality of its
existing WAN access products in a timely manner and to
identify, develop and achieve market acceptance of new
products that address new technologies and meet customer
needs in the WAN access market. Any failure by the Company
to anticipate or to respond adequately to competitive
solutions, technological developments in its industry,
changes in customer requirements, or changes in regulatory
requirements or industry standards, or any significant
delays in the development, introduction or shipment of
products, could have a material adverse affect on the
Company's business and operating results. For example,
the Company has experienced decreased sales of its SMDS
and ATM access products, which the Company believes is due
in part to delays in the further deployment of SMDS
networks due to technical problems within the networks and
to market confusion in Europe among Frame Relay, SMDS and
ATM technologies. There can be no assurance that the
Company's product development efforts will result in
commercially successful products or that product delays
will not result in missed market opportunities. In
addition, customers could refrain from purchasing
the Company's existing products in anticipation of
new product introductions by the Company or its
competitors. New products could also render certain of
the Company's existing products obsolete. Either of
these events could materially adversely affect the Company's
business and operating results.
*The Company is currently developing and may in the
future develop products with which the Company has
only limited experience and/or that are targeted at
emerging market segments, including the Company's W/ATM
GateWay product. The W/ATM GateWay product has not been
deployed to any end user customers, and the Company has
experienced delays in the development of this product,
in part related to technical problems which required
some software to be redesigned. The Company has entered into
an agreement with an OEM to market this product once its
development has been completed, but such agreement does not
obligate the OEM to purchase any minimum number of
products. In addition, an agreement with AT&T Network
Systems to market the W/ATM GateWay under that company's
name expired in September 1995. According to the Company's
current plan, this product is not anticipated to be
available for customer evaluation before December of
1996. Given its complexity, there can be no assurance that
this product will not encounter further technical or other
difficulties which could significantly delay its
deployment or acceptance or could result in the
termination of the development program for this product.
If this product becomes available, there can be no
assurance that markets for the W/ATM GateWay will
continue to develop, that the Company will receive orders
for this product, that the W/ATM GateWay will meet the
needs of the emerging ATM market or that products
currently under development by others will not be
introduced that would directly compete with the W/ATM
GateWay product, any of which could have a material
adverse affect on the Company's business and operating
results.
*The Company believes that its future success will
depend in large part upon the continued contributions of
members of the Company's senior management and other key
personnel, and upon its ability to attract and retain
highly skilled managerial, engineering, sales, marketing
and operations personnel, the competition for whom is intense.
Certain of the Company's senior management have only recently
joined the Company. For example, in September 1996, Alan Fraser
joined the Company as President and Chief Executive Officer, replacing
Vinita Gupta, who remains as Chairperson of the Board
of Directors. There can be no assurance that the
Company will be successful in attracting and retaining
skilled personnel to hold important management
positions.
*As discussed under "Legal Proceedings" in Part II
hereof, in April 1996, a class action complaint was
filed against the Company and certain of its officers and
directors in the Santa Clara Superior Court of the
State of California, alleging violations of the
California Corporations Code and California Civil Code.
In October 1996, a similar parallel lawsuit against the
Company and the same individuals in the State Court action
was filed in the United States District Court for the
Northern District of California alleging violations of
the federal securities laws. The class period in both of these
lawsuits runs from September 12, 1994 through December
29, 1995, and both complaints allege that the
defendants concealed and/or misrepresented material
adverse information about the Company and that the
individual defendants sold shares of the Company's stock
based upon material nonpublic information. The complaints
seek unspecified monetary damages. The Company believes
that both actions are without merit and intends to defend both
actions vigorously. However, litigation is subject to
inherent uncertainties and, thus, there can be no assurance
that these lawsuits will be resolved favorably to the Company
or that they will not have a material adverse affect
on the Company's financial condition and results of
operations.
*The telecommunications industry is characterized by
the existence of a large number of patents and frequent
litigation based on allegations of patent infringement.
For example, a third party has expressed its belief on
several occasions that certain of the Company's
products, including its CSU/DSUs, may infringe upon six
patents held by it and has suggested on such occasions
that the Company acquire a license to such patents. There
can be no assurance that these assertions will be resolved without
costly litigation or in a manner that is not adverse to
the Company. The Company believes that a license, to the
extent required, will be available; however, no assurance
can be given that the terms of any offered license would
be favorable to the Company. Should a license be
unavailable, the Company could be required to discontinue
the sale of or to redesign certain of its products. In
addition, Larscom, a competitor of the Company, has
continued to express its belief that the Company's
inverse multiplexer products may infringe a patent
jointly owned by Larscom and a third party and has
suggested that the Company acquire a license to the
patent. There can be no assurance that other third parties
will not assert infringement claims against the Company
in the future, that any such claims will not result in
costly litigation or that the Company will prevail in
such litigation or be able to license any valid and
infringed patents from third parties on commercially
reasonable terms. The Company's management,
after review and consultation with counsel, believes that
the ultimate resolution of these allegations are uncertain
and there can be no assurance that these assertions will
be resolved without costly litigation or in a manner that
is not adverse to the Company. Accordingly, while the
Company has accrued certain amounts for these
matters, the ultimate resolution of these matters could result
in payments in excess of the amounts accrued in the Company's
financial statements and require royalty payments in the future
which could adversely impact gross margins.
*The risks outlined herein are difficult for the
Company to forecast, and these or other factors can
materially affect the Company's operating results and stock
price for one quarter or a series of quarters. Further,
in recent years the stock market has experienced extreme
price and volume fluctuations that have particularly
affected the market prices of securities of many high
technology companies, for reasons frequently unrelated to
the operating performance of the specific companies.
These fluctuations, as well as general economic, political
and market conditions, may materially adversely affect the
market price of the Company's common stock.
*During October 1995, the Financial Accounting Standards
Board issued Statement No. 123 (SFAS No. 123), "Accounting
for StockBased Compensation," which establishes a fair
value based method of accounting for stock-based
compensation plans. The Company intends to continue to
account for employee stock options under APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123
is effective for fiscal years beginning after December 15,
1995 and will require certain additional disclosures in
the financial statements for the year ending
December 31, 1996.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1996, a class action complaint was filed
against the Company and certain of its officers and
directors in the Santa Clara Superior Court of the
State of California, alleging violations of the
California Corporations Code and California Civil Code.
In October 1996, a similar parallel lawsuit against the
Company and the same individuals in the State Court
action was filed in the United States District Court for
the Northern District of California alleging violations
of the federal securities laws. The class period in both
of these lawsuits runs from September 12, 1994 through
December 29, 1995, and both complaints allege that
the defendants concealed and/or misrepresented material
adverse information about the Company and that the
individual defendants sold shares of the Company's stock
based upon material nonpublic information. The complaints
seek unspecified monetary damages. The Company believes
that both actions are without merit and intends to defend
both actions vigorously. However, litigation is subject
to inherent uncertainties and, thus, there can be no assurance
that these lawsuits will be resolved favorably to the Company
or that they will not have a material adverse affect
on the Company's financial condition and results of
operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In September 1996, Alan Fraser joined the Company as
President and Chief Executive Officer, replacing Vinita
Gupta, who remains as Chairperson of the Board of Directors.
Mr. Fraser is also a member of the Company's Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.18 Employment Agreement between Registrant and
Alan Fraser dated September 5, 1996.
10.19 Security Agreement between Registrant and
Alan Fraser dated September 30, 1996.
10.20 Secured Promissory Note from Alan Fraser
dated September 30, 1996.
11.01 Statement of Computation of Net
Income Per Share.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
quarter ended September 30, 1996.
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 thereunto
duly authorized.
DIGITAL LINK CORPORATION
Date: November 14, 1996 \s\ Alan I. Fraser
Alan I. Fraser
Chief Executive Officer
Date: November 14, 1996 \s\ Stanley E. Kazmierczak
Stanley E. Kazmierczak
Chief Financial Officer
EXHIBIT INDEX
Exhibits
10.18 Employment Agreement between Registrant
and Alan Fraser dated September 5, 1996.
10.19 Security Agreement between Registrant
and Alan Fraser dated September 30, 1996.
10.20 Secured Promissory Note from Alan
Fraser dated September 30, 1996.
11.01 Statement of Computation of Net Income
Per Share.
27.01 Financial Data Schedule
Exhibit 11.01
<TABLE>
<CAPTION>
DIGITAL LINK CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data, unaudited)
Quarter Ended Nine Months Ended
September 30, September 30
1996 1995 1996 1995
Primary:
<S> <C> <C> <C> <C>
Net income $1,481 $1,678 $2,890 $ 4,303
Weighted average number of
shares from:
Common shares
outstanding 9,149 8,800 9,080 8,736
Common equivalent shares
from stock options
outstanding 302 683 337 734
Common and common equivalent
shares used in computing per
share amounts 9,451 9,483 9,417 9,470
Net income per share $ 0.16 $ 0.18 $ 0.31 $ 0.45
Note: There is no material difference in the computation of
net income per share on a fully diluted basis.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending September 30, 1996, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,644
<SECURITIES> 15,243
<RECEIVABLES> 6,463
<ALLOWANCES> 562
<INVENTORY> 5,604
<CURRENT-ASSETS> 31,239
<PP&E> 7,198
<DEPRECIATION> 5,359
<TOTAL-ASSETS> 59,513
<CURRENT-LIABILITIES> 8,722
<BONDS> 0
0
0
<COMMON> 29,778
<OTHER-SE> 21,013
<TOTAL-LIABILITY-AND-EQUITY> 59,513
<SALES> 36,355
<TOTAL-REVENUES> 36,355
<CGS> 14,869
<TOTAL-COSTS> 33,938
<OTHER-EXPENSES> (1,832)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,249
<INCOME-TAX> 1,359
<INCOME-CONTINUING> 2,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,890
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
Exhibit 10.18
September 5, 1996
Mr. Alan I. Fraser
14403 Donna Lane
Saratoga, CA 95070
Dear Alan:
On behalf of Digital Link Corporation (the "Company") Board of
Directors, I am extremely pleased to offer you the position of
President and Chief Executive Officer of the Company. The
terms offered are as follows:
1. Your biweekly salary will be $11,538.47 and will be
subject to an annual review starting January, 1998. Starting next
year you will be eligible to earn up to 35% of your base salary as
an annual bonus based on targets. Generally eighty per cent
(80%) of this bonus is based upon meeting the fiscal years
Company targeted revenues and operating income and 20% is at
the Board's discretion. The structure and criterion of bonus
may be changed at any time by the Compensation Committee.
Executive bonuses are payable after the first Board of
Directors' meeting following the close of the fiscal year which
is the calendar year. You must be an employee of Digital Link
at the time the bonus is paid. You will not qualify for any
bonus for the remainder of 1996. You will also be eligible to
participate in the regular health insurance and other employee
benefit plans established by the Company for its employees from
time to time. A brief summary of the benefits currently
offered by the company, entitled Flexible Benefit Program, is
attached.
2. Digital Link will pay a car allowance of $250.00 per
month plus $.20 per mile for actual business related auto travel.
3. The Company will pay you a $45,000 sign-on bonus on the
date you begin employment with the Company. This bonus is non
refundable as long as you stay as an active employee of the
Company for at least 90 days.
4. The Board of Directors of the Company will grant you an
option to purchase up to 370,000 shares of common stock of the
Company under the 1992 Equity Incentive Plan at the current
fair market value of the Company's common stock. The shares
you will be given the opportunity to purchase will vest at the
rate of 25% one year from the date of the grant, and then
ratably over the following 36 months as long as you remain
employed by the Company. You also qualify for additional stock
options under annual review starting January 1998.
5. The Company will loan you $250,000 on the date you begin
employment, to be repaid at the end of 36 months along with the
entire interest payment, except as provided below. The per
annum interest rate will be the IRS related party interest rate
on the date of the loan.
If you sell any shares of Digital Link common stock prior
to the end of the 36 months period, the proceeds of the sales
must first be applied to the repayment of the loan. Your
options and shares (upon exercise) will be the collateral for
repayment of the loan. You will have to sign a separate full
recourse promissory note and security agreement to document
these obligations.
6. As the CEO, you will be elected to the Company's Board of
Directors as of your first date of employment.
7. As an employee of the Company, you will have access to
certain Company confidential information and you may, during the
course of your employment, develop or have access to information or
inventions which will be the property of the Company. To protect the
interests of the Company, you will be required to sign the
Company's standard Invention Assignment and Proprietary
Information Agreement as a condition of your employment. A
copy of this agreement is attached for your review. We wish
to remind you not to bring with you any confidential or
proprietary material of any former employer or violate any
other obligations you may have to your former employers.
8. While we look forward to a long and profitable
relationship, should you decide to accept our offer, you will
be an at-will employee of the Company, which means that the
employment relationship may be terminated by either of us for
any reason at any time. Any statements or representations to
the contrary (and, indeed, any statements contradicting any
provision of this letter) should be regarded by you as
ineffective. unless written and signed by the Chairperson of
the Board. Participation in any Company benefit program is not
to be regarded as an assurance of continued employment for any
particular period of time.
9. In the event of termination by Digital Link of your active
services with Digital Link other than for cause (cause or other
than cause to be determined by the Board of Directors of the
Company) you will have a consulting contract with the Company
for up to the next twelve months. During these twelve months
you will be a consultant and will be paid full base salary and
benefits and the stock options will continue to vest. In the
event that you are employed elsewhere during the period, your
salary will discontinue upon start of alternate work but your
stock vesting will be continued. You in return agree not to
compete with the Company for the twelve month consulting period
after termination of your active employment with the Company.
10. In the event your position is eliminated due to the
Company being acquired by another company, you will have a
consulting contract with the acquirer, for up to the next
twelve months after termination. During these twelve months you
will be a consultant and will be paid full base salary and
benefits and the stock options will continue to vest. In the
event that you are employed elsewhere during the period, your
salary will stop upon start of alternate work but your stock
vesting will be continued. You in return agree not to compete
with the Company or its acquirer for the twelve month
consulting period after termination of your active employment
with the acquirer.
11. The Immigration Reform and Control Act of 1986 requires
you, within three business days of hire, to present
documentation demonstrating that you have authorization to work
in the United States. Acceptable documentation is shown on the
enclosed form titled Employment Eligibility Verification (Form
I-9). Please bring this form to work along with the
appropriate documentation. If you have questions about this
requirement, which applies to U.S. citizens and non-U.S.
citizens alike, please contact our Human Resources department.
12. You and the Company agree that any dispute or claim of any
nature arising between us, other than claims for worker's
compensation or unemployment benefits, shall be submitted to
final and binding arbitration before a single neutral
arbitrator. The arbitrator shall be selected according to the
commercial arbitrator selection procedures of the American Arbitration
Association, and his or her fees shall be shared equally by the
parties. The arbitrator shall decide any such claim and may
grant any relief authorized by law. The arbitrator shall issue
a written award and opinion. Nothing contained herein shall
preclude you or the Company from seeking a temporary injunction
or other provisional relief where appropriate. This agreement
is governed by the California arbitration statute, Code of
Civil Procedure 1280 et seq.
13. As an acceptance of the offer, please sign below and
return a copy of this letter to myself by September 12, 1996,
after which date this offer will expire, unless extended in
writing by the Company. Your signature will acknowledge that
you have read, understood and agree to the terms and conditions
of this offer. We would like your first day of employment be no
later than September 30, 1996.
I have received and had access to all the information I need to
make an informed decision in respect to employment by the
Company. I accept the offer of employment stated in this
letter and expect to begin employment on September 30, 1996.
\s\ Alan Fraser September 10, 1996
Signature Date
We look forward to welcoming you to the Company.
Sincerely,
\s\ Vinita Gupta
Vinita Gupta
Chairperson of the Board
Exhibit 10.19
SECURITY AGREEMENT
This Security Agreement (this "Agreement") is made and entered
into effective as of September 30, 1996 (the "Effective Date")
by and between Alan I. Fraser ("Borrower") and Digital Link
Corporation, a California corporation ("Lender").
RECITALS
A. Borrower has borrowed the principal amount of
$250,000.00 from Lender pursuant to the terms of a certain
Secured Promissory Note of Borrower to Lender dated of even
date herewith (the "Note").
B. The parties have agreed that Borrower's
obligations under the Note will be secured by Borrower's grant
to Lender of a security interest in and to certain collateral,
pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of loans made or to
be made by Lender under the Note, the parties' agreements
herein, and for other good and valuable consideration, the
parties hereby agree as follows:
1. Security. The payment and performance of
Borrower's obligations under the Note (hereinafter collectively
referred to as the "Obligations") will at all times be secured
as follows:
(a) Grant of Security Interest. As security
for the due performance and payment of the Obligations, Lender
hereby grants to Lender a security interest in the "Collateral"
as defined in Section 1(b).
(b) Collateral Defined. As used in this
Agreement, the term "Collateral" means, collectively, the
assets described in Exhibit A attached hereto and all proceeds
thereof. Borrower shall deposit the Collateral with Lender and
Lender shall keep the Collateral at Lender's principal place of
business for the term of this Agreement.
(c) Financing Statements. So long as Borrower
is indebted to Lender under the Note, Borrower will promptly
execute and deliver to Lender such assignments, notices,
financing statements, or other documents and papers as Lender
may reasonably require in order to perfect and maintain the
security interest in the Collateral granted to Lender hereby
and to give any third party notice of Lender's interest in the
Collateral. Borrower will pay to Lender all expenses incurred
by Lender in filing such assignments, notices, financing
statements or other documents or papers (and any continuation
statements or amendments thereto). Upon the full and final
discharge of all of Borrower's Obligations, Lender will execute
and deliver such documents as may be reasonably necessary and
requested by Borrower to release the Collateral from the
security interest granted to Lender in this Agreement.
2. Representations and Warranties of Borrower.
Borrower represents and warrants to Lender that:
(a) Authority. Borrower has all right, power
and authority necessary to make, enter into and perform its
obligations under this Agreement and to grant Lender the
security interest in the Collateral granted in Section 1 above,
without the need for the consent or approval of any other
person or entity. Borrower has taken all necessary action to
make this Agreement the legal, valid, binding and enforceable
obligation of Borrower that it purports to be.
(b) No Legal Obstacle to Agreement. To the
best of Borrower's knowledge, neither the execution and
delivery of this Agreement nor the consummation of any
transaction contemplated hereby, nor the fulfillment of the
terms of this Agreement or of any other agreement or instrument
referred to herein, has constituted or resulted in, or will
constitute or result in, a breach of the provisions of any
instrument, contract or agreement to which Borrower is a party
or by which Borrower and/or the Collateral is bound, or the
violation of any law, judgment, decree or governmental or
administrative order, rule or regulation applicable to
Borrower, or has resulted in or will result in the creation of
any lien or claim upon any of the Collateral. No consent of
any other person (including without limitation any creditor of
Borrower) is required in connection with the execution,
delivery, performance, validity or enforceability of this
Agreement.
(c) Title; No Liens or Claims in Collateral.
Borrower owns all right, title and interest in and to the
Collateral and no other person or entity has any right, title
or interest in or to the Collateral, except for statutory liens
for the payment of current taxes that are not yet delinquent.
All of the Collateral is (and until the Note has been paid in
full and all the Obligations are fully satisfied will be) free
and clear of all liens, security interests, mortgages, claims,
rights, encumbrances and restrictions of any kind except for
statutory tax liens and the security interest granted to Lender
under this Agreement.
(d) No Bankruptcy. Borrower is not subject to
any bankruptcy case or insolvency proceedings before any court
in any jurisdiction. In the ninety (90) days preceding the
effective date hereof, Borrower has not received any threat
from any third party to subject Borrower to any involuntary
bankruptcy or insolvency proceeding.
3. Covenants of Borrower. Borrower hereby
covenants and agrees with Lender as follows:
(a) Taxes. Borrower will pay all taxes due and
owing by Borrower at such time as they become due. Borrower
will keep the Collateral in good condition and repair
continuously for so long as Borrower has Obligations to Lender
under the Note.
(b) Maintenance of Records. Borrower will keep
and maintain at its own cost and expense satisfactory and
complete records of the Collateral belonging to it. For
Lender's further security, Lender will have a security interest
in all of the books and records of Borrower pertaining to the
Collateral.
(c) Notice to Account Debtors. Upon the
request of Lender at any time after the occurrence and during
the continuance of an Event of Default (as defined below),
Borrower shall notify account debtors on all Borrower's
accounts that such accounts have been assigned to Lender and
that payments in respect thereof shall be made directly to
Lender.
(d) Moving of Collateral. Borrower will not
move or relocate any or all of the Collateral that remains
owned by Borrower to any location outside the State of California
without Lender's prior written consent, which may be withheld
in Lender's sole discretion. Any notice provided by Borrower
relating to the movement of Collateral shall indicate in detail
the description of the Collateral to be moved or relocated and
the location(s) and address(es) to which such Collateral is to
be moved.
(e) Sale of Collateral. Borrower will not,
without Lender's prior written consent, which may be withheld
in Lender's sole discretion: (i) sell, lease, assign, transfer
or otherwise dispose of the Collateral, any part thereof or any
interest therein, or any of Borrower's rights therein, to any
person, entity or party other than Lender.
4. Lender' Rights and Remedies Upon Event of
Default.
(a) General Remedies. In the event of an
occurrence of any Event of Default (as that term is defined in
the Note, in addition to exercising any other rights or
remedies Lender may have under the Note, at law or in equity,
or pursuant to the provisions of the California Commercial
Code, Lender may, at its option, and without demand first made,
exercise any one or all of the following rights and remedies:
(i) collect the Collateral and its proceeds; (ii) take
possession of the Collateral wherever it may be found, using
all reasonable means to do so, or require Borrower to assemble
the Collateral and make it available to Lender at a place
designated by Lender which is reasonably convenient to
Borrower; (iii) proceed with the foreclosure of the security
interest in the Collateral granted herein and the sale or
endorsement and collection of the proceeds of the Collateral in
any manner permitted by law or provided for herein; (iv) sell,
lease or otherwise dispose of the Collateral at public or
private sale, with or without having the Collateral at the
place of sale; (v) institute a suit or other action against
Borrower for recovery on the Note; (vi) exercise any rights and
remedies of a secured party under the California Commercial
Code; and/or (vii) offset, against any payment due from
Borrower to Lender, the whole or any part of any indebtedness
of Lender to Borrower.
(b) No Election of Remedies. The election by
Lender of any right or remedy will not prevent Lender from
exercising any other right or remedy against Borrower.
(c) Proceeds. If an Event of Default occurs,
all proceeds and payments with respect to the Collateral will
be retained by Lender (or if received by Borrower will be held
in trust and will be forthwith delivered by Borrower to Lender
in the original form received, endorsed in blank) and held by
Lender as part of the Collateral or applied by Lender to the
payment of the Obligations.
(d) Sales of Collateral. Any item of
Collateral may be sold for cash or other value at public or
private sale or other disposition and the proceeds thereof
collected by or for Lender. Borrower agrees to promptly
execute and deliver, or promptly cause to be executed and
delivered, such instruments, documents, assignments, waivers,
certificates and affidavits and supply or cause to be supplied
such further information and take such further action as Lender
may require in connection with any such sale or disposition.
Lender will have the right upon any such public sale or sales,
and, to the extent permitted by law, upon any such private sale
or sales, to purchase the whole or any part of the Collateral
so sold, free of any right or equity of redemption in Borrower,
which right or equity is hereby waived or released. If any
notice of a proposed sale, lease, license or
other disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if given at least
ten (10) days before such sale, lease, license or other
disposition. Lender agrees to give Borrower ten (10) days
prior written notice of any sale, lease, license or other
disposition of Collateral (or any part thereof) by Lender.
(e) Application of Proceeds. The proceeds of
all sales and collections in respect of the Collateral, the
application of which is not otherwise specifically herein
provided for, will be applied as follows: (i) first, to the
payment of the costs and expenses of such sale or sales and
collections and the attorneys' fees and out-of-pocket expenses
incurred by Lender relating to costs of collection; (ii)
second, any surplus then remaining will be applied first, to
the payment of all unpaid interest accrued under the Note, and
then to the payment of unpaid principal under the Note; and
(iii) third, any surplus then remaining will be paid to
Borrower.
5. Notices. Any notice required or permitted
hereunder will be given in writing and will be deemed
effectively given upon personal delivery, three days after
deposit in the United States mail by first class mail, one (1)
business day after its deposit with any express courier
(prepaid), or one (1) business day after transmission by
telecopier, in each case addressed to the other party at such
party's address (or facsimile number, in the case of
transmission by telecopier) as shown below its signature to
this Agreement, or to such other address as such party may
designate in writing from time to time to the other party.
6. Jurisdiction; Venue. Borrower, by its execution
hereof hereby, irrevocably submits to the in personam
jurisdiction of the state courts of the State of California and
of the United States District Court for the Northern District
of California that are located in Santa Clara County,
California, for the purpose of any suit, action or other
proceeding arising out of or based upon this Agreement.
7. Termination. When all Obligations have been
paid and performed in full and discharged, this Agreement and the
security interest granted to Lender under this Agreement will
terminate.
8. Amendments and Waivers. No amendment or
modification of this Agreement may be made or be effective
unless and until it is set forth in writing and signed by all
parties hereto. No waiver of any right under this Agreement
will be effective unless expressly set forth in a writing
signed by each party against whom such waiver is asserted. No
course of dealing between the parties will operate as a waiver
of any party's rights under this Agreement. A waiver on any
one occasion will not be construed as a bar to or waiver of any
right or remedy on any future occasion. Borrower acknowledges
that the giving by Lender of any notice or information to
Borrower, or the securing of any consent by Borrower, not
required by the express terms hereof to be given or secured,
will not by implication constitute an amendment to or waiver or
modification of any provision hereof, or impose upon Lender any
duty to give any such notice or information or to secure any
such consent on any future occasion.
9. Attorneys' Fees. If any party hereto commences
or maintains any action at law or in equity (including
counterclaims or cross-complaints) against the other party
hereto by reason of the breach or claimed breach of any term or
provision of this Agreement, then the prevailing party in said
action will be entitled to recover its reasonable attorney's fees
and court costs incurred therein.
10. Successors and Assigns. The provisions of this
Agreement will inure to the benefit of, and be binding on, each
party's respective heirs, successors and assigns.
11. Miscellaneous. The invalidity or
unenforceability of any term or provision of this Agreement
will not affect the validity or enforceability of any other
term or provision hereof. The headings in this Agreement are
for convenience of reference only and will not alter or
otherwise affect the meaning of this Agreement. This Agreement
and the Note and the exhibits thereto, together constitute the
entire agreement and understanding of the parties regarding the
subject matter hereof and supersede any and all prior
understandings and agreements between the parties with respect
to such subject matter.
12. Governing Law. This Agreement will be governed
by and construed exclusively in accordance with the internal
laws of the State of California as applied to agreements
between residents thereof and to be performed entirely within
such State, without reference to that body of law relating to
conflict of laws or choice of law.
13. Execution in Counterparts. This Agreement may
be executed in any number of counterparts, which together will
constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed and delivered as of the Effective Date.
BORROWER: LENDER:
\s\ Alan I. Fraser \s\ Stanley E. Kazmierczak
Alan I. Fraser Stanley E. Kazmierczak
Address: 14403 Donna Lane Title: Chief Financial Officer
Saratoga, CA 95070 Address: 217 Humboldt Court
Fax No. Sunnyvale, CA 94089
Fax No.: (408) 745-6250
[The remainder of this page has been intentionally left blank]
EXHIBIT A
DESCRIPTION OF COLLATERAL
Option granted to Alan I. Fraser to purchase 370,000 shares of
Common Stock of Digital Link Corporation and shares of Common Stock
issuable upon exercise of such option.
Exhibit 10.20
SECURED PROMISSORY NOTE
Sunnyvale, California
$250,000.00 September 30, 1996
1. Obligation. The undersigned, Alan I.
Fraser ("Borrower") hereby promises to pay to the order of
Digital Link Corporation, a California corporation,
("Lender" or "Holder") on or before
September 30, 1999, at Lender's principal place of
business at 217 Humboldt Court, Sunnyvale, California
94089, or at such other place as Holder may direct, the
principal sum of Two Hundred Fifty Thousand Dollars
($250,000.00), together with all interest accrued on
unpaid principal, at a rate of six and two one
hundredths percent (6.02%) per annum (calculated on the
basis of a 360day year), compounded annually, which rate
is not less than the minimum rate established
pursuant to Section 1274(d) of the Internal Revenue Code of 1986,
as amended, as of the date hereof. As
used herein, the term "Holder" shall
initially mean Lender, and shall subsequently mean each
person or entity to whom this Note is duly assigned.
If any payment of principal or interest under this Note
becomes due and payable on a day other than a business
day then the maturity of such payment will be extended
to the next succeeding business day, and with respect
to the payment of principal, interest thereon will be
payable at the rate set forth herein during the period
of such extension.
2. Prepayment. Prepayment of unpaid principal
and/or interest due under this Note may be made at any time
without penalty. Unless otherwise agreed in writing
by Holder, all payments will be made in lawful tender of the United
States and will be applied (a) first, to the payment of
accrued interest, and (b) second, (to the extent that the
amount of such prepayment exceeds the amount of all such
accrued interest), to the payment of principal.
3. Security. Payment of this Note is secured
by a security interest in assets and properties of Borrower
granted pursuant to the terms and conditions of a
Security Agreement dated of even date herewith among
Borrower and Lender, as such may be amended from time to
time (the "Security Agreement").
4. Default; Acceleration of Obligation. Borrower
will be deemed to be in default under this Note and the
outstanding unpaid principal balance of this Note, together with all
interest accrued thereon, will immediately become due and
payable in full, without the need for any further action
on the part of Holder, upon the occurrence of any of
the following events (each an "Event of
Default"): (a) upon Borrower's failure to make any
payment when due under this Note; (b) upon any sale,
transfer or other disposition of the Collateral by
Borrower; (c) upon the filing by or
against Borrower of any voluntary or involuntary
petition in bankruptcy or any petition for relief
under the federal bankruptcy code or any other state or
federal law for the relief of debtors; provided, however, with
respect to an involuntary petition in bankruptcy, such petition has
not been dismissed within thirty (30) days after the
filing of such petition; (d) upon the execution by
Borrower of an assignment for the benefit of creditors
or the appointment of a receiver, custodian,
trustee or similar party to take possession of
Borrower's assets or property; or (e) upon any breach,
default or violation by Borrower of any term, condition,
obligation, representation or covenant of the Security Agreement.
5. Remedies On Default; Acceleration. Upon any
Event of Default, Holder will have, in addition to its rights and
remedies under this Note, full recourse against any
real, personal, tangible or intangible assets of
Borrower, and may pursue any legal or equitable remedies
that are available to Holder, and may declare the entire
unpaid principal amount of this Note and all unpaid
accrued interest under this Note to be immediately due and
payable in full.
6. Waiver and Amendment. Any provision of this
Note may be amended or modified only by a writing signed by both
Borrower and Holder. Except as provided below with
respect to waivers by Borrower, no waiver or consent with
respect to this Note will be binding or effective unless
it is set forth in writing and signed by the party
against whom such waiver is asserted. No course of
dealing between Borrower and Holder will operate as a
waiver or modification of any party's rights or
obligations under this Note. No delay or failure on
the part of either party in exercising any right or
remedy under this Note will operate as a waiver of such
right or any other right. A waiver given on one occasion
will not be construed as a bar to, or as a waiver of,
any right or remedy on any future occasion.
7. Waivers of Borrower. Borrower hereby
waives presentment, notice of non-payment, notice of dishonor,
protest, demand and diligence. This Note may be amended
only by a writing executed by Borrower and Holder.
8. Governing Law. This Note will be governed
by and construed in accordance with the internal laws of the
State of California as applied to agreements between
residents thereof to be performed entirely within such
State, without reference to that body of law relating to
conflict of laws or choice of law.
9. Severability; Headings. The
invalidity or unenforceability of any term or
provision of this Note will not affect the validity
or enforceability of any other term or provision
hereof. The headings in this Note are
for convenience of reference only and will not alter
or otherwise affect the meaning of this Note.
10. Jurisdiction; Venue. Borrower, by its
execution of this Note, hereby irrevocably submits to the in
personam jurisdiction of the state courts of the State of
California and of the United States District Court for the
Northern District of California that are located in Santa
Clara County, California, for the purpose of any suit,
action or other proceeding arising out of or based upon this
Note.
11. Attorneys' Fees. If suit is brought for collection
of this Note or enforcement of the Security Agreement,
Borrower agrees to pay all reasonable expenses, including
attorneys' fees, incurred by Holder in connection therewith
whether or not such suit is prosecuted to judgment.
12. Assignment. This Note is freely transferable
and assignable by Holder, provided that such transfer is made
in compliance with all applicable state and federal securities
laws. Any reference to Holder herein will be deemed to refer
to any subsequent transferee of this Note at such time
as such transferee holds this Note. This Note may not be
assigned or delegated by Borrower,
whether by voluntary assignment
or transfer, operation of law, merger or otherwise.
IN WITNESS WHEREOF, Borrower has executed this Note
as of the date and year first above written.
BORROWER
\s\ Alan I. Fraser
Alan I. Fraser
