SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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) (ZIP Code)
Registrant's telephone number, including area code: (408)745 6200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non affiliates of
the registrant as of March 28, 1997, was approximately $125,707,299.00.
The number of shares outstanding of the registrant's Common Stock as of
March 28, 1997, was shares 9,142,349.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission
relative to the Company's annual meeting of stockholders to be held May
21, 1997 are incorporated by reference in Part III of this Form 10-K.
DIGITAL LINK CORPORATION
ANNUAL REPORT ON FORM 10K
For the Year Ended December 31, 1996
TABLE OF CONTENTS
Form 10-K
Item No. Name of Item Page
PART I
Item 1. Business....................................... 3
Item 2. Properties .................................... 10
Item 3. Legal Proceedings.............................. 10
PART II
Item 5. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters ........................... 11
Item 6. Selected Financial Data ...................... 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . 12
Item 8. Financial Statements and Supplementary Data ... 22
PART III
Item 10. Directors and Executive Officers of the
Registrant ................................... 38
Item 11. Executive Compensation ....................... 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................... 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8K ..... .................... 40
Signatures .......................... ................... 42
PART I
ITEM 1. BUSINESS
Except for the historical statements contained herein, this Form 10-K
contains forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended ("the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward looking statements involve a number
of risks, known and unknown, and uncertainties, such as the loss of,
or difference in actual from anticipated levels of purchases from,
the Company's major customers, the impact of competitive products and
pricing and other risks which are described throughout this Form 10-K,
including under the sections titled "Products and Technology,"
"Customers and End Users," "Research and Development," "Manufacturing,"
"Competition," "Intellectual Property and Other Proprietary Rights"
and "Employees" in Item 1 hereof and within "Management's Discussion
and Analysis of Financial Condition and Results of Operations," including
under the title "Other Factors That May Affect Future Operating Results,"
in Item 7 of this Form 10-K. The actual results that Digital Link
Corporation (the "Company" or "Digital Link") achieves may differ
materially from any forward looking statements due to such
risks and uncertainties. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report
and in the Company's reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks
and factors that may affect the Company's business.
Due to all the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication
of future performance. Similarly, past performances are not necessarily
indicative of future results. It is likely that, in some future quarters,
the Company's operating results will be below the expectations of stock
market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected. Consequently,
the purchase or holding of the Company's Common Stock involves an extremely
high degree of risk.
Overview
The Company designs, manufactures, markets and supports a broad range
of high speed digital access products for wide area networks ("WANs")
worldwide. The Company's products provide access to private WANs based
on dedicated leased lines and public WANs based on centralized
switching networks such as Internet, Frame Relay, Switched Multimegabit
Data Service ("SMDS") and Asynchronous Transfer Mode ("ATM"). The
Company's products allow local area network ("LAN")-based internetworking
devices, such as routers, to access WANs and also integrate data with
digitized voice and video traffic for more efficient line utilization.
Digital Link's products are used both in the customer premise equipment
("CPE") environment and in the networks of interexchange carriers
("IXCs"), Internet service providers ("ISPs") and telephone companies.
The Company believes it is a leader in the WAN access products
market because of its broad range of products and its diverse sales
channels. The Company markets and sells its products in North America,
Europe, South America and Asia primarily through its direct sales force,
value added resellers ("VARs") and original equipment manufacturers
("OEMs").
The Company was incorporated in California in 1985. Its principal
executive offices are located at 217 Humboldt Court, Sunnyvale, California
94089, its Internet address is www.dl.com, and its telephone number
is (408) 745-6200.
Industry Background
The growing reliance on enterprise-wide networks to facilitate the
sharing of information has created an environment in which the linkage
of multiple LANs over wide area networks is critical to daily operations.
Two types of WANs have developed to satisfy internetworking
needs: private WANs, which are generally based on dedicated leased lines;
and public WANs, which are based on centralized switching networks that
route data to the proper destination. In private WANs, the
functions of switching, routing and multiplexing are performed on the
organization's premises utilizing customerowned equipment and dedicated
lines leased from telephone companies and IXCs. As an alternative to
private WANs, telephone companies, ISPs and IXCs offer public WAN services.
Companies that provide products for connecting LAN-based data networks to
WANs must support both private and public WANs, including public WANs based
on Frame Relay, SMDS and ATM technologies. In order for LANs to be
interconnected to WANs, an interface is required to condition LAN-based
data to a format appropriate for transmission over WANs. The Company
believes equipment providers addressing the WAN access market must develop
product solutions flexible enough to respond to the changing standards
and network requirements associated with emerging WAN technologies,
forge strong relationships with telephone companies and ISPs
implementing these services and actively participate in standards
development.
Products and Technology
WAN Access Products
The Company's principal products include 56/64kb, T1/E1 and T3/E3 access
products for private WANs and public WANs which include Internet, Frame
Relay, SMDS and ATM access products. The Company's products range from
simple desktop or rack mounted units for smaller sites to intelligent
multiprocessor systems that support multiple lines and integrate data
with digitized voice and video for larger and more complex sites. The
Company's products are utilized in the CPE environment to enable
internetworking equipment to access WANs. The Company's products may
also be used within the networks of telephone companies, ISPs
and IXCs to provide access to their backbone networks. The list prices
of the Company's products generally range from $300 to $40,000.
The Company's access products are classified as Digital
Service Units/Channel Service Units ("DSUs/CSUs"), access multiplexers
and inverse multiplexers. The Company's DSUs/CSUs generally provide
the interface between a single data port and a single WAN line, and
its access multiplexers are used to multiplex multiple data, voice or
video ports over one or more WAN lines. Digital Link's inverse
multiplexers break down high speed data from a single source for
transmission over multiple T1 WAN lines.
The Company introduced its first T1 access products in 1985. In 1993,
the Company introduced its Encore family of products, which is the next
generation of its T1/E1 access products with certain enhanced features.
This product family is used to interface Ethernet and Token Ring LAN
based data traffic from internetworking devices to dedicated or Frame
Relay based 56kb and T1/E1 lines.
In 1993, the Company also introduced the DL3800 T1 inverse multiplexer
in response to marketplace demand for a method of transporting information
at data rates faster than T1 without the expense and availability
issues associated with T3 lines. The DL3800 accepts data from a single
high speed data device and segments it for transmission over up to eight
T1 lines. In May 1995, the Company introduced the DL3900 multiplexer
shelf which allows customers to reduce the shelf space needed when
installing multiple inverse multiplexers in the same location. In June
1996, the Company introduced an international version of its inverse
multiplexer product line.
The Company introduced its first T3 access products in 1990. The Company's
T3/E3 DSUs and multiplexers include the DL3100 and DL3000 which were
introduced in 1992 and 1991, respectively. The DL3100 connects networking
equipment to T3/E3 lines and is available with single or multiple ports.
The DL3000 is a T3/E3 multiplexer that allows LAN and Fiber Distributed
Data Interface ("FDDI") based traffic from routers and channel extenders
to be multiplexed with T1 traffic from devices such as private branch
exchanges ("PBXs") in order to access multiple T3/E3 lines.
The Company's SMDS and ATM access products consist of DSUs/CSUs and
access multiplexers that connect internetworking equipment to SMDS or
ATM networks. In 1991, the Company began shipping the DL200, which is
a DSU/CSU used to access public SMDS networks that operate over T1/E1
lines. In 1992, the Company began shipping the DL3200, which is a DSU
used to access public SMDS and ATM networks that operate over T3/E3 lines.
The DL3200 is designed to comply with Data Exchange Interface ("DXI")
standards and take data from an internetworking unit that is in DXI format
over a high speed serial interface ("HSSI") and condition the data for
SMDS or ATM connectivity.
The Company believes that network reliability and management are some
of the most important factors considered by users when selecting a
network equipment supplier. In order to maximize network reliability,
the Company has built monitoring and diagnostic tools into all
of its products. Many of the Company's products are compatible with SNMP,
a standards-based network management system. In addition, the Company
provides an SNMPbased graphical user interface, WANview, which can
configure, maintain and test the Company's products.
The markets for the Company's products are characterized by rapid
technological advances, product obsolescence, changes in customer
requirements and evolving regulatory requirements and industry standards.
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 market requirementst.
Any failure by the Company to anticipate or to respond adequately to
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 effect on the Company's business
and operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Net Sales" in Item 7 of this
Form 10-K. In addition, customers could refrain from purchasing the
Company's existing products in anticipation of new product introductions
by the Company or its competitors.
W/ATM GateWay Product
The Company believes that telephone companies and IXCs view the
implementation of a core ATM network infrastructure as a long-term
strategy that will support integrated data and digitized voice and
video traffic. Accordingly, while networks and services based on more
established technologies continue to be deployed, large capacity ATM
switches are also now being developed to implement a future core ATM
infrastructure. In support of this anticipated ATM infrastructure and
to complement the large capacity ATM switches, the Company is developing
its W/ATM GateWay product to connect non-ATM traffic and slower
speed ATM traffic to these high speed ATM switches. The W/ATM
GateWay is designed to be a multiservice access product for local traffic.
The W/ATM GateWay is being designed for use primarily within telephone
company networks. In addition, this product is expected to support all
ATM traffic types, including constant and variable bit traffic for
data and delay sensitive voice and video. The Company has experienced
delays in the development of this product, in part related to technical
problems which required some software to be redesigned. This product was
shipped to a customer for evaluation in February 1997. 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. There can be no assurance that
products currently available or under development by competitors would
not directly compete with the W/ATM GateWay product, that the W/ATM
GateWay will meet the needs of the emerging ATM market or that markets
for the W/ATM GateWay will continue to develop, any of which would have a
material adverse effect on the Company's business and operating results.
Customers and End Users
Digital Link's customers and end users are diverse and represent many
industries. End users of private WANs that incorporate the Company's
access products, as well as telephone companies, ISPs and IXCs that
either incorporate the Company's products within their public networks
or purchase the Company's access products for resale to end users,
include major interexchange carriers, the Regional Bell Operating
Companies (RBOCs), major international carriers, industrial, electronics
and other companies and governments, universities and utilities.
The Company sells a majority of its products to a relatively limited
number of end users, VARs and telephone companies. There can be no
assurance that the Company's current customers will continue to place
orders with the Company or that the Company will be able to obtain orders
from new customers. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Net Sales" and "Quarterly Results of Operations" in Item 7 of this Form
10-K.
Sales and Marketing
The Company primarily markets its products worldwide directly to large
end users, ISPs, IXCs and RBOCs and indirectly primarily through a network
of VARs and OEMs to accommodate specific markets and customer support
requirements. The Company's sales force consists of three groups that
focus on (i) U.S. end users and ISPs, (ii) U.S. & Canadian IXCs and
telephone companies ("carriers") and (iii) international customers. Each
of these groups includes one or more field based system engineers to
provide technical sales support. In addition, the Digital Link sales
organization receives support from various groups within the Company
such as the marketing department, which is responsible, among other
things, for product marketing, customer service, advertising and other
marketing communications.
U.S. End Users and ISPs
Sales to U.S. end users are generally made through the Company's direct
sales force and indirectly through VARs. Thus, the U.S. end users sales
group is primarily responsible for developing and maintaining relationships
with selected end users and for supporting the sales activities of its VARs.
The Company's agreements with its VARs generally have terms of 12 months,
are subject to renewal by mutual agreement and provide for discounts from
the Company's list prices for products based on the expected annual sales
volumes and require the Company to provide sales and application engineering
support. The U.S. end user sales group operates through the Company's
headquarters in Sunnyvale, California and twelve other sales offices.
Carriers
Digital Link's carrier sales force focuses on developing relationships
with carriers in the U.S. and Canada and on understanding the network
deployment strategies of these carriers. Products sold to carriers may
be used (i) within a carrier's network in conjunction with the provision
of their services, (ii) to satisfy the needs of a carrier's management
information systems, where the carrier is anend user of the products,
or (iii) for resale in conjunction with a carrier's provision of services
to an end user. The Company has entered into agreements with certain
carriers in the United States to purchase its products. However,
these agreements do not obligate the carriers to purchase any minimum
quantity of the Company's products.
International Customers
Sales to international customers are primarily made through OEMs and
selected VARs. International VARs authorized to sell the Company's
products are located in several countries within Europe, South America
and Asia. Support for the Company's products sold internationally is
provided by the Company or its authorized VARs. The Company currently
has offices in the United Kingdom, Germany, and Hong Kong.
Customer Support
The Company believes that a high level of continuing service and support
is integral to the Company's objective of developing and maintaining
long-term relationships with its customers. The Company's customer
support personnel are responsible for servicing the Company's products
and provide installation, technical training and post-sales
support (primarily over the telephone). The Company's products generally
have a warranty of 24 months, and the Company offers free telephone
support during normal business hours. The Company also offers customers
the option of entering into a maintenance and support contract that can
include telephone support seven days a week and 24 hours a day, emergency
replacement programs and on-site support. Internationally, the Company
provides customer support either directly or through full service VARs.
Research and Development
The Company's research and development efforts are focused on developing
new products, core technologies and enhancements to existing products.
The Company's product development activities are based on customer
requirements, marketplace needs and active participation by the Company
in industry standards groups and forums.
In 1996, 1995 and 1994, the Company's research and development
expenditures were $10.1 million, $8.9 million, and $7.3 million, which
represented 19.4%, 20.1%, and 20.7%, respectively, of net sales. The
Company's research and development efforts in 1996 primarily focused on the
continued development of the Company's W/ATM GateWay product as well as on
the expansion of its Encore product family by introducing new products
and new features for existing Encore products. During 1997, the Company
expects that it will continue to devote research and development
resources to the development of its W/ATM GateWay product and anticipates
continuing to maintain its focus on developing new products and features
within its WAN access business. See "Products and TechnologyW/ATM GateWay
Product." The Company considers its research and development efforts to
be vital to its future success and anticipates that research and
development expenditures as a percentage of net sales will remain
significant for the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Research and
Development" in Item 7 of this Form 10-K.
As referenced above, the Company's product development activities
frequently address new WAN services and applications based on emerging
technologies. The Company believes this strategy has often resulted
in early market penetration for products based on these technologies.
However, industry standards and requirements are more likely to change
in new markets, which can adversely impact the Company's business and
operating results. Moreover, technology and implementation approaches
selected by the Company may be rendered obsolete by such changes, and a
new market may not become widespread. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Net Sales"
in Item 7 of this Form 10-K.
The Company's success will depend upon its ability to
develop new products that achieve market acceptance and to provide
enhancements to existing products as required by the Company's customers
and the communications marketplace. In order to meet the challenges of
rapidly changing technologies and services and new industry standards which
can render obsolete the Company's products, the Company has invested and
expects to continue to invest substantial resources in the development
of new products and technologies. 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. 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.
As of December 31, 1996, the Company's research and development staff
consisted of 53 employees, of whom 43 were engineers, and approximately
half of such engineers were engaged principally in the development of
software. The Company believes its ability to attract and retain
qualified development personnel is essential to the success of its
development programs. The market for such personnel is highly competitive,
and the Company's development activities could be adversely affected if
the Company is unsuccessful in attracting and retaining skilled
technical personnel.
Manufacturing
The Company's manufacturing operations consist primarily of component
procurement and final assembly, test and quality control of subassemblies
and systems. The Company uses local third party contractors to manufacture
and assemble printed circuit boards. The Company installs software
into the electronically programmable read only memory ("EPROM") of
its systems to maintain quality control and security. The manufacturing
process enables the Company to configure the hardware and software in
combinations to meet a wide variety of customer requirements. The
Company performs "burn-in" procedures and functional tests, as well as
comprehensive inspections to assure the quality and reliability of its
products.
The Company's product designs are proprietary but generally incorporate
industry standard hardware components. However, certain semiconductor
devices and components and subassemblies are presently available only
from single sources, and certain other components are presently available
or acquired only from a limited number of sources. To date, the Company
has been able to obtain adequate supplies of these components, as well
as subassemblies from third party contractors, in a timely manner from
existing sources or, when necessary, from alternative sources, or to
redesign its products to accommodate an alternative component. The
inability to obtain sufficient sole or limited source components or
subassemblies as required in the future, or to develop alternative
sources or redesign its products if and as required in the future, could
result in delays or reductions in product shipments that could materially
adversely affect the Company's business and operating results or damage
customer relationships.
Competition
The market for the Company's products is highly competitive. Many of
the Company's customers purchase products from both the Company and the
Company's competitors. The Company currently competes primarily
with Kentrox Industries, Inc., a subsidiary of ADC Telecommunications,
Inc. ("Kentrox"), Larscom Inc. ("Larscom") and Verilink Corporation
("Verilink"). The Company competes to a lesser extent with various other
communications companies, including Adtran, Inc., Paradyne Corporation
and Visual Networks, Inc. Many of the Company's current and potential
competitors have greater financial, research and development, intellectual
property, marketing and other resources than those of the Company and
have broader product lines and longer standing relationships with
customers than the Company.
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. In addition, the Company faces competition from
internetworking suppliers, such as routers, and telephone equipment, such
as switches, who included direct WAN interfaces in certain of their
products that could reduce demand for the Company's products which could
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
in Item 7 of this Form 10-K. The Company anticipates that this increased
pricing pressure will continue during 1997.
The Company believes that its ability to compete successfully depends
on a number of factors both within and outside of its control, including,
but not limited to, price; announcements by competitors; rapid development
of new products and features; product quality and performance; experienced
sales, marketing and service organizations; and evolving industry standards.
However, there can be no assurance that the Company will be able
to continue to compete successfully with its existing competitors or that
it will be able to compete successfully with new competitors.
Intellectual Property and Other Proprietary Rights
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of
patent infringement. The Company has been contacted by two separate parties
who have expressed their belief that certain of the Company's products
may infringe upon patents held by these two parties. See "Other Factors
That May Affect Future Operating Results - Risk of Third Party Claims of
Infringement," in Item 7 of this Form 10-K.
The Company treats its software and hardsware designs as proprietary
and relies primarily on a combination of copyrights, trademark and trade
secret laws, and employee and third party nondisclosure agreements, to
protect its proprietary information. There can be no assurance that
the contractual obligations to maintain the confidentiality of the
Company's trade secrets or proprietary information will not be breached
by employees, consultants, advisors or others, or that the Company's
trade secrets or proprietary technology will not otherwise become known
or be independently developed by competitors. The Company has one patent
with the U.S. Patent and Trademark office for certain ATM technology which
expires in September 2011. However, there can be no assurance that such
patent will prove to be important in the Company's product development
efforts.
Certain technologies used in the Company's products are licensed from
third parties on a non-exclusive basis. In January 1992, Epilogue
Technology Corporation ("Epilogue") granted the Company a twenty-year,
nonexclusive, nontransferable, worldwide license to modify and
incorporate the source code of certain of Epilogue's software programs
that are used in the Company's products. In addition, in December 1993,
the Company entered into a nonexclusive license with QPSX Communications
Ltd. ("QPSX") to use certain elements of patents owned by QPSX
to manufacture and distribute within the United States products that
conform to certain standards of the Institute of Electrical and Electronic
Engineers ("IEEE").
Employees
As of December 31, 1996, the Company had 222 employees, of whom 53 were
primarily engaged in research and development, 84 in sales, marketing and
administration, 11 in customer support and 74 in manufacturing. From time
to time, Digital Link employs contract labor to assist with its short-term
personnel needs. 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 key management personnel have only recently joined the
Company, including Alan Fraser, the Company's President and Chief Executive
Officer, who joined the Company in September 1996 and certain personnel
have only limited experience in the Company's industry. In February 1997,
Steve Tabaska joined the Company as Chief Technical Officer and Vice
President of Engineering. There can be no assurance that the Company
will be successful in attracting and retaining skilled personnel to hold
these important position. The Company expects to continue to experience
growth in the number of its employees, resulting in increased
responsibilities for the Company's management. The Company's employees
are not represented by any collective bargaining organization. The Company
believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company leases its 60,030 square foot principal facility, which
is located in Sunnyvale, California, pursuant to a lease that expires
in October 1997. The Company has an option to extend the lease for one
additional one year period. The Company also leases facilities for its sales
operations in the United States in Oak Brook Terrace, Illinois; Bethesda,
Maryland; Fort Lee, New Jersey; Cleveland, Ohio; Houston, Texas;
Irving, Texas; and McLean, Virginia. In Europe, the Company leases
facilities in London, England, near Stuttgart, Germany, and in Hong Kong.
The Company believes that its existing facilities are adequate to meet its
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms. See Note 3 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
In April 1996, a class action complaint was filed against the Company
and certain of its officers and directors in Santa Clara Superior Court
of the State of California, alleging violations of the California
Corporations Code and California Civil Code. See "Other Factors That May
Affect Future Operating Results Legal Proceedings," in Item 7 of this
Form 10K.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company began trading in the over the counter
market on the Nasdaq National Market on February 1, 1994 under the symbol
"DLNK." The following table sets forth the high and low closing prices
for the Company's Common Stock as reported on the Nasdaq National
Market for each quarterly period since January 1, 1995. These prices
reflect inter-dealer prices, without retail markup, mark-down or
commission, and may not necessarily represent actual transactions.
1996 1995
High Low High Low
1st Quarter.................... $14.13 $ 8.19 $32.50 $21.25
2nd Quarter.................... $22.00 $ 9.75 $30.75 $22.00
3rd Quarter.................... $18.25 $12.75 $33.50 $23.50
4th Quarter.................... $23.75 $16.50 $26.00 $13.75
As of December 31, 1996, there were 127 holders of record of the Company's
Common Stock and approximately 1,200 beneficial owners. The Company has
never declared or paid any cash dividends on its capital stock. The Company
currently intends to retain any future earnings for use in its business
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes
thereto included elsewhere herein. The consolidated statement of income
data for the years ended December 31, 1996, 1995 and 1994, and the
consolidated balance sheet data at December 31, 1996 and 1995 are derived
from, and are qualified by reference to, the audited consolidated
financial statements included elsewhere in this report and should be
read in conjunction with those financial statements and the notes thereto.
The consolidated statement of income data for the years ended December 31,
1993 and 1992 and the consolidated balance sheet data at December 31,
1994, 1993 and 1992 are derived from audited financial statements not
included in this report.
Year Ended December 31,
(in thousands, except 1996 1995 1994 1993 1992
per share data)
Statement of Income Data:
Net sales $52,078 $44,344 $35,222 $22,509 $17,079
Cost of sales 21,457 16,769 11,927 7,540 5,316
Gross profit 30,621 27,575 23,295 14,969 11,763
Expenses:
Research and development 10,120 8,922 7,300 4,316 3,291
Selling, general and 16,150 13,958 10,514 7,494 5,660
administrative
Total expenses 26,270 22,880 17,814 11,810 8,951
Operating income 4,351 4,695 5,481 3,159 2,812
Other income 2,495 2,281 1,098 242 184
Income before provision
for income taxes 6,846 6,976 6,579 3,401 2,996
Provision for income 2,149 2,162 2,171 1,197 1,055
taxes
Net income $4,697 $4,814 $4,408 $2,204 $1,941
Net income per share(1) $ 0.50 $ 0.51 $ 0.48 $ 0.31 $ 0.28
Shares used in computing
per share amounts(1) 9,478 9,467 9,113 7,169 7,005
Year Ended December 31,
(in thousands) 1996 1995 1994 1993 1992
Balance Sheet Data:
Cash, cash equivalents
and marketable securities $44,048 $37,609 $31,688 $4,505 $4,128
Working capital 28,523 27,483 23,352 8,789 6,821
Total assets 62,733 54,755 46,829 14,687 9,793
Total shareholders' 53,802 47,773 40,211 9,905 7,573
equity
_________________
(1) See Note 1 of Notes to Consolidated FinancialStatements for an
explanation of the determination of the number of shares used
in computing net income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical statements contained herein, this Form 10-K
contains forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended ("the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). These forward looking statements involve a
number of risks, known and unknown, and uncertainties, such as the loss
of, or difference in actual from anticipated levels of purchases from,
the Company's major customers, the impact of competitive products and
pricing and other risks which are described throughout this Form 10-K,
including under the sections titled "Products and Technology,"
"Customers and End Users," "Research and Development," "Manufacturing,"
"Competition," "Intellectual Property and Other Proprietary Rights"
and "Employees" in Item 1 hereof and within "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including
under the title "Other Factors That May Affect Future Operating Results,"
in Item 7 of this Form 10-K. The actual results that Digital Link
Corporation (the "Company" or "Digital Link") achieves may differ
materially from any forward looking statements due to such risks and
uncertainties. Readers are urged to carefully review and consider
the various disclosures made by the Company in this report and in the
Company's reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors
that may affect the Company's business.
Due to all the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of
future performance. Similarly, past performances are not necessarily
indicative of future results. It is likely that, in some future quarters,
the Company's operating results will be below the expectations of
stock market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected.
Consequently, the purchase or holding of the Company's Common Stock
involves an extremely high degree of risk.
Overview
The Company designs, manufactures, markets and supports a broad
range of high speed digital access products for wide area networks
("WANs") worldwide. The Company's products provide access to private
WANs based on dedicated leased lines and public WANs based on centralized
switching networks such as Internet, Frame Relay, Switched Multimegabit
Data Service ("SMDS") and Asynchronous Transfer Mode ("ATM"). The
Company's products allow local area network ("LAN")based internetworking
devices, such as routers, to access WANs and also integrate data
with digitized voice and video traffic for more efficient line utilization.
Digital Link's products are used both in the customer premise equipment
("CPE") environment and in the networks of interexchange carriers ("IXCs"),
Internet service providers ("ISPs") and telephone companies. The
Company believes it is a leader in the WAN access products market because
of its broad range of products and its diverse sales channels. The
Company markets and sells its products in North America, Europe,
South America and Asia primarily through its direct sales force, value
added resellers ("VARs") and original equipment manufacturers ("OEMs").
Results of Operations
The following table sets forth statement of income data as a percentage
of net sales for the years ended December 31, 1996, 1995 and 1994:
Year Ended December 31,
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Cost of sales 41.2 37.8 33.9
Gross profit 58.8 62.2 66.1
Expenses:
Research and development 19.4 20.1 20.7
Selling, general
and administrative 31.0 31.5 29.9
Total expenses 50.4 51.6 50.6
Operating income 8.4 10.6 15.6
Other income 4.8 5.1 3.1
Income before
provision for income taxes 13.2 15.7 18.7
Provision for income taxes 4.1 4.9 6.2
Net income 9.1% 12.5% 10.8%
Net Sales
Net sales increased 17% to $52.1 million in 1996 from $44.3 million
in 1995. The increase in 1996 was 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 SMDS access
products primarily sold in Europe and decreased average selling prices on
certain of the Company's narrowband and broadband products as a result of
price reductions made throughout 1996. Net sales increased 26% to $44.3
million in 1995 from $35.2 million in 1994. The increase in net sales
was primarily attributable to an increase in unit sales of the Encore
family of products and the inverse multiplexer product, offset by a
decrease in unit sales of SMDS access products primarily in Europe and a
decrease in the average selling price of certain of the Company's
narrowband and broadband products as a result of price reductions made
throughout 1995. The Company believes that the decrease in unit sales of
the Company's SMDS access products in Europe in 1996 and 1995 was due in
part to delays in the further deployment of SMDS networks due to technical
problems within the networks and market confusion in Europe among Frame
Relay, SMDS and ATM technologies, which began in late 1995.
In 1996, narrowband sales in absolute dollars increased by 28% and
increased as a percentage of net sales to 61% as compared to 56% in 1995.
Broadband sales increased in absolute dollars by 5% and decreased as
a percentage of net sales to 39% in 1996 as compared to 44% in 1995. In
1996, narrowband sales increased primarily as a result of increased sales
to ISPs and Frame Relay networks. Narrowband sales increased as a percentage
of net sales primarily as a result of lower broadband sales of SMDS products
in Europe. Broadband sales in absolute dollars increased in 1996 primarily
as a result of higher sales to certain domestic carriers and ISPs which
were offset in part by lower SMDS sales in Europe. Broadband sales as a
percentage of net sales decreased from 1995 to 1996 primarily as a result
of lower SMDS sales in Europe, which were slightly offset by higher
broadband sales to certain domestic carrier customers and ISPs. In 1995,
narrowband sales increased by 54% and increased as a percentage of net
sales to 56% as compared to 46% in 1994. In 1995, broadband sales
increased by 3% and decreased as a percentage of net sales to 44% as
compared to 54% in 1994. Narrowband sales increased primarily as a result
of higher unit sales of the Company's Encore product line. The broadband
sales increased primarily as a result of higher unit sales of inverse
multiplexer product, offset by a decrease in unit sales of SMDS access
products in Europe.
International sales (including sales in Canada) represented approximately
17%, 28% and 31% of sales in 1996, 1995 and 1994, respectively. The
decrease in international sales as a percentage of net sales from year to
year are primarily related to the decline in the sales of the Company's
SMDS products, as described above. 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.
In 1996, 1995 and 1994, net sales to MCI represented approximately 13%,
12% and 20%, respectively, of the Company's net sales. In addition, net
sales to Siemens during 1995 and 1994 were 11% and 14%, respectively,
and net sales to BBN Planet Corporation during 1996 were 13%, of the
Company's net sales. The Company anticipates that sales to BBN Planet
Corporation will decrease as a percentage of net sales in 1997
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.
During 1996, net sales through direct sales, value added resellers
(VARs), and OEMs were 58%, 33%, and 9%, respectively, compared to 45%, 37%,
and 18% in 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 of SMDS access products primarily sold in Europe.
Gross Profit
Gross profit increased 11% in 1996 to $30.6 million from $27.6 million
for 1995. Gross margin decreased to 58.8% of net sales in 1996 as compared
to 62.2% in 1995. 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.
Gross profit increased 18% to $27.6 million in 1995 from $23.3 million
in 1994, while gross margin decreased to 62.2% from 66.1%. This decrease
in gross margin in 1995 was primarily due to the above referenced price
reductions, and to a lesser extent, a shift in the mix of products sold to
include more narrowband products, which generally have lower gross margins
than broadband products.
Gross margins may vary significantly from quarter to quarter depending
on many factors including competitive pricing pressures and changes in the
mix of products sold. 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 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. The Company anticipates that this
increased pricing pressure will continue during 1997. In addition, the mix
of products sold may continue to 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
The primary types of expenses included in research and development ("R&D")
expenses are personnel, consulting, prototype materials and professional
services. R&D expenses increased 13% to $10.1 million in 1996 from $8.9
million in 1995. This increase is primarily attributable to higher
consulting fees related to the Company's W/ATM GateWay product, offset by
a decrease in professional services, personnel related expenses and
material costs for prototype products. As a percentage of net sales,
R&D expenses were 19.4% in 1996 as compared to 20.1% in 1995. R&D
expenses increased 22% to $8.9 million in 1995 from $7.3 million in
1994. As a percentage of net sales, R&D expenses decreased slightly to
20.1% in 1995 from 20.7% in 1994. The increase in R&D expenses in absolute
dollars was due primarily to higher personnel-related expenses pertaining
to the W/ATM GateWay, narrowband and broadband product developments. The
Company anticipates that its R&D expenses will continue to increase in
absolute dollars and as a percentage of sales may remain relatively flat
subject to, among other factors set forth or referenced in "Other Factors
That May Affect Future Operating Results," below, the Company's ability
to accelerate or defer operating expenses, achieve revenue levels during
such period and hire new personnel.
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
The primary types of expenses included in selling, general and
administrative ("SG&A") expenses are personnel, advertising, other
promotional, and travel and entertainment. SG&A expenses increased
16% for 1996 to $16.2 million from $14.0 million for 1995.
As a percentage of net sales, SG&A expenses decreased slightly to
31.0% for 1996 as compared to 31.5% for the prior year. The increase
in SG&A expenses in absolute dollars was primarily a result of higher
personnel related expenses, primarily within the sales and marketing
organization, and higher evaluation product and promotional expenses.
The decrease as a percentage of net sales was primarily the result of
operating efficiencies from higher net sales during 1996. SG&A expenses
increased 33% to $14.0 million in 1995 from $10.5 million in 1994. As
a percentage of net sales, SG&A expenses increased to 31.5% in 1995 from
29.9% in 1994. The increase in absolute dollars was was primarily the
result of of higher personnel related expenses, primarily within
the sales and marketing organization during 1995.
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. However, any decrease in such expenses as a
percentage of net sales in the second half of the year are 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
Other income includes primarily interest income and purchase discounts.
Other income increased 9% in 1996 to $2.5 million from $2.3 million for
1995. Other income increased 109% to $2.3 million in 1995 from $1.1 million
in 1994. These increases were primarily as a result of higher interest
income due to higher rates of return on marketable securities.
Provision for Income Taxes
The Company's effective tax rate increased to 31.4% in 1996 compared to
31.0% in 1995. This increase is due primarily to lower foreign sales
which resulted in lower foreign sales corporation tax benefit. The
Company's effective tax rate was 31.0% in 1995 compared to approximately
33.0% in 1994. This decrease was primarily due to an increase in R & D
credit. The Company anticipates that its effective tax rate will remain
at similar levels during 1997 as compared to 1996.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last eight quarters. The Company
believes this information reflects all adjustments, consisting only of
normal recurring adjustments, that the Company's management considers
necessary for a fair representation of this information in accordance
with generally accepted accounting principles. Quarterly results
are not necessarily indicative of future results of operations.
(in thousands, except per share data)
Quarter Ended
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
1995 1995 1995 1995 1996 1996 1996 1996
Net sales $10,415 $11,409 $12,500 $10,021 $10,203 $12,026 $14,127 $15,722
Cost of sales 3,572 4,212 4,687 4,298 4,366 4,838 5,666 6,587
Gross Profit 6,843 7,197 7,813 5,723 5,837 7,188 8,461 9,135
Expenses:
Research & 2,204 2,314 2,405 1,999 2,050 2,335 2,749 2,986
development
Selling, 3,436 3,413 3,550 3,559 3,584 4,145 4,206 4,215
general &
administrative
Total 5,640 5,727 5,955 5,558 5,634 6,480 6,955 7,201
expenses
Operating 1,203 1,470 1,858 165 203 708 1,506 1,934
income
Other income 598 534 573 575 633 574 625 663
Income 1,801 2,004 2,431 740 836 1,282 2,131 2,597
before
provision for
income taxes
Provision for 558 621 753 230 280 430 650 789
income taxes
Net income $1,243 $1,383 $1,678 $ 510 $ 556 $ 852 $1,481 $1,808
Net income $ 0.13 $ 0.15 $ 0.18 $ 0.05 $ 0.06 $ 0.09 $ 0.16 $ 0.19
per share
Shares used in 9,445 9,482 9,483 9,456 9,352 9,449 9,451 9,659
computing per
share amounts
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 other
factors discussed under "Net Sales," above. In addition, the Company's
business may be affected by rapidly evolving industry standards and
requirements as occurred in the fourth quarter and first half of 1996 as
discussed under "Net Sales" above.
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 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. The Company anticipates that
this increased pricing pressure will continue during 1997. In addition, the
mix of products sold may continue to 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. Other
factors that may cause fluctuations in the Company's operating results
include the gain or loss of significant customers, seasonal capital
spending patterns of large domestic customers, changes in sales volumes
through the Company's distribution channels, the timing of new product
announcements and introductions by the Company and its competitors,
market acceptance of new or enhanced versions of the Company's products,
availability and cost of components from the Company's suppliers 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. If revenue levels are below
expectations, the Company may be unable to adjust spending in a
timely manner, which would adversely affect operating results.
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share" (SFAS 128), and Statement No. 129,
"Disclosure of Information About Capital Structure" (SFAS 129). These
Statements will be effective for the Company's fiscal year 1997. SFAS 128
requires a revised presentation and calculation of earnings per share (EPS)
and that prior periods be restated to conform to that revised presentation
and calculation. SFAS 129 requires disclosure about the entity's capital
structure and contains no change in disclosure requirements for entities
that were subject to the previously existing requirements. Early adoption
of these Statements is not permitted and the adoption of SFAS 129 will not
have a material effect on the Company's financial position and results of
operations. The impact of the adoption of SFAS 128 on the financial
statements of the Company has not yet been determined.
Liquidity and Capital Resources
With the exception of $1.0 million that the Company received from the
sale of Preferred Stock in 1987, through 1993 the Company financed its
operations and capital equipment requirements primarily from cash
flows from operations. In early 1994, the Company sold approximately
1,937,500 shares of common stock at a price per share of $14.00 in its
initial public offering. The Company has added the net proceeds of
that offering to working capital, where such proceeds are available to
support general corporate purposes.
The Company's working capital increased to $28.5 million at December 31,
1996 from $27.5 million at December 31, 1995 and $23.4 million at December
31, 1994. The Company's cash, cash equivalents and long and short term
marketable securities increased to $44.0 million at December 31, 1996 from
$37.6 million at December 31, 1995 and $31.7 million at December 31, 1994.
Net cash provided by operating activities was $6.4 million, $4.6 million
and $4.6 million in 1996, 1995 and 1994, respectively. In 1996, such net
cash provided was primarily a result of net income, a decrease in accounts
receiveable and an increase in accrued payroll and other accrued expenses,
offset to some extent by increased inventories. To date, the Company has
not experienced any material inventory obsolescence as a result of new
product development, but there can be no assurance that future product
development efforts will not render Company products obsolete. Leasehold
improvements and capital equipment additions were $1.3 million in 1996,
$1.4 million in 1995, and $2.2 million in 1994. Net cash provided by
financing activities consisted of $812,000, $852,000 and $24.9 million,
in 1996, 1995 and 1994, respectively. In 1996 and in 1995, such
cash was the result of proceeds from employee stock option exercises
and stock purchases, while in 1994, it was primarily a result of the
Company's initial public offering.
In October 1996, the Company's Board of Directors announced the
authorization for the Company to repurchase 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, at
which time the stock will be retired. No time limit was set for completion
of the program.
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
In addition to the factors set forth above in the "Management's Discussion
and Analysis of Financial Conditions and Results of Operations," there are
a number of other factors that may affect the Company's future operating
results.
Operating Results May Fluctuate; Absence of Siginificant Backlog
The Company believes that the loss of, or difference in actual from
anticipated levels of purchases from, the Company's major customers could
in the future affect operating results. Other factors that may cause
fluctuations in the Company's operating results includes, but not limited
to, seasonal capital spending patterns of large domestic customers, changes
in the product mix sold toward narrowband products that yield lower gross
margins, completion of the build out of carrier and ISP infrastructures,
the timing of new product introductions by the Company and its competitors,
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 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 operates with limited order backlog, and a
substantial majority of its revenues in each quarter result from orders
booked in that quarter. If revenue levels are below expectations, the
Company may be unable to adjust spending in a timely manner which would
adversely affect operating results.
Market for the Company's Products in Highly Competitive
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. In addition, the Company faces competition from internetworking
suppliers such as routers, and telephone equipment, such as switches, who
included direct WAN interfaces their products that could reduce demand for
the Company's products 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 1997.
Company Must Respond to Technological Change
The Company's future prospects will depend in part on its ability to
enhance the functionality of its existing WAN access products and W/ATM
GateWay 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. 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.
Risks of Company's Involvement With Products for Emerging Markets
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 Company has experienced delays in the development of the W/ATM GateWay
products, in part related to technical problems which required some
software to be redesigned. This product was shipped to a customer for
evaluation in February 1997. 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 products currently available or under development by
competitors would not directly compete with the W/ATM GateWay
product, that the W/ATM GateWay will meet the needs of the emerging ATM
market or that markets for the W/ATM GateWay will continue to
develop, any of which would have a material adverse effect on the Company's
business and operating results.
Company Depends on Key Personnel
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, and in February 1997, Steve Tabaska
joined the Company as Chief Technical Officer and Vice President,
Engineering. There can be no assurance that the Company will be successful
in attracting and retaining skilled personnel to hold important management
positions or will be able to successfully integrate any new management
personnel.
Legal Proceedings
As discussed under "Legal Proceedings" in Part I 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. On December 5, 1996, the Superior Court
for the State of California, County of Santa Clara dismissed portions of
plaintiff's state court complaint with leave to amend. Plaintiff has
amended his complaint, and the Company has again moved to dismiss the
amended complaint. The hearing on this motion is scheduled for April 29,
1997. The Company has also moved to dismiss the federal complaint. The
hearing on that motion is scheduled for April 18, 1997. 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.
Risk of Third Party Claims of Infringement
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 patents held by it and has suggested on
such occasions that the Company acquire a license to such patents. 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. The
Company does not believe that there is merit to Larscom's claim.
Management after review and consultation with counsel, believes that
the ultimate resolution of these allegations is 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. While the
Company has accrued certain amounts for these matters in prior
years, it is currently unable to estimate the possible loss or range of
loss regarding these matters. Therefore, 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 adversly impact gross margins. 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.
Possible Adverse Effect of Future Market Price
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The quarterly supplementary data is included as part of Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations." The financial statements required by this item are set
forth below.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants................................. 23
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 ... 24
Consolidated Statements of Income for each of the
three years in the period ended December 31, 1996............... 25
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
December 31, 1996 .............................................. 26
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31, 1996 .......... 27
Notes to Consolidated Financial Statements ......................28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Digital Link Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Digital
Link Corporation and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Digital Link Corporation and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 21, 1997
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31,
1996 1995
Current assets:
Cash and cash equivalents $2,043 $2,639
Short-term marketable securities 19,585 16,726
Accounts receivable, less allowance
for doubtful accounts of
$465 in 1996 and $895 in 1995 6,490 7,690
Inventories, net 5,920 4,603
Prepaid and other current assets 1,131 986
Deferred income taxes 2,285 1,821
Total current assets 37,454 34,465
Property and equipment, at cost, net 2,147 1,608
Long-term marketable securities 22,420 18,244
Other assets 712 438
Total assets $62,733 $54,755
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,947 $ 1,371
Accrued payroll expense 1,648 1,433
Other accrued expenses 3,795 2,751
Income taxes payable 1,541 1,427
Total current liabilities 8,931 6,982
Commitments and contingency (Note 3)
Shareholders' equity:
Preferred stock, no par value:
Authorized: 5,000,000 shares;
Issued and outstanding: 0 shares
in 1996 and 1995
Common stock, no par value:
Authorized: 25,000,000 shares;
Issued and outstanding:
9,218,150 shares in 1996
and 9,000,500 shares in 1995 30,913 29,283
Unrealized gain on marketable securities 257 555
Retained earnings 22,632 17,935
Total shareholders' equity 53,802 47,773
Total liabilities and
shareholders' equity $62,733 $54,755
The accompanying notes are an integral part of these consolidated
financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31,
1996 1995 1994
Net sales $52,078 $44,344 $35,222
Cost of sales 21,457 16,769 11,927
Gross profit 30,621 27,575 23,295
Expenses:
Research and development 10,120 8,922 7,300
Selling, general and
administrative 16,150 13,958 10,514
Total expenses 26,270 22,880 17,814
Operating income 4,351 4,695 5,481
Other income 2,495 2,281 1,098
Income before provision
for income taxes 6,846 6,976 6,579
Provision for income taxes 2,149 2,162 2,171
Net income $ 4,697 $ 4,814 $ 4,408
Net income per share $ 0.50 $ 0.51 $ 0.48
Shares used in computing
per share amounts 9,478 9,467 9,113
The accompanying notes are an integral part of these consolidated
financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unrealized
Gain (Loss) On
Preferred Stock Common Stock Marketable Retained
Shares Amount Shares Amount Securities Earnings Total
Balances,
December 31, 1993 850 $ 974 5,125 $ 218 --- $8,713 $9,905
Issuance of
common stock in
connection with:
Initial public
offering, net of
issuance costs
of$700 --- --- 1,938 24,527 --- --- 24,527
Stock option
plan --- --- 283 248 --- --- 248
Stock purchase
plan --- --- 7 87 --- --- 87
Conversion of
preferred stock
to common stock in
connection with
initial public
offering (850) (974) 1,275 974 --- --- ---
Tax benefit related
to disqualifying
dispositions from
exercise of
stock options --- --- --- 1,108 --- --- 1,108
Unrealized loss on
marketable
securities --- --- --- ---- $ (72) --- (72)
Net income --- --- --- ---- ---- 4,408 4,408
Balances,
December 31, 1994 --- --- 8,628 27,162 (72) 13,121 40,211
Issuance of common
stock in connection
with:
Stock option plan --- --- 356 600 --- --- 600
Stock purchase
plan --- --- 16 252 --- --- 252
Tax benefit
related to
disqualifying
dispositions
from exercise
of stock options --- --- --- 1,269 --- --- 1,269
Unrealized gain on
marketable
securities --- --- --- --- 627 --- 627
Net income --- --- --- --- --- 4,814 4,814
Balances,
December 31, 1995 --- --- 9,000 29,283 555 17,935 47,773
Issuance of common
stock in
connection with:
Stock option plan --- --- 199 546 --- --- 546
Stock purchase
plan --- --- 19 266 --- --- 266
Tax benefit related
to disqualifying
dispositions from
exercise of stock
options --- --- --- 818 --- --- 818
Unrealized loss
on marketable
securities --- --- --- --- (298) --- (298)
Net income --- --- --- --- --- 4,697 4,697
Balances,
December 31, 1996 --- $ --- 9,218 $30,913 $257 $22,632 $53,802
The accompanying notes are an integral part of these consolidated
financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net income $ 4,697 $ 4,814 $ 4,408
Adjustments to reconcile net income
to net cash flows provided by operating
activities:
Depreciation and amortization 752 1,720 1,172
Provision (reduction in allowance) for
doubtful accounts (383) 434 250
Provision (reduction in allowance) for
excess and obsolete inventories 457 (160) 564
Deferred income taxes (482) (213) (792)
Changes in assets and liabilities:
Accounts receivable 1,583 (405) (3,417)
Inventories (1,775) (1,819) 34
Prepaid and other current assets (402) (148) (545)
Accounts payable 783 (656) 392
Accrued payroll and other
accrued expenses 1,053 (407) 3,245
Income taxes payable 114 1,427 (693)
Net cash flows provided by
operating activities 6,398 4,587 4,618
Cash flows from investing activities:
Purchases of marketable securities (34,915) (32,008) (31,621)
Maturities of marketable securities 24,391 13,168 7,685
Sales of marketable securities 4,008 12,816 -
Acquisition of property and equipment (1,290) (1,414) (2,225)
Net cash flows used in investing
activities (7,806) (7,438) (26,161)
Cash flows from financing activities:
Proceeds from initial public offering ---- --- 24,527
Proceeds from exercise of stock options
and employee stock purchases 812 852 335
Net cash flows provided by
financing activities 812 852 24,862
Net increase (decrease)
in cash and cash
equivalents (596) (1,999) 3,319
Cash and cash equivalents at beginning
of year 2,639 4,638 1,319
Cash and cash equivalents at end of year $ 2,043 $ 2,639 $ 4,638
Supplemental disclosure of cash flow information:
Cash paid during the year for
income taxes $ 1,727 $ 662 $ 2,714
Cash received during the year
for income taxes $ 27 $ 1,137 ------
Supplemental schedule of noncash investing
and financing activities:
Conversion of Series A preferred stock
to common stock --- --- $ 974
Unrealized gain (loss) on securities
carried at market $ (298) $ 627 $ (72)
Tax benefit related to disqualifying
dispositions from exercise of
stock options $ 818 $ 1,269 $ 1,108
The accompanying notes are an integral part of these consolidated
financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Digital
Link Corporation and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been
eliminated.
Cash, Cash Equivalents and Marketable Securities:
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase and money market funds to be
cash equivalents. The Company has deposited its cash and money market
funds at one major bank and two investment firms. Cash equivalents are
stated at cost plus accrued interest, which approximates market.
All marketable securities are deemed by management to be available for
sale and are reported at fair value with net unrealized gains or losses
reported as a separate component in shareholders' equity. Realized
gains and losses on the sale of marketable securities are computed
on the specific identification basis. Available for sale marketable
securities with maturities less than one year from the balance sheet date
are classified as current and those with maturities greater than one year
from the balance sheet date are classified as long-term.
Revenue Recognition:
Product revenues are recognized upon shipment of the product if remaining
obligations are insignificant and collections of the resulting receivable
is probable. The Company records estimated product returns and accrues for
future warranty costs, anticipated retroactive price adjustments and
insignificant vendor obligations at the time of product shipment. Warranty
costs to date generally have not been significant. Maintenance and support
revenues, which are not significant, are recognized over the terms of the
related agreements.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and Equipment:
Effective January 1, 1996, the Company adopted the straight line 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 continues to be depreciated using the double-declining balance method.
The estimated useful lives under either method range 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 twelve months ended December 31, 1996. When property and
equipment are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in income.
Fair Value:
The fair value of cash equivalents and marketable securities is disclosed
in relevant notes to the financial statements. For all other financial
instruments, the carrying amount approximates fair value.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of investments in
marketable securities and accounts receivable.
The Company currently places its investments with three high credit
qualified financial institutions. With respect to accounts receivable,
the Company's customer base is dispersed across many different geographic
areas. While its customers are dispersed across many industries, a
substantial portion of its sales are from ISPs and domestic carriers.
The Company performs ongoing credit evaluations of its customers,
generally does not require collateral and maintains an allowance for
potential credit losses. At December 31, 1996 and 1995, two customers
accounted for 19% and 23% of accounts receivable, respectively.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
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) and the Series A preferred
stock as if converted for all periods prior to the effectiveness of the
Company's initial public offering (see Note 4).
Advertising Costs:
Costs related to advertising and promotion of products is charged to
advertising expense as incurred. Advertising expense was $1,408,000,
$931,000, and $813,000 for 1996, 1995, and 1994, respectively.
Research and Development Costs:
Costs related to research, design and development of products are
charged to research and development expenses as incurred. Software
development costs are capitalized beginning when a product's technological
feasibility has been established and ending when a product is available
for general release to customers provided that research and development
activities for the related hardware portion of the product have been
completed. Generally, the Company's products include hardware and software
components that are developed concurrently. As a result, the Company
has not capitalized any software development costs since such costs have
not been significant.
Foreign Currency Translation:
The Company's foreign subsidiaries use the United States dollar as their
functional currency. Resulting foreign transition gains and losses, which
have been insignificant, are included in the results of operations.
Accounting for Income Taxes:
The Company's provision for income taxes comprises its estimated tax
liability currently payable and the change in its deferred income taxes.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Stock-Based Compensation:
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 has chosen to continue to
account for employee stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and has provided pro forma disclosure in
Note 4 to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted.
Recent Pronouncements:
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share" (SFAS 128), and Statement No. 129,
"Disclosure of Information About Capital Structure" (SFAS 129). These
Statements will be effective for the Company's fiscal year 1997. SFAS 128
requires a revised presentation and calculation of earnings per share (EPS)
and that prior periods be restated to conform to that revised presentation
and calculation. SFAS 129 requires disclosure about the entity's capital
structure and contains no change in disclosure requirements for entities
that were subject to the previously existing requirements. Early adoption
of these Statements is not permitted and the adoption of SFAS 129 will not
have a material effect on the Company's financial position and results of
operations. The impact of the adoption of SFAS 128 on the financial
statements of the Company has not yet been determined.
2. Balance Sheet Detail:
Marketable Securities:
December 31,
1996 1995
(in thousands)
Market Market
Cost Value Cost Value
Debt securities:
U.S. government corporations
and agencies $21,829 $22,050 $25,034 $25,579
U.S. treasury bills 2,007 2,007 4,333 4,341
State and municipal
securities 15,361 15,387 2,723 2,725
Other 2,551 2,561 2,325 2,325
$41,748 $42,005 $34,415 $34,970
Gross unrealized gains and unrealized losses for marketable securities
were $288,000 and $31,000, respectively, at December 31, 1996 and $564,000
and $9,000, respectively, at December 31, 1995.
At December 31, 1996, scheduled maturities of marketable securities
within one year are $19,585,000 (cost $19,446,000) and for one year to
five years are $22,420,000 (cost $22,302,000).
Inventories, net:
December 31,
1996 1995
(in thousands)
Raw materials $2,255 $1,838
Work in progress 2,301 1,965
Finished goods 1,364 800
$5,920 $4,603
The Company's products are concentrated in a single segment in the
telecommunications industry which is highly competitive and rapidly
changing. Significant technological changes in the industry segment could
affect operating results adversely. The Company's inventories include high
technology parts and components that may be specialized in nature or subject
to rapid technological obsolescence. While the Company has programs to
minimize the required inventories on hand and considers technological
obsolescence in estimating the required allowance to reduce recorded
amounts to market values, such estimates could change in the
future.
Property and Equipment, Net:
December 31,
1996 1995
(in thousands)
Manufacturing and development equipment $ 6,442 $ 5,650
Furniture and fixtures 1,043 544
Leasehold improvements 201 201
7,686 6,395
Less accumulated depreciation and amortization (5,539) (4,787)
$2,147 $ 1,608
Other Accrued Expenses:
December 31,
1996 1995
(in thousands)
Product warranty $ 795 $ 601
Deferred product revenue 99 11
Other 2,901 2,139
$3,795 $2,751
3. Commitments and Contingency:
Commitments:
The Company leases its headquarters facility under an operating lease.
Under the terms of the lease agreement, the Company is responsible for
insurance, maintenance and property taxes and has an option to extend the
lease for one additional one year period. During the extension period, all
terms and conditions under the agreement would remain the same, except that
the monthly rental payments would be the greater of 95% of the fair market
value for similar properties or the preceding period rental rate.
Future minimum lease payments under the lease are as follows at
December 31, 1996:
1997 $ 568,000
1998 60,000
Total minimum lease payments $ 628,000
Rent expense was $549,000, $510,000, and $495,000 for 1996, 1995 and
1994, respectively.
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 is
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. While the Company has accrued certain amounts for these
matters in prior years, it is currently unable to estimate the possible
loss or range of loss regarding these matters. Therefore, 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 adversly impact gross margins.
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. On December 5, 1996, the Superior Court for
the State of California, County of Santa Clara dismissed portions of
plaintiff's state court complaint with leave to amend. Plaintiff has
amended his complaint, and the Company has again moved to dismiss the
amended complaint. The hearing on this motion is scheduled for April 29,
1997. The Company has also moved to dismiss the federal complaint. The
hearing on that motion is scheduled for April 18, 1997. 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.
4. Shareholders' Equity:
Initial Public Offering:
On January 31, 1994, the Company made an initial public offering of
2,550,000 shares of common stock at a price of $14.00 per share. Of
these shares, 1,900,000 were sold by the Company and 650,000 were sold by
existing shareholders. On February 7, 1994, the Company's underwriters
exercised an option to purchase an additional 382,500 shares to cover
overallotments, of which 37,500 shares were sold by the Company and 345,000
were sold by existing shareholders. The net proceeds realized by the
Company from this offering were approximately $24.5 million after deducting
underwriting discounts and commissions and expenses payable by the
Company related to the offering.
In connection with the closing of the offering, all of the Company's
Series A preferred stock outstanding at December 31, 1993 converted into
an aggregate of 1,275,000 shares of common stock.
Stock Options Plan:
The Company has a 1992 Equity Incentive Plan ("Plan"), which succeeds
the Company's prior plan. All outstanding stock options issued under the
prior plan will continue to be governed by the terms and conditions
of that plan, but no additional stock options will be granted under that
prior plan. During 1995, an additional 500,000 shares were authorized for
grant or sale to employees, officers, directors and consultants
of the Company under the Plan. The Plan expires ten years after its
adoption.
Options granted under the Plan may be either incentive stock options or
nonqualified stock options, as designated by the Board of Directors. The
Plan provides that the exercise price of options granted must be no
less than the fair market value of the Company's common stock at the date
of grant. The Board of Directors also has the authority to set exercise
dates (no longer than ten years from the date of grant), payment terms and
other provisions for each grant. Generally, options granted under the Plan
through October 31, 1995 become exercisable annually as to 20% and options
granted on or after October 31, 1995 become exercisable as to 25% of
the shares one year after the first vesting date and thereafter with
respect to an additional 2.084% at the end of each succeeding month.
The Plan also provides for the award of common stock based on performance
and the sale of restricted stock to eligible persons at the fair market
value of the common stock of the Company at the date of sale or at discounts
of up to 15%, as determined by the Board of Directors. All restricted stock
awards under this Plan are subject to a repurchase option that expires over
a five year period at the original issuance price. As of December 31,
1996, no restricted stock awards have been issued under the Plan.
Directors Stock Options Plan:
In October 1994, the Company adopted the 1994 Directors Stock Option
Plan (the "Directors Plan"). The Company has reserved 200,000 shares of
Common Stock for issuance to directors of the Company who are not employees
of the Company. The Directors Plan expires ten years after its
adoption.
Options granted under the Directors Plan are nonqualified stock options.
The Directors Plan provides that the exercise price of options granted shall
be the fair market value of the Company's common stock at the date of grant.
Options granted under the Directors Plan become exercisable ratably over
four years. The maximum term of these options granted is ten years from the
date of grant.
Activity under the Plan and the Directors Plan during 1996, 1995 and 1994
is as follows:
(in thousands, except per share amounts)
Oustanding Options
Weighted
Shares Number Price Average
available of per Aggregate Exercise
for grant Shares Share Price Price
Balances, December 31, 1993 1,340 1,352 $0.27-$8.50 $ 2,057 $ 1.52
Options granted (483) 483 $9.25-$21.75 6,036 $12.50
Options exercised -- (283) $0.27-$4.67 (248) $ 0.88
Options cancelled 117 (117) $0.60-$14.00 (516) $ 4.41
Balances, December 31, 1994 974 1,435 $0.33-$21.75 7,329 $ 5.11
Additional shares reserved 500 -- -- -- --
Options granted (561) 561 $15.25-$28.25 10,882 $19.40
Options exercised -- (356)$0.33-$15.12 (600) $ 1.69
Options cancelled 178 (178)$0.67-$28.25 (1,798) $10.10
Balances, December 31, 1995 1,091 1,462 $0.60-$28.25 15,813 $10.82
Options granted (984) 984 $10.125-$23.25 15,302 $15.55
Options exercised -- (199)$0.60-$21.75 (546) $ 2.74
Options cancelled 425 (425)$0.83-$28.25 (6,079) $14.30
Balances, December 31, 1996 532 1,822 $0.83-$28.25 24,490 $13.44
The weighted-average fair value of those options granted in 1996 and 1995
was $8.47, and $10.76, respectively. Options to purchase 350,000 shares,
267,000 shares and 338,000 shares were exercisable with a weighted-average
exercise price of $8.88, $4.68, and $1.21 at December 31, 1996, 1995 and
1994, respectively.
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
(number of options in thousands)
Options Outstanding Options Exercisable
Weighted
Range Number Average Weighted Number Weighted
of Outstanding at remaining Average Exercisable Average
Exercise December 31, Contractual Exercise at December 31, Exercise
Price 1996 Life (years) Price 1996 Price
$0.83-$1.33 132 3.73 $ 1.13 96 $ 1.09
$1.67-$3.33 155 6.63 $ 2.10 66 $ 2.22
$4.67-$8.50 20 6.88 $ 5.19 3 $ 6.80
$9.00-$13.25 258 8.39 $10.14 53 $10.00
$14.00-$21.25 1,048 9.38 $15.69 99 $15.30
$21.75-$28.25 209 8.93 $23.29 33 $23.86
$0.83-$28.25 1,822 8.52 $13.44 350 $ 8.88
Employee Stock Purchase Plan:
In December 1993, the Company established the 1993 Employee Stock
Purchase Plan (the "Purchase Plan") under which 300,000 shares of Common
Stock have been reserved for issuance. Under the Purchase Plan, an
eligible employee may purchase shares of Common Stock from the Company
through payroll deductions of up to 6% of his or her base compensation, at
a price per share equal to 85% of the lesser of the fair market value of
the Company's Common Stock as of the first day or last day of each six
month offering period under the Purchase Plan. The Company sold 19,000
shares, 16,000 shares, and 7,000 shares to employees in 1996, 1995, and
1994 respectively. The weighted-average fair value of those purchase
rights granted in 1996 and 1995 was $5.66 and $7.72, respectively.
Pro Forma Stock-Based Compensation:
The Company accounts for the fair value of its grants under the Plan, the
Directors Plan and the Purchase Plan, in accordance with APB 25.
Accordingly, no compensation expense has been recognized for these plans.
Had compensation expense been determined based on the fair value at the
grant dates for awards under these plans consistent with the method of
SFAS 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
(Amounts in thousands, except per share data) 1996 1995
Net income
As reported ........................... $4,697 $4,814
Pro forma.............................. $3,771 $4,462
Net income per share
As reported............................ $ 0.50 $ 0.51
Pro forma.............................. $ 0.43 $ 0.48
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants under the Plan and the
Directors Plan in 1996 and 1995:
1996 1995
Dividend yield 0.00% 0.00%
Expected Life of option 4.50 years 4.50 years
Risk-free interest rate 6.05% 6.05%
Expected Volitility 60.00% 60.00%
The Company has also estimated the fair value for the purchase rights
issued under the Purchase Plan using the Black Scholes option pricing
model with the following assumptions for grants in 1996 and 1995:
1996 1995
Dividend yield 0.00% 0.00%
Expected Life of option 0.50 years 0.50 years
Risk-free interest rate 5.34% 5.07%
Expected Volitility 60.00% 60.00%
The above pro forma disclosures are not likely to be representative of
the effects on reported net income for future years.
5. Segments, Significant Customers, Suppliers and Foreign Revenues:
The Company operates in a single industry segment encompassing the
design, development, manufacture, marketing and support of highspeed
digital access products for wide area networks worldwide. The
Company markets and sells its products primarily in North America, Europe,
South America and Asia, through a direct sales force, value added resellers
(VARs) and original equipment manufacturers (OEMs). In addition to twelve
sales offices in the United S tates, the Company opened its first
international offices in the United Kingdom and Germany during 1993 and in
Hong Kong during 1996.
Sales of the Company's products to end users, VARs and OEMs comprised 58%,
33% and 9% of net sales, respectively in 1996 and 45%, 37% and 18% of net
sales, respectively in 1995.
In 1996, sales to two customers accounted for 13% and 13% of net sales.
In 1995, sales to two customers accounted for 12% and 11% of net sales.
In 1994, sales to two customers accounted for 20% and 14% of net sales.
The loss of any one or more of the Company's major customers could
materially adversely affect the Company's business and operating results.
The Company's product designs are proprietary but generally incorporate
industry standard hardware components. However, certain semiconductor
devices and components and subassemblies are presently available only from
single sources, and certain other components are presently available or
acquired only from a limited number of sources. To date, the Company has
been able to obtain adequate supplies of these components, as well as
subassemblies from third party contractors, in a timely manner from
existing sources or, when necessary, from alternative sources. The
inability to obtain sufficient sole or limited source components or
subassemblies as required in the future, or to develop alternative
sources or redesign its products if and as required in the future, could
result in delays or reductions in product shipments that could materially
adversely affect the Company's business and operating results or damage
customer relationships.
Outside of Europe, no geographic segment had sales in excess of 10% of
total sales. International sales in 1996, 1995, and 1994 were as follows;
1996 1995 1994
Europe $ 4,142,000 $ 7,524,000 $7,534,000
Other 4,524,000 4,730,000 3,377,000
Total International Sales $ 8,666,000 $12,254,000 $10,911,000
6. Employee Benefit Plan:
The Company has a 401(k) profit sharing plan for its full time employees
who have attained the age of 21 and completed six months of service.
Eligible employees may make voluntary contributions to the Plan up to 18%
of their annual compensation. The Company makes a matching contribution
equal to 33% of each employee's contributions. In applying this
matching contribution, however, only contributions up to 6% of the employee's
compensation will be considered. For 1996, 1995 and 1994, the Company
contributed $191,000, $184,000, and $112,000 respectively.
7. Income Taxes:
The provision for income taxes comprises:
1996 1995 1994
(in thousands)
Current:
Federal $2,376 $1,987 $2,385
State 135 388 578
2,511 2,375 2,963
Deferred:
Federal (295) (172) (674)
State (67) (41) (118)
(362) (213) (792)
$2,149 $2,162 $2,171
The difference between the actual tax provision and the amount obtained by
applying the U.S. Federal statutory rate to income before provision for
income taxes is as follows:
1996 1995 1994
Tax provision at federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 5.4 6.1 4.8
Nontaxable municipal interest (2.1) (1.1) (3.3)
Foreign sales corporation (0.6) (1.9) (3.2)
Research and development tax credit (6.3) (7.7) (4.2)
Other 1.0 1.6 4.9
31.4% 31.0% 33.0%
The components of the deferred tax asset are as follows:
December 31,
1996 1995
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts receivable $ 184 $ 359
Allowance for excess and obsolete inventories 577 339
Depreciation 418 474
Accrual for warranty, royalties and other 1,524 1,049
Total deferred tax assets $2,703 $2,221
The Company has not provided a valuation allowance on the deferred tax
assets as those amounts can be realized through carryback to prior years
when the Company paid income taxes or are expected to be realized from
future operations based upon the Company's history of profitable operations.
Deferred tax assets included in the balance sheet are:
December 31,
1996 1995
Current $2,285 $1,821
Noncurrent (included in other assets) 418 400
$2,703 $2,221
8. Subsequent Event:
During February and March of 1997, the Company repurchased on the open
market a total of 117,000 shares of common stock at a price ranging from
$15.00 to $17.88 a share. This stock has subsequently been retired.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is incorporated by reference from the
sections titled "Nominees" under "Proposal No. 1 - Election of Directors,"
"Executive Officers" and Section 16(a) "Beneficial Ownership Reporting
Compliance" from the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission relative to the Company's annual meeting
of shareholders to be held on May 21, 1997 (the "Definitive Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
sections titled "Director Compensation" under "Proposal No. 1 - Election of
Directors" and "Executive Compensation" from the Definitive Proxy Statement.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" from the
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from
"Certain Transactions" from the Definitive Proxy Statement.
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements and schedules are filed as part of
this report:
Page
(a)1. Financial Statements
See index in Part II, Item 8 22
(a)2. and (d) Financial Statement Schedules
Report of Independent Accountants 43
Schedule II - Valuation and Qualifying Accounts 44
All schedules not listed above are omitted because they are not
applicable or the required information is included in the financial
statements or notes thereto.
(a)3. and (c) Exhibits
3.01 Registrant's Amended and Restated Articles of Incorporation filed on
February 7, 1994. (1)
3.02 Registrant's Certificate of Correction of Amended and Restated
Articles of Incorporation filed on April 7, 1994. (1)
3.03 Registrant's Bylaws, as amended. (2)
4.01 Form of Specimen Certificate for Registrant's Common Stock. (3)
4.02 Registration Rights Agreement among Registrant, Vinita Gupta, Summit
Ventures L.P., SV Eurofund C.V. and Summit Investors, L.P. dated
December 23, 1987 and certain exhibits thereto. (3)
10.01 Registrant's 1986 Stock Option Plan, as amended. (3)
10.02 Form of Agreement for Registrant's 1986 Stock Option Plan. (1)
10.03 Registrant's 1986 Stock Purchase Plan. (3)
10.04 Form of Agreement for Registrant's 1986 Stock Purchase Plan, as
amended. (1)
10.05 Registrant's 1992 Equity Incentive Plan, as amended. (2)
10.06 Form of Agreement for Registrant's 1992 Equity Incentive Plan, as
amended. (1)
10.07 Registrant's 1993 Employee Stock Purchase Plan. (3)
10.08 Registrant's 1994 Directors Stock Option Plan. (1)
10.09 Form of Agreement for Registrant's 1994 Directors Stock Option
Plan. (1)
10.10 Form of Indemnity Agreement entered into with each of Registrant's
directors. (3)
10.11 Lease Agr eement between Registrant and John Hancock Mutual Life
Insurance Company dated June 17, 1992. (3)
10.12 Form of Patent License Agreement between Registrant and QPSX
Communications Ltd. dated December 1993. (3)
10.13*Software License Agreement between Registrant and Epilogue Technology
Corporation dated January 20, 1992. (3)
10.14 Stockholder Agreement among Registrant, Vinita Gupta, Narendra Gupta,
Summit Ventures, L.P., SV Eurofund C.V. and Summit Investors, L.P.
dated December 23, 1987. (3)
10.15 Separation Agreement between Registrant and Benjamin W. Berry dated
November 11, 1994.(1)
10.16 Original Equipment Manufacturer Agreement between Registrant
and Siemens Aktiengesellschaft dated April 7, 1995.(4)
10.17 Separation Agreement between Registrant and Daniel L. Palmer
dated October 20, 1995.(5)
10.18 Employment Agreement between Registrant and Alan Fraser dated
September 5, 1996.(6)
10.19 Security Agreement between Registrant and Alan Fraser dated
September 30, 1996.(6)
10.20 Secured Promissory Note from Alan Fraser dated September 30, 1996. (6)
+10.21 Separation Agreement between Registrant and James Checco dated
November 19, 1996.
11.01 Statement of Computation of Net Income Per Share.
21.01 List of Subsidiaries. (3)
23.01 Consent of Independent Accountants
27.01 Financial Data Schedule
* Confidential treatment has been obtained with respect to portions
of this exhibit.
(1) Filed as an exhibit to Registrant's Form 10-K for the year ended
December 31, 1994 andincorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on
Form S8 (No. 33-95176) filed on July 31, 1995 and
incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Form S-1 Registration
Statement (File No. 33-72642), which was declared effective
January 31, 1994, and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Form 10-Q for the quarter
ended June 30, 1995 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference.
+ Management contract or compensatory plan required to be filed as
an exhibit to this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DIGITAL LINK CORPORATION
March 28, 1997 By: /s/ Stanley E. Kazmierczak
Stanley E. Kazmierczak
Chief Financial Officer
Each person whose signature appears below constitutes and appoints
Alan I. Fraser and Stanley E. Kazmierczak, jointly and severally, his or
her true and lawful attorneys-infact, each with the power of substitution,
for him or her in any and all capacities, to sign amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact,
or his or her substitute or substitutes, may do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following person on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Vinita Gupta Chairperson of the Board March 28, 1997
Vinita Gupta
Chief Executive Officer
and President
/s/ Alan I. Fraser (Principal Executive Officer) March 28, 1997
Alan I. Fraser
Chief Financial Officer and
Vice President, Finance and
Administration
/s/ Stanley E. Kazmierczak (Principal Financial and March 28, 1997
Stanley E. Kazmierczak Accounting Officer)
/s/ Richard C. Alberding Director March 28, 1997
Richard C. Alberding
/s/ Gregory M. Avis Director March 28, 1997
Gregory M. Avis
/s/ Narendra K. Gupta Director March 28, 1997
Narendra K. Gupta
Director March 28, 1997
Charles R. Moore
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Digital Link
Corporation and Subsidiaries is included on page 23 of this Form 10-K.
In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index
on page 40 of this Form 10K.
In our opinion, the financial statement schedule referred to above,
when and considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 21, 1997
SCHEDULE II
DIGITAL LINK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1995 and 1996
(Amounts in thousands)
Balance at Charged to Balance
Beginning Costs at Endf
of the and Deductions of the
Period Expenses Description Amt Period
Description
Balances for the year
ended December 31, 1994:
Allowance for doubtful $ 211 $ 250 $ 461
accounts receivable
Allowance for excess
and obsolete inventories 440 564 1,004
Balances for the year
ended December 31, 1995:
Allowance for doubtful 461 434 895
accounts receivable
Allowance for excess 1,004 -- (a) $160 844
and obsolete inventories
Balances for the year
ended December 31, 1996:
Allowance for doubtful 895 -- (b) 383
accounts receivable
(a) 47 465
Allowance for excess 844 457 (a) 167 1,134
and obsolete inventories
(a) Write-Off's & adjustments
(b) Credit to G&A expenses
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT is made and entered into by and between
James W. Checco (hereinafter referred to as "Employee") and Digital Link
Corporation, a California corporation (hereinafter referred to as the
"Company").
WITNESSETH:
WHEREAS, Employee and the Company have mutually agreed that Employee will
separate from the Company; and
WHEREAS, Employee and the Company desire to settle fully and finally all
differences between them, including, but in no way limited to, any
differences that might arise out of Employee's employment with and
separation from the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employee and Company agree that, subject to Employee's compliance
with this Agreement:
(a) Employee agrees that his active employment with the Company
will end at the end of the business day on November 19, 1996. Employee
will cease being an officer of the Company as of the same date. Regardless
of whether employee signs this Agreement or not he will be paid all
accrued salary and paid time off through November 19, 1996, less applicable
withholding for federal and state income taxes, FICA, SDI and any employee
contributions for the 401(k) plan. Thereafter, Employee will be available
to the Company as a consultant only to answer questions upon reasonable
notice. Employee agrees that after November 19, 1996, he is no longer
authorized to incur any expenses, obligations or liabilities on behalf of
the Company.
(b) Employee will remain a consultant of Company until the end
of business on May 19, 1997, even if he otherwise becomes employed and will
be paid at his current salary on a bi-weekly basis at the same time as
Company employees (the "Salary Benefit"). Employee will continue
being provided all current benefits until May 19, 1997 except that (i) no
car allowance will be paid, (ii) there will be no further participation in
the 1993 Employee Stock Purchase Plan, (iii) there will be no paid time off,
(iv) no bonus will be paid for Fiscal Year 1997, and (v) an amount
equal to current health insurance benefits will paid toward Employee's
COBRA costs. In the event Employee is employed, whether temporarily,
full-time or as a consultant, prior to May 19, 1997, Employee's benefits
(other than the Salary Benefit) under this subparagraph (b) will cease
upon Employee becoming employed.
(c) The Company will pay $15,000 to Employee for assistance in
finding new employment. The Fiscal Year 1996 bonus will be paid on a
pro-rated basis to November 19, 1996, per the 1996 Executive Bonus Plan.
The bonus will be paid at the end of February 1997.
(d) Employee has the following outstanding stock option grants
to purchase the Company's Common Stock, which vest on or prior to May 19,
1997:
Grant No. Grant Date Vesting from 11-19-96 to 05/19/97
594 11-03-95 3,750
692 04-10-96 12,188
Total Shares 15,938
These options will continue to vest in accordance with such grants
through May 19, 1997. The provisions of Employee's option grants shall
continue in full force and effect.
(e) Employee agrees that on or before November 19, 1996 he will
return to the Company all files, memoranda, records, credit cards and other
documents and physical or personal property, which Employee has in his
possession or control and which are the property of the Company.
2. Employee agrees that the payments and provision of benefits under
this Agreement are in full satisfaction of all obligations of Company to
Employee arising out of or in connection with his employment including,
without limitation, all salary, bonuses, accrued vacation, sick pay,
and reimbursement of expenses. Employee agrees that the additional payment
constitutes consideration for the consulting services, covenants and
releases of Employee as set forth herein.
3. The Employee, on behalf of himself, his agents, representatives,
heirs, employees, predecessors, successors, and assigns and any persons
acting by, through, under or in concert with each of them hereby releases
and forever discharges each of the Company, its subsidiaries,
affiliates, agents, representatives, directors, officers, employees,
predecessors, successors and assigns, and any persons acting by, through,
under or in concert with each of them (the "Releasees"), from any and all
manner of action or actions, causes of action, in law or in equity, suits,
debts, liens, contracts, agreements, promises, liabilities, claims,
demands, losses, damages, costs, or expenses (including, without
limitation, any claim based on Employee's prior employment by Company or
his separation therefrom, any claims for wages, bonuses, or expense
reimbursement, any claims that any circumstances of Employee's separation
were wrongful, or in violation of any of his rights, contractual, statutory
or otherwise), including, but not limited to, the Age Discrimination in
Employment Act, 29 U.S.C. 621 et seq. (as amended by the Older Workers'
Benefit Protection Act, 29 U.S.C. 626(f)), whether or not now known,
claimed or suspected, fixed or contingent, which Employee now, has, owns or
holds, or at any time heretofore had, owned or held or ever claimed to
have had, owned or held or may hereafter have, own or hold against the
Releasees based upon or arising from any matter, cause, fact, thing,
act or omission whatsoever occurring or existing at any time to and
including the date hereof. This release does not release Company from its
obligations under this Agreement. The foregoing release shall remain in
effect in the event of any breach of this Agreement.
4. This Agreement shall not in any way be construed as an admission
by the Releasees that they acted wrongfully with respect to the Employee or
any other person. Similarly, this Agreement shall not in any way be
construed as an admission that the Employee has acted wrongfully, or
that the Employee has any rights whatsoever against the Company. The
parties have entered into this settlement in order to purchase peace
and avoid any possible involvement in protracted litigation.
5. At all times after the execution of this Agreement, Employee
and Company represent and agree that each will keep the terms, (including
benefits and amounts paid to Employee) of this Agreement confidential, and
no information concerning this Agreement will be disclosed to
anyone, except (1) in the case of Employee, to his spouse, tax preparer and
attorney, if any; and (2) in the case of Company, to its attorney,
accountant, and others as may be required by law, including, but not
limited to Securities and Exchange Commission requirements.
6. Employee and Company agree that neither shall make any statement,
written or oral, or otherwise engage in any communication, which disparages
in any way the other or the other party's directors, officers, employees,
capabilities, products or business practices.
7. Employee represents and warrants that no other person had or
has or claims any interest in the matters referred to in paragraph 3
hereof; that he has the sole right and exclusive authority to execute
this Agreement, and that he has not sold, assigned, transferred, conveyed
or otherwise disposed of any claim or demand relating to any
matter covered by this Agreement.
8. Employee expressly waives any right or benefit available to him
in any capacity under the provisions of Section 1542 of the Civil Code of
California, which provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
9. Employee represents and agrees that he fully understands his
right to discuss all aspects of this Agreement with his private attorney,
that to the extent, if any, that he desired, he has availed himself of this
right, that he has carefully read and fully understands all of the
provisions of this Agreement, and that he is voluntarily entering into
this Agreement. Employee understands and agrees that the waiver of
rights contained in this Agreement is only an exchange for the
consideration specified herein, and that Employee would not otherwise be
entitled to such consideration. Employee acknowledges that he was
offered a period of at least twentyone (21) days to consider the terms
of this Agreement. For a period of seven (7) days following execution of
this Agreement, Employee may revoke said Agreement, and the Agreement
shall not become effective until the seven (7) day period has expired.
10. Employee represents and agrees that this Agreement is binding upon
himself, his estate, heirs and assignees. Company represents and agrees
that this Agreement is binding upon the Company, its successors and
assigns. The provisions of this Agreement are severable, and if any part
of it is found to be unenforceable, the other paragraphs shall remain fully
valid and enforceable.
11. Any dispute arising out of or related to this Agreement shall be
settled in accordance with the Rules of the American Arbitration
Association. The arbitration will take place in Sunnyvale, California.
The award of the arbitrators will be final and binding upon the parties.
Judgment upon the award may be entered in any court having
jurisdiction.
12. This Agreement sets forth the entire agreement between the
parties hereto, and fully supersedes any and all prior agreements or
understandings between the parties hereto pertaining to the subject
matter hereof.
Executed at Sunnyvale, California.
PLEASE READ CAREFULLY. THIS SETTLEMENT AGREEMENT AND RELEASE INCLUDES
A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
Date: 12/12/96 /s/ James W. Checco
James W. Checco
Digital Link Corporation
Date: 12/12/96 By: /s/ Alan Fraser
Chief Executive Officer
Exhibit 11.01
DIGITAL LINK CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
1996 1995 1994
Weighted-average common shares outstanding
for the period 9,106 8,784 7,972
Weighted-average shares from conversion of
preferred stock ---- ---- 319
Common equivalent shares from conversion of
stock options under treasury stock method 372 683 822
Shares used in computing per share amounts 9,478 9,467 9,113
Net income $4,697 $4,814 $4,408
Net income per share $ 0.50 $ 0.51 $ 0.48
Note: There is no material difference in the computation of net income
per share on a fully diluted basis.
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Digital Link Corporation and Subsidiaries on Form S-8
(File Nos. 33-74666 and 33-95176) of our reports dated January 21, 1997,
on our audits of the financial statements and financial statement schedule
of Digital Link Corporation and Subsidiaries as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995 and 1994 which
reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 28, 1997
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