SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(Amendment No. 1)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 3, 1998
Digital Link Corporation
------------------------------------------
(Exact name of Registrant as specified in its charter)
California 0-23110 77-0067742
- ----------------------------- ------------------------ --------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
217 Humboldt Court, Sunnyvale, California 94089
(Address of principal executive offices, including zip code)
(408) 745-6200
(Registrant's telephone number, including area code)
<PAGE>
The undersigned hereby amends Item 7 of its Current Report on Form 8-K
filed with the Commission on April 17, 1998 to read as follows:
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits.
<TABLE>
<CAPTION>
Page
<S> <C>
(a) Financial Statements of Business Acquired
Report of Independent Accountants 4
Balance Sheets as of December 31, 1997 and 1996 5
Statement of Operations for the years ended December 31, 1997 6
and 1996
Statements of Common Stock, And Other Shareholders' Deficit for 7
the years ended December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 8
and 1996
Notes to Financial Statements 9
(b) Pro Forma Financial Information
Introduction to Unaudited Pro Forma Financial Statements 22
Unaudited Pro Forma Condensed Combined Statement of 23
Operations for the year ended December 31, 1997
Unaudited Pro Forma Condensed Combined Statement of Operations 24
for the three months ended March 31, 1998
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations 25
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 1998 26
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet 27
(c) Exhibits
The following exhibits are filed herewith:
2.01 Previously filed
4.01 Previously filed
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 16, 1998 By: /s/ Stanley E. Kazmierczak
-----------------------------
Stanley E. Kazmierczak
Vice President, Finance and Administration
and Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Semaphore Communications Corporation:
We have audited the accompanying balance sheets of Semaphore Communications
Corporation as of December 31, 1997 and 1996, and the related statements of
operations, common stock and other shareholders' deficit, and cash flows for the
years then ended. 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 financial position of Semaphore Communications
Corporation as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 1, 1998
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
BALANCE SHEETS
-------
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................................... $ 153,758 $ 171,542
Accounts receivable, net of allowance for doubtful accounts of $70,000
and $75,143, respectively ................................................ 1,503,759 452,795
Inventories, net ............................................................. 867,058 403,443
Prepaid expenses and other current assets .................................... 105,974 151,079
------------ ------------
Total current assets ................................................. 2,630,549 1,178,859
Property and equipment, net ..................................................... 711,959 618,960
------------ ------------
Total assets ...................................................... $ 3,342,508 $ 1,797,819
============ ============
Current liabilities:
Accounts payable ............................................................. $ 489,596 $ 269,056
Deferred licensing revenue ................................................... 196,890 366,000
Accrued expenses ............................................................. 947,778 769,966
Other liabilities ............................................................ 282,549 532,649
Intercompany advances (Note 6) ............................................... 6,912,751
------------ ------------
Total current liabilities ............................................ 8,829,564 1,937,671
------------ ------------
Commitments (Note 4)
Series A, B, C mandatorily redeemable convertible preferred stock, par value
$0.001:
Issued and outstanding: 9,687,108 in 1997 and 1996
(Aggregate liquidation value: $13,527,341 at December 31, 1997) .............. 13,507,346 13,507,346
COMMON STOCK, AND OTHER SHAREHOLDERS' DEFICIT
Common stock, par value $0.001
Authorized: 15,000,000 shares;
Issued and outstanding: 400,111 in 1997 and 366,250 shares in 1996 ....... 400 366
Additional paid-in capital ................................................... 100,379 91,947
Accumulated deficit .......................................................... (19,095,181) (13,739,511)
------------ ------------
Total common stock, and other shareholders' deficit .................. (18,994,402) (13,647,198)
------------ ------------
Total liabilities, mandatorily redeemable stock, common stock,
additional and other shareholders' deficit ..................... $ 3,342,508 $ 1,797,819
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
-------
Year ended December 31,
--------------------------------------
1997 1996
--------------------------------------
Product revenue, net $ 3,588,047 $ 1,564,686
Contract development revenue 415,243 945,845
--------------------------------------
Total revenue 4,003,290 2,510,531
Cost of product revenue 2,392,485 797,729
Cost of contract development revenue 173,758 145,000
--------------------------------------
Gross profit 1,437,047 1,567,802
--------------------------------------
Operating expenses:
Research and development 3,477,561 2,527,452
General and administrative 1,640,708 1,255,121
Sales and marketing 1,387,382 1,563,431
--------------------------------------
Total operating expenses 6,505,651 5,346,004
--------------------------------------
Operating loss (5,068,604) (3,778,202)
Interest and other income - 40,328
Interest expense 287,066 33,477
--------------------------------------
Net loss $ (5,355,670) $ (3,771,351)
======================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
STATEMENTS OF COMMON STOCK, AND OTHER SHAREHOLDERS' DEFICIT
for the years ended December 31, 1997 and 1996
-------
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Common Stock Capital Deficit Total
---------------------------- -------------- ------------- ---------------
Shares Amount
------------ -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 .......... 38,038 $ 38 $ 10,222 $ (9,968,160) $ (9,957,900)
Issuance of common stock for cash 328,212 328 81,725 82,053
Net loss ........................ (3,771,351) (3,771,351)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1996 ........ 366,250 366 91,947 (13,739,511) (13,647,198)
Issuance of common stock for cash 33,861 34 8,432 8,466
Net loss ........................ (5,355,670) (5,355,670)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1997 ........ 400,111 $ 400 $ 100,379 $(19,095,181) $(18,994,402)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1996
--------------- -----------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ..................................................... $(5,355,670) $(3,771,351)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .............................................. 347,015 191,794
Provision for allowance for doubtful accounts ............. 70,000 9,638
Provision for allowance for excess and obsolete inventories
400,133
Changes in assets and liabilities:
Accounts receivable ..................................... (1,120,964) (171,038)
Inventories ............................................. (463,615) (499,486)
Prepaid expenses and other current assets ............... 45,105 (25,434)
Accounts payable ........................................ 220,540 (552,287)
Deferred licensing revenue .............................. (169,110) 38,000
Accrued expenses ........................................ 177,812 273,059
Other liabilities ....................................... (250,100) 278,549
Accrued interest ........................................ 282,751
Intercompany advances ................................... 130,000
----------- -----------
Net cash used in operating activities ................ (6,086,236) (3,828,423)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ........................ (440,014) (647,025)
----------- -----------
Net cash used in investing activities ................ (440,014) (647,025)
----------- -----------
Cash flows from financing activities:
Intercompany advances ........................................ 6,500,000
Proceeds from issuance of common stock ....................... 8,466 82,053
Net proceeds from issuance of Series C mandatorily redeemable
convertible preferred stock .............................. 3,000,000
----------- -----------
Net cash provided by financing activities ............ 6,508,466 3,082,053
----------- -----------
Net decrease in cash and cash equivalents ....................... (17,784) (1,393,395)
Cash and cash equivalents, beginning of year .................... 171,542 1,564,937
----------- -----------
Cash and cash equivalents, end of year .......................... $ 153,758 $ 171,542
=========== ===========
Supplemental schedule of noncash financing activities:
Issuance of Series A convertible preferred stock in exchange
for convertible promissory notes and interest ............ $ 3,750,000
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................... $ 7,500 $ 33,477
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business of the Company:
Semaphore Communications Corporation (the "Company"), a Xerox New
Enterprise Company, is a supplier of security management and virtual
private network solutions for Internet/Intranet and frame relay
applications.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The Company has incurred losses from operations and its current
liabilities exceed its current assets. The accompanying financial
statements do not include any adjustments related to the Company's
ability to continue as a going concern since subsequent to year end, as
described in Note 9, substantially all non-cash assets were purchased
by Digital Link Corporation.
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 revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash equivalents:
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 cash
equivalents in one major bank.
Revenue Recognition:
Product revenue is recognized upon shipment of the product if all
remaining obligations are insignificant and collection of the resulting
receivable is probable. Contract development revenue is recognized
using the percentage-of-completion method. Maintenance and support
revenue, which is not significant, is recognized over the terms of the
agreement.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Inventories:
Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market,
where market is determined as the lower of replacement cost or net
realizable value. Appropriate consideration is given to obsolescence,
excessive levels and other factors in determining the value of
inventories.
Property and Equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Property and equipment are depreciated on a straight-line
basis over their estimated useful lives of generally three years.
When assets are retired, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or
loss on disposal is included in the results of operations.
Earnings Per Share:
Earnings per share has not been presented as Xerox owns substantially
all of the Company's outstanding stock.
Income Taxes:
Income taxes are accounted for under the asset and liability method
under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued expenses approximate fair value due to their
short maturities.
continued
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Concentration of Credit Risk and Other Risks and Uncertainties:
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of cash and cash
equivalents, accounts receivable and intercompany payables. The
Company's cash is invested in deposits with one financial institution.
At times, such deposits may be in excess of insured limits. Management
believes that the financial institution which hold the Company's cash
and cash equivalents is financially sound and, accordingly, minimal
credit risk exists with respect to these cash balances.
With respect to accounts receivable and revenue, 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 international customers. As of and for the year
ended December 31, 1997, there were two international customers that
accounted for 68% and 13% of accounts receivable and 74% and 9% of
revenue, respectively. As of and for the year ended December 31, 1996
one international customer accounted for 38% of accounts receivable and
41% of revenue. In addition, at December 31, 1996, there were two
customers that accounted for 12% and 13% of revenue, respectively.
Intercompany payables are due to the Company's parent (Note 6).
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 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.
Stock-based Compensation:
The Company accounts for employee stock options under APB Opinion No.
25, "Accounting for Stock Issued to Employees," and provides pro forma
disclosure in Note 5 to the financial statements as if the measurement
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," had been adopted.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, continued:
Recent Accounting Pronouncement:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period,
resulting from transactions and other events and circumstances from
nonowner sources. This statement is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
During October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition". SOP 97-2 is effective for transactions entered
into in fiscal years beginning after December 15, 1997.
The implementation of SFAS No. 130 and SOP 97-2 are not expected to
have a material impact on the financial statements.
3. Balance Sheet Detail:
Inventories:
December 31,
---------------------------------------
1997 1996
------------------ -------------------
Raw materials $ 796,707 $ 505,706
Work in process 168,170 38,482
Finished goods 252,181 267,815
------------------ -------------------
1,217,058 812,003
Allowance for excess and obsolete
inventories (350,000) (408,560)
------------------ -------------------
$ 867,058 $ 403,443
================== ===================
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. Balance Sheet Detail, continued:
The Company's products are concentrated in the high-tech encryption
industry that is highly competitive and rapidly changing. Significant
technological changes in the industry 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.
The Company's revenues are concentrated in the sale of two main
products. In addition, certain 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.
Property and Equipment:
December 31,
------------------------------------
1997 1996
----------------- -----------------
Computer equipment and software $ 1,605,339 $ 1,200,070
Machinery and equipment 54,982 20,237
Furniture and fixtures 39,614 39,614
----------------- -----------------
1,699,935 1,259,921
Less accumulated depreciation (987,976) (640,961)
----------------- -----------------
$ 711,959 $ 618,960
================= =================
Accrued Expenses:
December 31,
-------------------------------
1997 1996
--------------- --------------
Product warranty $ 210,745 $ 332,000
Accrued consulting 70,482 70,390
Accrued vacation 126,616 93,766
Other 539,935 273,810
--------------- --------------
$ 947,778 $ 769,966
=============== ==============
continued
<PAGE>
SEMAPHORE COMMUNI MENTS
4. Commitments:
The Company leases its facilities under a noncancelable operating lease
that expires April 2001. In addition to the base rental, the Company is
responsible for certain expenses, including insurance, utilities,
maintenance and taxes.
Future minimum lease payments required under noncancelable operating lease
obligations is as follows:
1998 $ 219,381
1999 228,081
2000 236,781
2001 59,739
--------------
$ 743,982
==============
Rent expense was $208,584 and $157,368 for the years ended December 31,
1997 and 1996, respectively.
5. Stock and Option Plans:
Mandatorily Redeemable Convertible Preferred Stock:
Total Shares Issued and Liquidation
Amount Designated Outstanding Preference
--------------- ------------ ------------- ---------------
Series
- ---------
A $ 4,757,346 4,371,156 4,371,156 $ 4,687,347
B 2,000,000 1,379,310 1,379,310 2,000,000
C 6,750,000 3,936,642 3,936,642 6,839,994
--------------- ------------ ------------- ---------------
$ 13,507,346 9,687,108 9,687,108 $ 13,527,341
=============== ============ ============= ===============
The Company has issued a total of 4,371,156 shares of Series A Stock at
$1.0723358 per share, 1,379,310 shares of Series B Stock at $1.45 per
share and 3,936,642 of Series C Stock at $1.73752 per share.
Under the Company's Articles of Incorporation, the Company's
convertible preferred stock is issuable in series and the Company's
Board of Directors is authorized to determine the rights, preferences
and terms of each series.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Stock and Option Plans, continued:
Mandatorily Redeemable Convertible Preferred Stock, continued:
Redemption:
The Company shall redeem all of the Series A, B and C Preferred
Stock as follows: For Series A and Series B Preferred Stock, on
each November 30th of 2000, 2001 and 2002, except for Series C
Preferred Stock which is on each November 30th of 2001, 2002 and
2003, the Company is obligated to redeem at a price per share equal
to the Redemption Price of such shares: a) the lesser of the number
of shares of the Series A, B and C Preferred Stock outstanding
immediately following the Effective Time multiplied by 1/3 or b)
all of the shares of Series A, B and C Preferred Stock which then
remain outstanding. The redemption price of all shares of Series A,
B and C Preferred Stock shall be an amount per share in cash equal
to the Series A, B and C Liquidation Value of such share on the
Redemption Date.
To the extent the Redemption Dates of the Series A, B and C
Preferred Stock are the same, the Company shall effect such
redemption prorata from the holders of the Series A, B and C
Preferred Stock.
If required by the shareholders, the redeemable preferred stock
payments would be as follows:
<TABLE>
<CAPTION>
Series A Series B Series C Total
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
November 30, 2000 $ 1,562,449 $ 666,667 $ 2,229,116
November 30, 2001 1,562,449 666,667 $ 2,279,998 4,509,114
November 30, 2002 1,562,449 666,666 2,279,998 4,509,113
November 30, 2003 2,279,998 2,279,998
-------------- -------------- -------------- ---------------
$ 4,687,347 $ 2,000,000 $ 6,839,994 $ 13,527,341
============== ============== ============== ===============
</TABLE>
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Stock and Option Plans, continued:
Mandatorily Redeemable Convertible Preferred Stock, continued:
Dividends:
The holders of the Series A, B and C convertible preferred stock
are entitled to receive dividends, out of any assets legally
available, prior and in preference to any declaration or payment of
any dividend on the common stock of the Company, at the rate of
$0.1072, $0.145, and $0.173752 per share per annum, respectively.
Such dividends are payable when, and if, declared by the Board of
Directors, and are not cumulative. Dividend rates in excess of
stated dividend rates can only be made if, at the same time,
equivalent dividends are paid to holders of shares of Common Stock.
As of December 31, 1997 no dividends have been declared.
Liquidation:
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of Series A
convertible preferred stock shall be entitled to receive, prior and
in preference to any distribution of any of the assets of the
Company to the holders of common stock by reason of their
ownership, an amount per share equal to $1.0723358, $1.45 and
$1.73752 for each outstanding share of Series A, B and C
convertible preferred stock, respectively, plus any declared but
unpaid dividends on such shares. After the distributions to the
holders of Series A, B, and C convertible preferred stock have been
made, the remaining assets of the Company available for
distribution to shareholders shall be distributed pro rata among
the holders of common stock.
Mergers:
Upon a merger, reorganization, or sale of all or substantially all
of the assets of the Company, in which outstanding shares of the
Company are exchanged for securities or other consideration issued
by the acquiring corporation, the holders of the convertible
preferred stock shall be paid for each share of such stock in cash
or in securities received from the acquiring corporation, or in
combination thereof. If, upon such an event, the cash and
securities distributed to the holders of the Series A, B and C
convertible preferred stock shall be insufficient to permit the
payment to such holders of the full preferential amounts, then the
entire assets and funds of the corporation legally available for
distribution shall be distributed ratably among the holders of the
Series A, C and C convertible preferred stock.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Stock and Option Plans, continued:
Mandatorily Redeemable Convertible Preferred Stock, continued:
Voting:
The holder of each share of Series A, B, and C convertible
preferred stock is entitled to the number of votes equal to the
number of shares of common stock into which each share could be
converted on the record date for the vote or consent of
stockholders, except as otherwise required by law, and has voting
rights and powers equal to the voting rights and powers of holders
of common stock.
Conversion:
Each share of Series A, B, and C convertible preferred stock, at
the option of the holder, is convertible into an equal number of
fully paid and nonassessable shares of Common Stock as is
determined: for Series A, B and C Preferred stock by dividing the
sum of $1.0723358, $1.45, $1.73752, respectively plus declared but
unpaid dividends on the Series A, B and C shares being converted by
the Conversion Price, as defined, in effect at the time for such
shares.
Conversion is automatic upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering
the offer and sale of common stock in which the aggregate proceeds
raised exceed $7,500,000.
Common Stock:
Each share of common stock is entitled to one vote. The holders of
common stock are also entitled to receive dividends whenever funds are
legally available and when declared by the Board of Directors, subject
to the prior rights of holders of all classes of stock outstanding.
Stock Option Plan:
The Company has a 1991 Stock Option Plan and a 1995 Stock Incentive
Plan (the Plans) under which 15,000,000 shares of common stock have
been reserved for issuance. All outstanding stock options issued under
the Plans are governed by the terms and conditions of that respective
plan. Each Plan expires ten years after its adoption.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Stock and Option Plans, continued:
Options granted under the 1991 Stock Option Plan are nonstatutory stock
options. Options granted under the 1995 Stock Incentive Plan may be
either incentive stock options or nonstatutory stock options, as
designated by the Board of Directors. Both Plans provide that the
exercise price of options granted must be no less than the fair market
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 Plans become
exercisable as to 25% of the shares one year after the grant date and
thereafter with respect to an additional 1/48th at the end of each
succeeding month.
Both Plans also provide 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 awarded under both Plans are subject to
a repurchase option that expires over a five year period at the
original issuance price. As of December 31, 1997, no restricted stock
awards have been issued under the Plan.
Information as to activity under the Plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------
Weighted
Average
Remaining
Shares Number Exercise Contractual
Available of Price Aggregate Life in
for Grant Shares Per Share Price Years
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 1,845,036 1,392,926 $0.25 $ 348,232 -
Granted (632,830) 632,830 $0.25 158,208 -
Exercised (328,212) $0.25 (82,053) -
Canceled 172,181 (172,181) $0.25 (43,045) -
------------ ------------ -----------
Balances, December 31, 1996 1,384,387 1,525,363 $0.25 381,342 -
Granted (488,000) 488,000 $0.25 122,000 -
Exercised (33,861) $0.25 (8,466) -
Canceled 291,588 (291,588) $0.25 (72,897) -
------------ ------------ -----------
Balances, December 31, 1997 1,187,975 1,687,914 $0.25 $ 421,979 8.52
============ ============ ===========
</TABLE>
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Stock and Option Plans, continued:
There were 478,650 and 265,055 options exercisable at December 31, 1997
and 1996, respectively for which the weighted average exercise price
was $0.25 for both 1997 and 1996.
Stock-Based Compensation:
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the Plans been determined
based on the fair value at the grant date for awards in 1997 and 1996,
according to the provisions of SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
1997 1996
----------------- ----------------
Net loss
As reported $ 5,355,670 $ 3,771,351
Pro forma 5,382,146 3,787,959
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following weighted average
assumptions:
Risk-free interest rate 5.94% to 6.39%
Expected life 5 years
Expected dividends -
The weighted average grant date fair value of options granted
in 1997 and 1996 are $0.066 and $0.065, respectively.
6. Related Parties:
During the years ended December 31, 1997 and 1996, the Company had related
party transactions with its parent company, Xerox Corporation consisting
of periodic advances received from Xerox for working capital. Such
advances bear interest at the prime rate (8.25% at December 31, 1997). It
is the intent of the parties to convert the advances to equity. The
Company had outstanding advances from Xerox of $6,500,000 and zero at
December 31, 1997 and 1996, respectively. In addition, $282,751 of accrued
interest charges related to the advances from Xerox at December 31, 1997
and $130,000 in administrative fees to Xerox based on 1% of planned
revenue earned for the year ended December 31, 1997 are included in
intercompany advances.
continued
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Income Taxes:
The Company computes its provision (benefit) on a separate return basis
for financial reporting purposes. The Company's net deferred tax asset at
December 31, 1997 and 1996 comprise $300,445 and $382,692, respectively,
in allowances and accruals which have been offset by valuation allowances
of $300,445 and $382,692, respectively, exclusive of net operating loss
carryforwards, as discussed below. A valuation allowance has been
established to the full extent of such amounts since it is more likely
than not that such differences will not be realized on a separate return
basis.
According to the tax sharing agreement between the Company and Xerox, the
Company's tax attributes shall be included in Xerox's consolidated tax
return. Xerox shall pay the Company for the actual net tax benefit
realized by the Xerox Group from utilizing the Company's net operating
losses, tax credits, and other tax attributes reflected on any Xerox
consolidated tax return. As of December 31, 1997 and 1996, Xerox had fully
utilized the Company's net operating losses which amounted to
approximately $7.6 million and $5.4 million, respectively. As it is not
the intent to settle such amounts, but rather to offset such benefit
against future income taxes paid by Xerox on behalf of the Company, no
receivables nor tax benefit have been recorded by the Company for the
utilization of current and prior net operating losses.
The change in the valuation allowance was $82,247 for the year ended
December 31, 1997.
8. Employee Benefit Plan:
In July 1996, the Company established a defined contribution plan for all
employees with more than one month of service that is covered under
section 401(k) of the Internal Revenue Code. Each employee may defer a
portion of their salary up to the maximum percentage allowed under IRS
rules. The contribution percentages can be changed without limit. The
Company has the discretion to make contributions to the Plan. For the
years ended December 31, 1997 and 1996, the Company made contributions of
approximately $143,000 and $99,000, respectively.
9. Subsequent Events:
On April 3, 1998, Digital Link Corporation ("Digital Link") entered into
an Asset Sale Agreement with the Company, to acquire substantially all of
the Company's non-cash assets excluding furniture and fixtures.
continued
<PAGE>
SEMAPHORE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Subsequent Events, continued:
Under the terms of the purchase agreement, Digital Link issued 291,182
shares of its common stock to the Company on April 3, 1998 and assumed
certain liabilities. The number of shares issued was determined by
dividing $3,200,000 by the volume-weighted average price per share (as
reported by Bloomberg Financial Services) at which Digital Link's common
stock traded on the five business days immediately preceding the execution
of the Agreement by the parties. Digital Link received $182,000 from the
Company with respect to the assumption liabilities.
In March 1998, the Company entered into release and settlement agreements
with a customer and a manufacturer to terminate a noncancelable purchase
order and the related manufacturing arrangement. Under such agreements,
the Company paid the manufacturer approximately $600,000 for product and
other sunk costs which was reimbursed by the customer.
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed data, including the notes
thereto, are qualified in their entirety by reference to, and should be
read in conjunction with, the historical financial statements of Semaphore
Communications Corporation included elsewhere in this Form 8-K/A and the
consolidated financial statements of Digital Link Corporation. The
unaudited pro forma combined statements of operations combine Semaphore's
results of operations and Digital Link's results of operations for the
three months ended March 31, 1998 and the year ended December 31, 1997,
giving effect to the acquisition as if it had occurred at January 1, 1997.
The unaudited pro forma combined balance sheet data combine Semaphore's
and Digital Link's balance sheets as of March 31, 1998, giving effect to
the acquisition as if it had occurred on March 31, 1998.
The Pro Forma Financial Information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or
financial position that would have occurred had the acquisition been
consummated at the beginning of the periods presented, not is it
necessarily indicative of future operating results or financial position.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS for the year ended December
31, 1997 (in thousands, except per share
data)
<TABLE>
<CAPTION>
Digital Semaphore
Link Communications Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales .............................. $ 66,008 $ 4,003 $ 70,011
Cost of sales ...................... 29,078 2,566 31,644
-------- -------- --------
Gross profit ....................... 36,930 1,437 38,367
-------- -------- --------
Research and development ........... 11,005 3,478 14,483
Selling, general and administrative 22,019 3,028 $ 25(1) 25,072
Purchased, research and development 3,651 3,651
-------- -------- -------- --------
Total expenses ..................... 36,675 6,506 25 43,206
-------- -------- -------- --------
Operating income (loss) ............ 255 (5,069) (25) (4,839)
Interest expense ................... 287 287
Other (income) expense, net ........ (2,524) (2,524)
-------- -------- -------- --------
Income (loss) before provision for
income taxes ................... 2,779 (5,356) (25) (2,602)
Provision for income taxes ......... 847 847
-------- -------- -------- --------
Net income (loss) .................. $ 1,932 $ (5,356) $ (25)(1) $ (3,449)
======== ======== ======== ========
Income (loss) per share - basic .... $ 0.21 $ (0.36)
Shares used in per share calculation
- basic ........................ 9,249 9,540(2)
======== ========
Income (loss) per share - diluted .. $ 0.20 $ (0.36)
======== ========
Shares used in per share calculation
- diluted ...................... 9,600 9,540(2)
======== ========
</TABLE>
See accompanying notes to unaudited proforma condensed combined statements
of operations.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Digital Semaphore
Link Communications Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
-------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 14,519 $ 486 $ 15,005
Cost of sales 7,204 77 7,281
-------------- ----------------- ---------------
Gross profit 7,315 409 7,724
-------------- ----------------- ---------------
Research and development 2,822 995 3,817
Selling, general and administrative 5,023 641 $ 6(1) 5,670
-------------- ----------------- ------------- ---------------
Total expenses 7,845 1,636 6 9,487
-------------- ----------------- ------------- ---------------
Operating income (loss) (530) (1,227) (6) (1,763)
Interest expense 151 151
Other (income) expense, net (601) (601)
-------------- ----------------- ------------- ---------------
Income (loss) before provision for
income taxes 71 (1,378) (6) (1,313)
Provision for income taxes 22 22
-------------- ----------------- ------------- ---------------
Net income (loss) $ 49 $ (1,378) $ (6)(1) $ (1,335)
============== ================= ============= ===============
Income (loss) per share - basic $ 0.01 $ (0.14)
============== ===============
Shares used in per share
calculation - basic 9,383 9,674(2)
============== ===============
Income (loss) per share - diluted $ 0.01 $ (0.14)
============== ===============
Shares used in per share
calculation - diluted 9,436 9,674(2)
============== ===============
</TABLE>
See accompanying notes to unaudited proforma condensed combined statements
of operations.
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations:
(1) Adjustment reflects the amortization of the amount of the purchase price
allocated to identified intangible assets over 12 months ended December
31, 1997 and 3 months ended March 31, 1998. Intangibles are being
amortized over 5 years.
(2) Shares used in the per share calculation reflect Digital Link shares
issued to Semaphore stockholders as if they were outstanding from the
beginning of each period presented and existing Digital Link shares.
Shares used in proforma income (loss) per share-basic and diluted calculations
for the year ended December 31, 1997 are as follows (in thousands):
Digital Link shares issued in asset acquisition 291(4)
Existing Digital Link shares 9,249
-------
Shares used in per share calculation - basic and diluted 9,540
=======
Shares used in proforma income (loss) per share calculations for the three
months ended March 31, 1998 are as follows (in thousands):
Digital Link shares issued in asset acquisition 291(4)
Existing Digital Link shares 9,383
-------
Shares used in per share calculation - basic and diluted 9,674
=======
(3) In-process research and development costs in the amount of $2,299, which
will be written off immediately after the transaction is completed, have
been excluded from these unaudited pro forma condensed combined
statements of operations.
(4) The number of shares issued was determined by dividing $3,200 by the
volume-weighted average price per share (as reported by Bloomberg
Financial Services) at which Digital Link's common stock traded on the
five business days immediately preceding the execution of the Asset Sale
Agreement by the parties.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
as of March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Digital Semaphore
Link Communications Pro Forma Pro Forma
Corporation Corporation Adjustments Combined
------------- ------------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 7,824 $ 1,561 $ (1,379)(1) $ 8,006
Short-term marketable securities 9,838 9,838
Accounts receivable 6,802 296 (95)(1) 7,003
Inventories 6,984 952 (504)(1) 7,432
Prepaid and other current assets 1,413 39 1,452
Deferred income taxes 2,304 2,304
Intangible assets 126(1) 126
2,299(1)(2)
(2,299)(1)(2)
Property and equipment 3,281 625 (110)(1) 3,796
Long-term marketable securities 24,799 24,799
Deferred income taxes 2,062 989(2) 3,051
Other 1,149 61 (51)(1) 1,159
------------- ----------------- --------------- ------------
Total $ 66,456 $ 3,534 $ (1,024) $ 68,966
============= ================= =============== ============
Current liabilities $ 10,531 $ 10,214 $ (9,594)(1) $ 11,151
Mandatorily redeemable preferred
stock 13,507 (13,507)(1)
Stockholders' equity (deficit) 55,925 (20,187) 20,187(1) 57,815
3,200(1)
989(2)
(2,299)(2)
------------- ----------------- --------------- ------------
Total $ 66,456 $ 3,534 $ (1,024) $ 68,966
============= ================= =============== ============
</TABLE>
See accompanying notes to unaudited proforma condensed combined balance
sheet.
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet:
(1) Reflects the allocation of the purchase price of $3.2 million of Digital
Link common stock issued to the identified tangible and intangible
assets and liabilities assumed by Digital Link.
Based on the Asset Sale Agreement, Digital Link purchased substantially
all non-cash assets and assumed certain liabilities from Semaphore. The
net working capital provided was $260 as the majority of the current
liabilities are intercompany payables to Semaphore's parent and were not
assumed. The purchase price allocation is as follows:
Cash and cash equivalents $ 182
Accounts receivable 201
Inventories 448
Intangible assets 126
Property and equipment 515
Other assets 49
Current liabilities (620)
In-process research and development 2,299
----------
$ 3,200
==========
(2) Reflects the impact on stockholders' equity of the anticipated write-off
of in-process research and development in the amount of $2,299 and the
related tax effect of $989. Amount is initially recorded as an
intangible asset and then is expensed into accumulated deficit.
