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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K/A
AMENDMENT NO. 3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 17, 1998
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Date of Report (date of earliest event reported)
DATALINK SYSTEMS CORPORATION
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Exact Name of Registrant as Specified in its Charter
Nevada 0-21069 35-3574355
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State or Other Jurisdiction Commission File IRS Employer Identification
of Incorporation Number Number
1735 Technology Drive, Suite 790, San Jose, CA 95110
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Address of Principal Executive Offices, Including Zip Code
(408) 367-1700
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Registrant's Telephone Number, Including Area Code
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ITEM 4. CHANGES IN THE REGISTRANT'S CERTIFYING ACCOUNTANT
On July 17, 1998, Datalink Systems Corporation (the "Company") received
notification from Pricewaterhouse Coopers LLP ("PwC"), formerly Coopers &
Lybrand L.L.P., the Company's independent accountants for the fiscal years
ended March 31, 1996, 1997 and 1998 stating that the client-auditor
relationship had ceased. The reports of PwC on the Company's financial
statements for the fiscal years ended March 31, 1996, 1997 and 1998 did not
contain an adverse opinion or disclaimer of an opinion nor were they qualified
or modified as to uncertainty, audit scope or accounting principles or
practices.
PwC submitted a response letter, as required by Item 304(a) of Regulation
S-B, to the Company's 8-K filing made on July 24, 1998 which was filed as
Exhibit 16 to the Company's Form 8-K/A Amendment No. 1 filed on August 5,
1998. The Company agrees with the statement of PwC made therein that,
"Other than this matter, in connection with its audits for the
two most recent fiscal years and through July 17, 1998, there
have been no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved
to the satisfaction of PwC would have caused them to make reference
in their report on the financial statements for such years."
The PwC "matter" referred to above concerns a disagreement the Company had
with PwC regarding the application of Emerging Issues Task Force abstract
88-18 (hereinafter "EITF 88-18") to revenues from certain sales of technology
in fiscal years 1997 and 1998.
Subsequent to filing Form 8-K/A Amendment No. 1 on August 5, 1998,
disclosing the PwC response letter referred to above, the Company received a
second response letter (the "PwC Letter") which is filed herewith as Exhibit
16.1. The Company has read the PwC Letter and agrees with the statements made
therein, except as set forth below:
Paragraph 2 of the PwC Letter states: "The Company filed on September
11, 1996 an amended 8-K/A, which included the audited financial statements of
DSC Datalink Systems Corporation, as of December 31, 1995 and 1994 and for the
years ended December 31, 1995 and 1994 and for the period from June 15, 1993
(date of inception) to December 1995. Note 9 to the aforementioned financial
statements discloses the applicability of EITF 88-18 to the sale of
technology. In addition, the applicability of EITF 88-18 was discussed in
detail with senior management of the Company in August 1996."
Although PwC did recommend the application of EITF 88-18 to the sale of
technology in the financial disclosures made in the Company's September 11,
1996 8-K/A and the 10-QSB for the quarter ending September 30, 1996, after
these filings were made, the senior PwC audit partner informed the Company
that PwC had changed its position regarding the applicability of EITF 88-18 to
the technology sale transaction. The Company was then instructed to prepare
its 10-QSB for the quarter ended December 31, 1996 using an accounting
treatment that did not apply EITF 88-18.
All financial disclosure contained in such Quarterly Report were reviewed
and concurred in by PwC.
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Subsequently PwC informed the Company that it had again changed its
position and recommended that EITF 88-18 be applied to treatment of such
revenues for purposes of the Company's financial disclosure in its 1997 10-KSB
and future reports filed with the Commission. Although the Company did not
resist complying with PwC's recommendation, there was concern over PwC's
inconsistent direction regarding this EITF 88-18 issue and accordingly Company
management met with the PwC Senior Audit Partner in September 1997 to discuss
said concern.
Subsequent financial disclosures were made consistent with PwC's
recommendations, as documented by PwC's correspondence dated September 29,
1997, to the Company's Board of Directors:
"Recognition of the Shalcor transaction in accordance with EITF
88-18 is required and though management disagreed with the account-
ing treatment it did record the transaction in accordance with
EITF 88-18."
The same EITF 88-18 issue arose during the audit for the fiscal year 1998
concerning a similar sale of technology. Once again, the Company and PwC
revisited the applicability of this treatment to the sale of technology. The
Company asked PwC to explain the rationale for using EITF 88-18 and had
discussions with PwC regarding the meaning of the term "investor" as used in
the application of EITF 88-18.
Paragraph 3 of the PwC Letter states: "Senior management of the Company
had advised PwC, that the Company had sought the advice of several accounting
firms, including an accounting firm that provides tax consulting to the
Company, and an economic consulting firm."
With the intention of researching the EITF 88-18 treatment, the Company
did seek the advice of accounting and consulting professionals regarding
clarification of the foregoing issue. None of such professionals was engaged
in rendering public accounting services, nor did they perform any auditing
services for the Company; the Company's Board of Directors considered
undertaking such research to be appropriate and consistent with its fiduciary
duties to the Company and its stockholders. The Company reaffirms its prior
statement that it did not, and disclaims any suggestion that it did, seek the
formal opinion of any accountant or accounting firm other than PwC.
Although alternative sale of technology accounting treatments were
suggested by the Company, none were found acceptable to PwC. Consequently,
the Company acquiesced in favor of PwC. All financial disclosures in the
Company's SEC filings for the fiscal years 1997 and 1998 have been made in
accordance with PwC's direction and approval.
In September 1997, PwC advised the Company's Board of Directors of
certain "internal control weaknesses." The Company's management has addressed
and rectified each of these issues, set forth in the PwC response letter as
Exhibit 16 with the Company's Form 8-K/A Amendment No. 1 filed on August 5,
1998, as described below:
PWC ISSUE: Failure to timely file periodic reports as required by
the Securities Exchange Act of 1934, as amended (the "Exchange Act.")
COMPANY RESOLUTION: The Company was late in filing the 1997 10-KSB.
This was in large part due to requirements made by PwC during July
1997 to make last minute adjustments to the 10-KSB as required by
the unexpected application of EITF 88-18. PwC delivered its original,
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manually-executed report on the Company's financial statements for the
year ended March 31, 1997 under a cover letter dated August 12, 1997.
This is the same date of PwC's consent to refer to and include its
report in the 1997 10-KSB. The 1997 10-KSB was subsequently filed
on August 12, 1997. The last minute adjustments required for the
1997 10-KSB also applied to the report for the quarter ended June 30,
1997 and caused this report to be filed one date late. The Company
has since filed all reports required to be filed by it pursuant to
the Exchange Act on a timely basis.
Paragraph 4 of the PwC Letter states: "The delay in the Company's filing
of the 1997 Form 10-KSB was the result of the Companys inability to reconcile
certain common stock and stock option activity on a timely basis and the
Company's continued resistance with respect to the previously reported
disagreement."
The Company had completely reconciled its stock option and common stock
activity for the year ended March 31, 1997 when it was directed by PwC to
revise the financial disclosure in the 1997 Form 10-KSB and re-apply the EITF
88-18 treatment to the sale of technology. The Company had prepared the 1997
Form 10-KSB consistent with the sale of technology treatment directed by PwC
in the Company's prior Form 10-QSB for the quarter ended December 31, 1996.
Upon learning of the new application of EITF 88-18, the Company tried to
quickly revise its 1997 Form 10-KSB and file it with the Commission; however,
due to the extensive nature of the revision required by the EITF 88-18
treatment, the Company was unable to file the Form 10-KSB until August 12,
1997.
The Company's concerns regarding the inconsistent direction from PwC on
the EITF 88-18 issue were discussed with the PwC senior partner after the 1997
Form 10-KSB filing was made. The Company maintains that all stock
transactions have been properly accounted for and fully audited by PwC.
PWC ISSUE: Material Audit adjustments related to the sale of tech-
nology, accounts payable and accrued liabilities and common stock
transaction.
COMPANY RESOLUTION: All adjustments related to the sale of tech-
nology were made as a result of the implementation of EITF 88-18.
Adjustments to accounts payable, accrued liabilities, and common
stock transactions were required due to Company practices occurring
prior to the Company becoming publicly-held. After the Company
became public, all required adjustments were completed. PwC has
since audited and issued its report on the Company's financial
statements for the fiscal year ended March 31, 1998.
Paragraph 5 of the PwC Letter states: "The Company practices in question
also dealt with transactions subsequent to the Company becoming publicly
held."
The Company maintains that all subsequent stock and option transactions
have been properly accounted for and fully audited by PwC.
PWC ISSUE: Adequacy of records maintained by the Company related
to certain prior common stock transactions.
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COMPANY RESOLUTION: The claimed inadequacy of records maintain by
the Company related to certain prior common stock transactions were
considered to be the result of past practices prior to the date the
Company became a public company. Since the Company became publicly-
held, such records have also been maintained by the Company's trans-
fer agent, American Securities Transfer & Trust, Inc. PwC has since
audited and issued its report on the Company's financial statements
for the fiscal year ended March 31, 1998.
Paragraph 6 of the PwC Letter states: "The Company practices in question
also dealt with transactions subsequent to the Company becoming publicly
held."
Again the Company maintains that all subsequent stock and option
transactions have been properly accounted for and fully audited by PwC.
Although there are no documents in support of this statement, nor does
senior management at the Company have any recollection of being informed of
the need to amend its Form 10-QSB for the quarter ended December 31, 1997, the
Company is currently preparing an amended Form 10-QSB and expects to file it
shortly.
Finally, the report of PwC dated June 19, 1997 on the Company's financial
statements as of March 31, 1997 and for the year then ended, which contained a
paragraph stating that the Company's recurring losses from operations raised
substantial doubt as to the Company's ability to continue as a going
concerning, was filed with the Commission in August 1997 as required.
The Company was surprised by PwC's repeated reversals of its position on
the applicability of EITF 88-18 to treatment of the transaction and revenues
in question; however, it denies any failure on its part to cooperate fully
with PwC regarding this issue and strongly objects to any suggestion to the
contrary.
Subsequent to filing Form 8-K/A Amendment No. 2 on August 18, 1998,
disclosing the PwC Letter discussed above, the Company received a third
response letter, which is filed herewith as Exhibit 16.2, wherein PwC asserts
that it never changed its position with respect to the applicability of EITF
88-18. For the reasons discussed above, the Company does not agree with the
statements made by PwC in its third response letter.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: None
(b) Pro Forma Financial Information: None
(c) Exhibits:
16 Letter of PricewaterhouseCoopers Previously filed
LLP dated July 27, 1998 required by
Item 304(a)(3) of Regulation S-B
16.1 Letter of PricewaterhouseCoopers Previously filed
LLP dated August 12, 1998
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16.2 Letter of PricewaterhouseCoopers Filed herewith
LLP dated August 19, 1998 Electronically
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, hereunto duly authorized.
DATALINK SYSTEMS CORPORATION
Dated: August 25, 1998 By:/s/ Anthony N. LaPine
Anthony N. LaPine, President
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EXHIBIT 16.2
PricewaterhouseCoopers, LLP
Ten Almaden Boulevard, Suite 1600
San Jose, California 95113
August 19, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Datalink Systems Corporation (copy
attached) which we understand were filed with the Commission, pursuant to Item
4 of Form 8-K/A, as part of the Company's Form 8-K/A report as of July 17,
1998. Further to our letters to the Commission of July 27, 1998 and August
12, 1998, we agree with the statements concerning our Firm contained in such
Form 8-K/A, except as set forth below:
Paragraph 6 of the Company's response states: "Although PwC did
recommend the application of EITF 88-18 to the sale of technology in the
financial disclosures made in the Company's September 11, 1996 8-K/A and the
10-QSB for the quarter ending September 30, 1996, after these filings were
made, the senior PwC audit partner informed the Company that PwC had changed
its position regarding the applicability of EITF 88-18 to the technology sale
transaction. The Company was then instructed to prepare its 10-QSB for the
quarter ended December 31, 1996, using an accounting treatment that did not
apply EITF 88-18." PwC has never changed its position regarding the
applicability of EITF 88-18, nor did it instruct the Company to prepare the
December 31, 1996 10-QSB using a different accounting treatment. No
discussion took place regarding the preparation of the December 1, 1996 10-
QSB.
Paragraph 8 of the Company response states: "Subsequently PwC informed
the Company that it had again changed its position and recommended that EITF
88-18 be applied to treatment of such revenues for purposes of the Company's
financial disclosure in its 1997 10-KSB and future reports filed with the
Commission. Although the Company did not resist complying with PwC's
recommendation, there was concern over PwC's inconsistent direction regarding
this EITF 88-18 issue and accordingly Company management met with the PwC
Senior Audit Partner in September 1997 to discuss said concern. "PwC has
never changed its position regarding the applicability of EITF 88-18. The
Company's CEO repeatedly objected to the application of EITF 88-18 during the
1997 and 1998 audits. In September 1997, at PwC's request, a meeting was held
with the Company CEO to advise him again that EITF 88-18 was applicable to the
Company's sale of technology of reportable conditions based on the 1997 audit,
and its management letter comments.
Paragraph 16 of the Company's response states: "The Company had
completely reconciled its stock option and common stock activity for the year
ended March 31, 1997, when it was directed by PwC to revise the financial
disclosure in the 1997 Form 10-KSB and re-apply the EITF 88-18 treatment to
the sale of technology. The Company had prepared the 1997 Form 10-KSB
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consistent with the sale of technology treatment directed by PwC in the
Company's prior Form 10-QSB for the quarter ended December 31, 1996. Upon
learning of the new application of EITF 88-18, the Company tried to quickly
revise its 1997 Form 10-KSB and file it with the Commission; however, due to
the extensive nature of the revision required by the EITF 88-18 treatment, the
Company was unable to file the Form 10-KSB until August 12, 1997." PwC has
never changed its position regarding the applicability of EITF 88-18. The
Company did not complete a timely reconciliation of its stock option and
common stock activity for the year ended March 31, 1997 and required
additional time to perform these reconciliations. This additional time
resulted in the late filing of the 1997 Form 10-KSB.
Paragraph 17 of the Company's response states: "The Company's concerns
regarding the inconsistent direction from PwC on the EITF 88-18 issue were
discussed with the PwC senior partner after the 1997 Form 10-KSB filing was
made." PwC has never changed its position regarding the applicability of EITF
88-18.
Paragraph 29 of the Company's response states: "The Company was surprised
by PwC's repeated reversals of its position on the applicability of EITF 88-18
to treatment of the transaction and revenues in question; however, it denies
any failure on its part to cooperate fully with PwC regarding the issue and
strongly objects to any suggestion to the contrary." PwC has never changed
its position regarding the applicability of EITF 88-18.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
