-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GqGnmzZGhMsQYR1P2mxcwQKBNLzKq1mVif7Lk3GOu4QMotDyHWCR0/ucKhGBb1Vl C0aQOC4TARc0s5YFpI0Bwg== 0000810467-96-000007.txt : 19961118 0000810467-96-000007.hdr.sgml : 19961118 ACCESSION NUMBER: 0000810467-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL LINK CORP CENTRAL INDEX KEY: 0000810467 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 770067742 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23110 FILM NUMBER: 96666731 BUSINESS ADDRESS: STREET 1: 217 HUMBOLDT COURT CITY: SUNNYVALE STATE: CA ZIP: 94089-1300 BUSINESS PHONE: 4087456200 MAIL ADDRESS: STREET 1: 217 HUMBOLDT COURT CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-23110 DIGITAL LINK CORPORATION (Exact name of registrant as specified in its charter) California 77-0067742 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 217 Humboldt Court, Sunnyvale, California 94089 (Address of principal executive offices, including zip code) (408) 745-6200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock at November 13, 1996 was 9,167,905. DIGITAL LINK CORPORATION INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION: ITEM 1 - Financial Statements Page Consolidated Balance Sheets as of September 30, 1996 3 and December 31, 1995 Consolidated Statements of Income for the quarters 4 and nine months ended September 30, 1996 and September 30, 1995 Consolidated Statements of Cash Flows for 5 the nine months ended September 30, 1996 and September 30, 1995 Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and 9 Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings 19 ITEM 2 - Changes in Securities 19 ITEM 3 - Defaults Upon Senior Securities 19 ITEM 4 - Submission of Matters to a Vote of 19 Security Holder ITEM 5 - Other Information 19 ITEM 6 - Exhibits and Reports on Form 8-K 19 SIGNATURE(S) 21
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements DIGITAL LINK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share amounts) September 30, December 31, 1996 1995 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,644 $ 2,639 Short-term marketable securities 15,243 16,726 Accounts receivable, net 5,901 7,690 Inventories, net 5,604 4,603 Prepaid and other current assets 2,847 2,807 Total current assets 31,239 34,465 Property and equipment at cost, net 1,839 1,608 Long-term marketable securities 25,739 18,244 Other assets 696 438 TOTAL ASSETS $59,513 54,755 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,917 $ 1,371 Accrued payroll expense 1,748 1,433 Other accrued expenses 3,768 2,751 Income taxes payable 1,289 1,427 Total current liabilities 8,722 6,982 SHAREHOLDERS' EQUITY: Common stock, no par value: Authorized: 25,000,000 shares; Issued and outstanding: 9,161,530 shares in 1996 and 9,000,500 shares in 1995 29,778 29,283 Unrealized gain on marketable securities 189 555 Retained earnings 20,824 17,935 Total shareholders' equity 50,791 47,773 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $59,513 $54,755 The accompanying notes are an integral part of these consolidated financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Amounts in thousands, except per share amounts) Quarter Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Net sales $14,127 $12,500 $36,355 $34,324 Cost of sales 5,666 4,687 14,869 12,471 Gross profit 8,461 7,813 21,486 21,853 EXPENSES: Research and development 2,749 2,405 7,135 6,923 Selling, general and administrative 4,206 3,550 11,934 10,400 Total expenses 6,955 5,955 19,069 17,323 Operating income 1,506 1,858 2,417 4,530 Other income 625 573 1,832 1,706 Income before provision for income taxes 2,131 2,431 4,249 6,236 Provision for income taxes 650 753 1,359 1,933 NET INCOME $1,481 $1,678 $2,890 $4,303 NET INCOME PER SHARE $ 0.16 $ 0.18 $ 0.31 $ 0.45 Shares used in computing per share amounts 9,451 9,483 9,417 9,470 The accompanying notes are an integral part of these consolidated financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Amounts in thousands) Nine Months Ended September 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,890 $4,303 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization 898 1,204 Provision (reduction in provision) for doubtful accounts (282) 130 Provision for excess and obsolete inventories 357 123 Changes in assets and liabilities: Accounts receivable 2,071 (1,286) Inventories (1,357) (1,329) Prepaid and other assets (298) (426) Accounts payable 546 (417) Accrued payroll and other accrued expenses 1,332 176 Income taxes payable (138) 2,004 Net cash flows provided by operating activities 6,019 4,482 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (31,971) (27,749) Maturities of marketable securities 25,593 21,176 Acquisition of property and equipment (1,131) (1,088) Net cash flows used in investing activities (7,509) (7,661) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and employee stock purchases 495 496 Net cash flows provided by financing activities 495 496 Net decrease in cash and cash equivalents (995) (2,683) Cash and cash equivalents at beginning of year 2,639 4,638 Cash and cash equivalents at end of period $ 1,644 $1,955 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for income taxes $ 1,443 $ 405 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Unrealized gain (loss) on securities carried at market $ (366) $ 515 The accompanying notes are an integral part of these consolidated financial statements.
DIGITAL LINK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared by the Company without audit in accordance with generally accepted accounting principles for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair representation have been included. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 28, 1996. The year-end balance sheet at December 31, 1995 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Operating results for the nine months ended September 30, 1996 may not necessarily be indicative of the results to be expected for any other interim period or for the full year. 2. COMPUTATION OF NET INCOME PER SHARE Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options using the treasury stock method for all periods presented. 3. INVENTORIES Inventories are valued at the lower of cost (determined using the first-in, first-out method) or market. Inventories consisted of (in thousands): September 30, 1996 December 31, 1995 (Unaudited) Raw materials $ 2,210 $1,838 Work-in-process 2,226 1,965 Finished goods 1,168 800 $ 5,604 $4,603 4. CONTINGENCY Certain third parties have expressed their belief that certain of the Company's products may infringe patents held by them and have suggested that the Company acquire licenses to such patents. The Company believes that licenses, to the extent required, will be available; however, no assurance can be given that the terms of any offered licenses would be favorable to the Company. Management, after review and consultation with counsel, believes that the ultimate resolution of these allegations are uncertain and there can be no assurance that these assertions will be resolved without costly litigation or in a manner that is not adverse to the Company. Accordingly, while the Company has accrued certain amounts for these matters, the ultimate resolution of these matters could result in payments in excess of the amounts accrued in the accompanying financial statements and require royalty payments in the future which could adversely impact gross margins. As discussed under "Legal Proceedings" in Part II hereof, in April 1996, a class action complaint was filed against the Company and certain of its officers and directors in the Santa Clara Superior Court of the State of California, alleging violations of the California Corporations Code and California Civil Code. In October 1996, a similar parallel lawsuit against the Company and the same individuals in the State Court action was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. The Company believes that both actions are without merit and intends to defend both actions vigorously. However, litigation is subject to inherent uncertainties and, thus, there can be no assurance that these lawsuits will be resolved favorably to the Company or that they will not have a material adverse affect on the Company's financial condition and results of operations. Accordingly, no provision for any liability that may result upon adjudication has been made on the accompanying financial statements. 5. CHANGE IN DEPRECIATION METHOD Effective January 1, 1996, the Company adopted the straightline method of depreciation for all property and equipment placed in service after that date. Property and equipment placed in service prior to January 1, 1996 continue to be depreciated using the double-declining balance method. The estimated useful lives under either method ranges from 3 to 5 years. Management believes that the change from the double-declining balance method to the straight-line method provides a better matching of costs and revenues over the lives of its property and equipment and conforms to predominant industry practice. Use of the straight line method of depreciation on assets placed in service in 1996 versus the double-declining balance method resulted in no material difference on the pre-tax income or net income in the nine months ended September 30, 1996. 6. RECENT ACCOUNTING PRONOUNCEMENT During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans. The Company intends to continue to account for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 is effective for fiscal years beginning after December 15, 1995 and will require certain additional disclosures in the financial statements for the year ending December 31, 1996. DIGITAL LINK CORPORATION ITEM 2. Management's Discussion And Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Except for the historical statements contained herein, this Form 10-Q contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements involve a number of risks and uncertainties, such as the impact of competitive products and pricing, the loss of, or differences in actual from anticipated levels of purchases from the Company's major customers, the Company's timely development of new products, including its W/ATM GateWay product, and their acceptance by the market, and other risks which are described throughout the Company's reports filed with the Securities and Exchange Commission, including its Form 10K for the year ended December 31, 1995, and within this "Management's Discussion and Analysis of Financial Condition and Results of Operations," including under the title "Other Factors That May Affect Future Operating Results." The actual results that the Company achieves may differ materially from any forward looking statements due to such risks and uncertainties. The Company has identified by an asterisk (*) various paragraphs within this "Management's Discussion and Analysis of Financial Condition and Results of Operations," which contain such forward looking statements. Actual results could differ materially from such forward looking statements as a result of the factors discussed in such paragraphs and those factors discussed in the sections referenced above and in other sections of this and other documents filed with the Securities and Exchange Commission. In addition, when used in this Form 10-Q, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward looking statements, but are not the exclusive means of identifying such statements. The Company undertakes no obligation to revise any forward looking statements in order to reflect events or circumstances that may arise after the date of this report. Net Sales Net sales for the third quarter of 1996 increased 13% to $14,127,000 from $12,500,000 for the same period of the prior year. Net sales for the nine months ended September 30, 1996 increased 6% to $36,355,000 from $34,324,000 for the same period of the prior year. These increases were primarily attributable to an increase in unit sales of both narrowband (i.e., transmission rates up to T1/E1) products in the Encore product family and domestic broadband (i.e., transmission rates in excess of T1/E1) products. These increases were offset in part by decreased unit sales of the Company's broadband SMDS access products primarily sold in Europe and decreased average selling prices on certain of the Company's narrowband and broadband products. *The Company believes that the decrease in sales of broadband SMDS access products is due in part to the continuing effects of earlier delays in Europe, and in particular in the United Kingdom, in the deployment of SMDS networks due to technical problems within the networks and to earlier market confusion among Frame Relay, SMDS and ATM technologies. The Company anticipates that it will continue to experience the effects of these earlier conditions through at least the remainder of 1996, which would result in lower levels of annual sales of its broadband SMDS access products in 1996 as compared to annual sales in 1995. *Narrowband sales in absolute dollars increased by 13% and remained flat as a percentage of net sales at 53% in the third quarter of 1996, as compared to the third quarter of 1995. Broadband sales increased in absolute dollars by 13% and remained flat as a percentage of net sales at 47% in the third quarter of 1996 as compared to the third quarter of 1995. For the third quarter of 1996, as compared to the same quarter last year, narrowband sales and broadband sales as a percentage of net sales remained flat notwithstanding lower sales in Europe of broadband products which were offset by higher broadband sales to certain domestic carrier customers and Internet Service Providers (ISPs). Narrowband sales in absolute dollars increased by 22% and increased as a percentage of net sales to 59% for the nine months ended September 30, 1996, as compared to 51% for the first nine months of 1995. Broadband sales decreased in absolute dollars by 11% and decreased as a percentage of net sales to 41% for the first nine months of 1996, as compared to 49% for the first nine months of the prior year. For the first nine months of 1996, as compared to the first nine months of 1995, broadband sales as a percentage of net sales decreased as a result of lower SMDS net sales in Europe, which was slightly offset by higher broadband sales to certain domestic carrier customers and ISPs. The Company anticipates that the mix of products sold may change to include a higher percentage of narrowband products which would adversely affect the Company's gross margins. *International sales represented 18% of net sales in the third quarter of 1996 as compared to 21% in the third quarter of 1995, and 15% of net sales for the nine months ended September 30, 1996 as compared to 30% for the same period of the prior year. The decreases for the quarter and nine month periods ending September 30, 1996 were primarily due to a decrease in unit sales of SMDS products in Europe. For the reasons discussed above, the Company anticipates that international sales will remain at similar levels during the remainder of 1996, as compared to 1995, which would result in a decrease in international sales as a percentage of net sales for 1996. International sales are subject to inherent risks, including difficulties in homologating products in other countries, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements and tariffs, and potentially adverse tax consequences, which may in the future contribute to fluctuations in the Company's business and operating results. *During the third quarter of 1996, sales to MCI accounted for 16% of the Company's net sales. During the first nine months of 1996, MCI and BBN Planet Corporation accounted for 16% and 15%, respectively of the Company's net sales. The Company anticipates that sales to BBN Planet Corporation will decrease as a percentage of net sales in the fourth quarter of 1996 as a result of fluctuations in activities associated with the build out of its Internet infrastructure. A significant portion of the Company's business is derived from substantial orders placed by large end users and telephone companies, and the timing of such orders could cause material fluctuations in the Company's business and operating results. For example, in the fourth quarter of 1995, the Company had lower operating results than expected due in part to a weaker than expected demand from certain domestic carrier customers, as well as the slow down of sales of its SMDS access products. During the third quarter of 1996, net sales through direct sales, value added resellers (VARs), and OEMs were 53%, 38%, and 9%, respectively, compared to 55%, 33%, and 12% in the third quarter of 1995. Net sales through direct sales, VARs, and OEMs for the nine months ending September 30, 1996, were 59%, 32%, and 9%, respectively, compared to 48%, 32%, and 20% for the same period of 1995. These increases in the percentage of direct sales were primarily a result of selling directly to BBN Planet Corporation during 1996 compared to 1995 when sales to BBN Planet Corporation were made through a VAR. The decreases in the percentage of OEM sales were primarily a result of decreased sales in SMDS access products primarily sold in Europe. Gross Profit Gross profit increased 8% in the third quarter of 1996 to $8,461,000 from $7,813,000 for the same period of the prior year. Gross margin decreased to 59.9% of net sales in the third quarter of 1996 as compared to 62.5% in the third quarter of 1995. This decrease in gross margin was primarily due to price reductions made since the second half of 1995 with respect to some of the Company's access products. Gross profit decreased 2% in the nine months ended September 30, 1996 to $21,486,000 from $21,853,000 for the same period of the prior year. Gross margin decreased to 59.1% of net sales for the first nine months of 1996 as compared to 63.7% for the same period of the prior year. This decrease in gross margin reflects the above referenced price reductions and a shift in the mix of products sold to include more narrowband products, which generally have lower gross margins than broadband products. The Company anticipates that this increased pricing pressure will continue during at least the remainder of 1996. *Gross margins may vary significantly from quarter to quarter depending on factors such as competitive pricing pressures, changes in the mix of products sold and the channels through which they are distributed, the timing of orders and the timing of new product introductions by the Company. A significant portion of the Company's business is very price competitive, which has in the past and will in the future require the Company to lower its prices, resulting in fluctuations in the Company's business and operating results. For example, periodically throughout 1995, and the first nine months of 1996, the Company reduced the prices on some of its access products to address competitive pricing pressures, which adversely affected the Company's gross margins during 1995 and 1996. In addition, the Company anticipates that the mix of products sold may change to include a higher percentage of narrowband products which generally have lower gross margins and would therefore adversely affect the Company's overall gross margins. Research and Development Research and development ("R&D") expenses increased 14% to $2,749,000 in the third quarter of 1996 from $2,405,000 in the third quarter of 1995. This increase was due primarily to an increase in consulting fees primarily related to the Company's W/ATM GateWay product, offset by a decrease in personnel-related expenses and professional services. As a percentage of net sales, R&D expenses were 19.5% in the third quarter of 1996 as compared to 19.2% in the third quarter of 1995. This slight increase as a percentage of net sales is primarily due to the faster rate of growth in consulting fees during the third quarter of 1996 relative to the rate of growth in net sales during the same period of the prior year. R&D expenses increased 3% to $7,135,000 in the nine months ended September 30, 1996 from $6,923,000 for the same period of the prior year. As a percentage of net sales, R&D expenses were 19.6% for the first nine months of 1996 as compared to 20.2% for the same period of the prior year. The absolute dollar increase for the nine-month period is primarily attributable to higher consulting fees related to the Company's W/ATM GateWay product, offset by a decrease in professional services, material costs for prototype products, and personnel-related expenses. The decrease as a percentage of net sales was primarily the result of operating efficiencies from higher sales volume during the period. *The Company anticipates that its R&D expenses in the fourth quarter of 1996, especially consulting expenses related to its W/ATM GateWay product, will increase in absolute dollars and may increase as a percentage of net sales as compared to the third quarter of 1996, subject to, among other factors set forth or referenced in "Net Sales" above and "Other Factors That May Affect Future Operating Results" below, the Company's ability to accelerate or defer operating expenses, achieve revenue levels and hire new personnel during the remainder of 1996. *All of the Company's R&D expenditures to date have been expensed as incurred. In the future, the Company may be required to capitalize a portion of its software development costs pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Selling, General and Administrative Selling, general and administrative ("SG&A") expenses increased 18% in the third quarter of 1996 to $4,206,000 from $3,550,000 for the same period of the prior year. As a percentage of net sales, SG&A expenses were 29.8% in the third quarter of 1996 as compared to 28.4% in the third quarter of 1995. These increases were primarily due to higher personnel-related expenses, primarily within the sales and marketing organizations, an increase in promotional activities and higher evaluation product expenses. SG&A expenses increased 15% for the nine months ended September 30, 1996 to $11,934,000 from $10,400,000 for the same period of the prior year. As a percentage of net sales, SG&A expenses were 32.8% for the first nine months of 1996 as compared to 30.3% for the same period of the prior year. These increases were primarily a result of higher personnel related expenses, primarily within the sales and marketing organization, and higher evaluation product and promotional expenses. *The Company has in the past hired more of its SG&A personnel and incurred increased expenses related to trade shows and other promotional activities during the first half of the year. Accordingly, SG&A expenses as a percentage of net sales are generally higher during the first half of the year, and the Company anticipates that this will be true for the remainder of 1996. The Company anticipates that its SG&A expenses will increase in absolute dollars during the fourth quarter of 1996 as compared to the third quarter of 1996 as a result, in part, of increases in legal expenses associated with its defense of the recently filed class action lawsuits against the Company. However, any such decrease is subject to, among other factors set forth or referenced in "Net Sales" above and "Other Factors That May Affect Future Operating Results" below, the Company's ability to accelerate or defer operating expenses and achieve revenue levels during such periods. Other Income Net other income increased 9% in the third quarter of 1996 to $625,000 from $573,000 for the same period of the prior year. For the nine months ended September 30, 1996, net other income increased 7% to $1,832,000 from $1,706,000 for the same period of the prior year. These increases were primarily due to higher interest income from higher cash and marketable securities balances. Provision for Income Taxes The Company's effective tax rate decreased to 30.5% for the third quarter of 1996 compared to 31.0% for the same period last year. This decrease is due primarily to the use of the Company's R&D tax credit. The Company's effective tax rate increased to 32.0% for the nine months ended September 30, 1996 compared to 31.0% for the same period last year. This increase is due to lower foreign sales and lower R&D tax credit. The Company anticipates that its effective tax rate during the fourth quarter of 1996 will remain at levels similar to that experienced in the third quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $22.5 million and cash, cash equivalents and marketable securities of $42.6 million at September 30, 1996. Net cash provided by operating activities was $6.0 million for the first nine months of 1996, primarily as a result of a net income before depreciation and amortization, a decrease in accounts receivable and an increase in accrued payroll and other accrued expenses, offset to some extent by an increase in inventories. This compares to net cash provided by operating activities of $4.5 million for the first nine months of 1995, primarily as a result of net income before depreciation and amortization and an increase in income taxes payable, offset by an increase in accounts receivable and inventories. Cash used in investing activities during the first nine months of 1996 was primarily from net purchases of marketable securities and, to a lesser extent, leasehold improvements and capital equipment additions of $1,131,000 in cash flow as compared to $1,088,000 in the first nine months of 1995. In October 1996, the Company approved the repurchase of up to 500,000 shares of common stock for cash from time-to-time at market prices and as market and business conditions warrant, in open market, negotiated, or block transactions. Net cash provided by financing activities was $495,000 in the first nine months of 1996 from the exercise of stock options and issuance under the employee stock purchase plan, as compared to $496,000 in the first nine months of 1995. *The Company believes that existing cash and cash flows from operations will be sufficient to meet its anticipated cash requirements for working capital and capital expenditures for at least the next 12 months. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS As indicated above, there are a number of factors that may affect the Company's future operating results. *The Company believes that changes in the product mix sold toward narrowband products that yield lower gross margins have in the past and could in the future affect operating results. Other factors that may cause fluctuations in the Company's operating results include the gain or loss of significant customers, the timing of new product introductions by the Company and its competitors, seasonal capital spending patterns of large domestic customers, completion of the build out of carrier and ISP infrastructures, changes in sales volumes through the Company's distribution channels, market acceptance of new or enhanced versions of the Company's products, availability and cost of components from the Company's suppliers (some of which are in short supply and are key to new product development), and economic conditions generally or in various geographic areas. In addition, the Company's expense levels are based in part on its expectations of future revenue. The Company typically operates with limited order backlog, and a substantial majority of its revenues in each quarter result from orders booked in that quarter. The Company has occasionally recognized a substantial portion of its revenues in a given quarter from sales booked and shipped in the last month of that quarter. If revenue levels are below expectations, the Company may be unable to adjust spending in a timely manner which could adversely affect operating results. *The market for the Company's products is highly competitive. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets. The Company anticipates that it will face competition from internetworking equipment and other telecommunications equipment manufacturers, certain of whom are including a direct WAN interface in their products. For example, in 1995, the Company signed an OEM agreement with Cisco Systems, Inc. ("Cisco") pursuant to which the Company supplies DSU cards for inclusion in one of Cisco's key product lines. Increased sales to Cisco or other internetworking equipment and telecommunications equipment manufacturers could adversely affect the Company's gross margins, as sales to OEMs generally have higher discounts than sales to end users. Further, to the extent that internetworking equipment, such as routers, and telecommunications equipment, such as switches, successfully develop a direct WAN interface for inclusion in their products, overall demand for the Company's products would be reduced, which would have a material adverse affect on the Company's business and operating results. As discussed above, increased competition has also placed increasing pressures on the pricing of the Company's products, which has resulted in lower operating results. The Company anticipates that this increased pricing pressure will continue during at least the remainder of 1996. *The Company's future prospects will depend in part on its ability to enhance the functionality of its existing WAN access products in a timely manner and to identify, develop and achieve market acceptance of new products that address new technologies and meet customer needs in the WAN access market. Any failure by the Company to anticipate or to respond adequately to competitive solutions, technological developments in its industry, changes in customer requirements, or changes in regulatory requirements or industry standards, or any significant delays in the development, introduction or shipment of products, could have a material adverse affect on the Company's business and operating results. For example, the Company has experienced decreased sales of its SMDS and ATM access products, which the Company believes is due in part to delays in the further deployment of SMDS networks due to technical problems within the networks and to market confusion in Europe among Frame Relay, SMDS and ATM technologies. There can be no assurance that the Company's product development efforts will result in commercially successful products or that product delays will not result in missed market opportunities. In addition, customers could refrain from purchasing the Company's existing products in anticipation of new product introductions by the Company or its competitors. New products could also render certain of the Company's existing products obsolete. Either of these events could materially adversely affect the Company's business and operating results. *The Company is currently developing and may in the future develop products with which the Company has only limited experience and/or that are targeted at emerging market segments, including the Company's W/ATM GateWay product. The W/ATM GateWay product has not been deployed to any end user customers, and the Company has experienced delays in the development of this product, in part related to technical problems which required some software to be redesigned. The Company has entered into an agreement with an OEM to market this product once its development has been completed, but such agreement does not obligate the OEM to purchase any minimum number of products. In addition, an agreement with AT&T Network Systems to market the W/ATM GateWay under that company's name expired in September 1995. According to the Company's current plan, this product is not anticipated to be available for customer evaluation before December of 1996. Given its complexity, there can be no assurance that this product will not encounter further technical or other difficulties which could significantly delay its deployment or acceptance or could result in the termination of the development program for this product. If this product becomes available, there can be no assurance that markets for the W/ATM GateWay will continue to develop, that the Company will receive orders for this product, that the W/ATM GateWay will meet the needs of the emerging ATM market or that products currently under development by others will not be introduced that would directly compete with the W/ATM GateWay product, any of which could have a material adverse affect on the Company's business and operating results. *The Company believes that its future success will depend in large part upon the continued contributions of members of the Company's senior management and other key personnel, and upon its ability to attract and retain highly skilled managerial, engineering, sales, marketing and operations personnel, the competition for whom is intense. Certain of the Company's senior management have only recently joined the Company. For example, in September 1996, Alan Fraser joined the Company as President and Chief Executive Officer, replacing Vinita Gupta, who remains as Chairperson of the Board of Directors. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel to hold important management positions. *As discussed under "Legal Proceedings" in Part II hereof, in April 1996, a class action complaint was filed against the Company and certain of its officers and directors in the Santa Clara Superior Court of the State of California, alleging violations of the California Corporations Code and California Civil Code. In October 1996, a similar parallel lawsuit against the Company and the same individuals in the State Court action was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. The Company believes that both actions are without merit and intends to defend both actions vigorously. However, litigation is subject to inherent uncertainties and, thus, there can be no assurance that these lawsuits will be resolved favorably to the Company or that they will not have a material adverse affect on the Company's financial condition and results of operations. *The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. For example, a third party has expressed its belief on several occasions that certain of the Company's products, including its CSU/DSUs, may infringe upon six patents held by it and has suggested on such occasions that the Company acquire a license to such patents. There can be no assurance that these assertions will be resolved without costly litigation or in a manner that is not adverse to the Company. The Company believes that a license, to the extent required, will be available; however, no assurance can be given that the terms of any offered license would be favorable to the Company. Should a license be unavailable, the Company could be required to discontinue the sale of or to redesign certain of its products. In addition, Larscom, a competitor of the Company, has continued to express its belief that the Company's inverse multiplexer products may infringe a patent jointly owned by Larscom and a third party and has suggested that the Company acquire a license to the patent. There can be no assurance that other third parties will not assert infringement claims against the Company in the future, that any such claims will not result in costly litigation or that the Company will prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. The Company's management, after review and consultation with counsel, believes that the ultimate resolution of these allegations are uncertain and there can be no assurance that these assertions will be resolved without costly litigation or in a manner that is not adverse to the Company. Accordingly, while the Company has accrued certain amounts for these matters, the ultimate resolution of these matters could result in payments in excess of the amounts accrued in the Company's financial statements and require royalty payments in the future which could adversely impact gross margins. *The risks outlined herein are difficult for the Company to forecast, and these or other factors can materially affect the Company's operating results and stock price for one quarter or a series of quarters. Further, in recent years the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices of securities of many high technology companies, for reasons frequently unrelated to the operating performance of the specific companies. These fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of the Company's common stock. *During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS No. 123), "Accounting for StockBased Compensation," which establishes a fair value based method of accounting for stock-based compensation plans. The Company intends to continue to account for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 is effective for fiscal years beginning after December 15, 1995 and will require certain additional disclosures in the financial statements for the year ending December 31, 1996. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1996, a class action complaint was filed against the Company and certain of its officers and directors in the Santa Clara Superior Court of the State of California, alleging violations of the California Corporations Code and California Civil Code. In October 1996, a similar parallel lawsuit against the Company and the same individuals in the State Court action was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. The Company believes that both actions are without merit and intends to defend both actions vigorously. However, litigation is subject to inherent uncertainties and, thus, there can be no assurance that these lawsuits will be resolved favorably to the Company or that they will not have a material adverse affect on the Company's financial condition and results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION In September 1996, Alan Fraser joined the Company as President and Chief Executive Officer, replacing Vinita Gupta, who remains as Chairperson of the Board of Directors. Mr. Fraser is also a member of the Company's Board of Directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.18 Employment Agreement between Registrant and Alan Fraser dated September 5, 1996. 10.19 Security Agreement between Registrant and Alan Fraser dated September 30, 1996. 10.20 Secured Promissory Note from Alan Fraser dated September 30, 1996. 11.01 Statement of Computation of Net Income Per Share. 27.01 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL LINK CORPORATION Date: November 14, 1996 \s\ Alan I. Fraser Alan I. Fraser Chief Executive Officer Date: November 14, 1996 \s\ Stanley E. Kazmierczak Stanley E. Kazmierczak Chief Financial Officer EXHIBIT INDEX Exhibits 10.18 Employment Agreement between Registrant and Alan Fraser dated September 5, 1996. 10.19 Security Agreement between Registrant and Alan Fraser dated September 30, 1996. 10.20 Secured Promissory Note from Alan Fraser dated September 30, 1996. 11.01 Statement of Computation of Net Income Per Share. 27.01 Financial Data Schedule EX-11 2 Exhibit 11.01
DIGITAL LINK CORPORATION STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data, unaudited) Quarter Ended Nine Months Ended September 30, September 30 1996 1995 1996 1995 Primary: Net income $1,481 $1,678 $2,890 $ 4,303 Weighted average number of shares from: Common shares outstanding 9,149 8,800 9,080 8,736 Common equivalent shares from stock options outstanding 302 683 337 734 Common and common equivalent shares used in computing per share amounts 9,451 9,483 9,417 9,470 Net income per share $ 0.16 $ 0.18 $ 0.31 $ 0.45 Note: There is no material difference in the computation of net income per share on a fully diluted basis.
EX-27 3
5 This schedule contains summary financial information extracted from the consolidated balance sheet, consolidated statement of operations and consolidated statement of cash flows included in the Company's Form 10-Q for the period ending September 30, 1996, and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1,644 15,243 6,463 562 5,604 31,239 7,198 5,359 59,513 8,722 0 0 0 29,778 21,013 59,513 36,355 36,355 14,869 33,938 (1,832) 0 0 4,249 1,359 2,890 0 0 0 2,890 0.31 0.31
EX-10 4 Exhibit 10.18 September 5, 1996 Mr. Alan I. Fraser 14403 Donna Lane Saratoga, CA 95070 Dear Alan: On behalf of Digital Link Corporation (the "Company") Board of Directors, I am extremely pleased to offer you the position of President and Chief Executive Officer of the Company. The terms offered are as follows: 1. Your biweekly salary will be $11,538.47 and will be subject to an annual review starting January, 1998. Starting next year you will be eligible to earn up to 35% of your base salary as an annual bonus based on targets. Generally eighty per cent (80%) of this bonus is based upon meeting the fiscal years Company targeted revenues and operating income and 20% is at the Board's discretion. The structure and criterion of bonus may be changed at any time by the Compensation Committee. Executive bonuses are payable after the first Board of Directors' meeting following the close of the fiscal year which is the calendar year. You must be an employee of Digital Link at the time the bonus is paid. You will not qualify for any bonus for the remainder of 1996. You will also be eligible to participate in the regular health insurance and other employee benefit plans established by the Company for its employees from time to time. A brief summary of the benefits currently offered by the company, entitled Flexible Benefit Program, is attached. 2. Digital Link will pay a car allowance of $250.00 per month plus $.20 per mile for actual business related auto travel. 3. The Company will pay you a $45,000 sign-on bonus on the date you begin employment with the Company. This bonus is non refundable as long as you stay as an active employee of the Company for at least 90 days. 4. The Board of Directors of the Company will grant you an option to purchase up to 370,000 shares of common stock of the Company under the 1992 Equity Incentive Plan at the current fair market value of the Company's common stock. The shares you will be given the opportunity to purchase will vest at the rate of 25% one year from the date of the grant, and then ratably over the following 36 months as long as you remain employed by the Company. You also qualify for additional stock options under annual review starting January 1998. 5. The Company will loan you $250,000 on the date you begin employment, to be repaid at the end of 36 months along with the entire interest payment, except as provided below. The per annum interest rate will be the IRS related party interest rate on the date of the loan. If you sell any shares of Digital Link common stock prior to the end of the 36 months period, the proceeds of the sales must first be applied to the repayment of the loan. Your options and shares (upon exercise) will be the collateral for repayment of the loan. You will have to sign a separate full recourse promissory note and security agreement to document these obligations. 6. As the CEO, you will be elected to the Company's Board of Directors as of your first date of employment. 7. As an employee of the Company, you will have access to certain Company confidential information and you may, during the course of your employment, develop or have access to information or inventions which will be the property of the Company. To protect the interests of the Company, you will be required to sign the Company's standard Invention Assignment and Proprietary Information Agreement as a condition of your employment. A copy of this agreement is attached for your review. We wish to remind you not to bring with you any confidential or proprietary material of any former employer or violate any other obligations you may have to your former employers. 8. While we look forward to a long and profitable relationship, should you decide to accept our offer, you will be an at-will employee of the Company, which means that the employment relationship may be terminated by either of us for any reason at any time. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision of this letter) should be regarded by you as ineffective. unless written and signed by the Chairperson of the Board. Participation in any Company benefit program is not to be regarded as an assurance of continued employment for any particular period of time. 9. In the event of termination by Digital Link of your active services with Digital Link other than for cause (cause or other than cause to be determined by the Board of Directors of the Company) you will have a consulting contract with the Company for up to the next twelve months. During these twelve months you will be a consultant and will be paid full base salary and benefits and the stock options will continue to vest. In the event that you are employed elsewhere during the period, your salary will discontinue upon start of alternate work but your stock vesting will be continued. You in return agree not to compete with the Company for the twelve month consulting period after termination of your active employment with the Company. 10. In the event your position is eliminated due to the Company being acquired by another company, you will have a consulting contract with the acquirer, for up to the next twelve months after termination. During these twelve months you will be a consultant and will be paid full base salary and benefits and the stock options will continue to vest. In the event that you are employed elsewhere during the period, your salary will stop upon start of alternate work but your stock vesting will be continued. You in return agree not to compete with the Company or its acquirer for the twelve month consulting period after termination of your active employment with the acquirer. 11. The Immigration Reform and Control Act of 1986 requires you, within three business days of hire, to present documentation demonstrating that you have authorization to work in the United States. Acceptable documentation is shown on the enclosed form titled Employment Eligibility Verification (Form I-9). Please bring this form to work along with the appropriate documentation. If you have questions about this requirement, which applies to U.S. citizens and non-U.S. citizens alike, please contact our Human Resources department. 12. You and the Company agree that any dispute or claim of any nature arising between us, other than claims for worker's compensation or unemployment benefits, shall be submitted to final and binding arbitration before a single neutral arbitrator. The arbitrator shall be selected according to the commercial arbitrator selection procedures of the American Arbitration Association, and his or her fees shall be shared equally by the parties. The arbitrator shall decide any such claim and may grant any relief authorized by law. The arbitrator shall issue a written award and opinion. Nothing contained herein shall preclude you or the Company from seeking a temporary injunction or other provisional relief where appropriate. This agreement is governed by the California arbitration statute, Code of Civil Procedure 1280 et seq. 13. As an acceptance of the offer, please sign below and return a copy of this letter to myself by September 12, 1996, after which date this offer will expire, unless extended in writing by the Company. Your signature will acknowledge that you have read, understood and agree to the terms and conditions of this offer. We would like your first day of employment be no later than September 30, 1996. I have received and had access to all the information I need to make an informed decision in respect to employment by the Company. I accept the offer of employment stated in this letter and expect to begin employment on September 30, 1996. \s\ Alan Fraser September 10, 1996 Signature Date We look forward to welcoming you to the Company. Sincerely, \s\ Vinita Gupta Vinita Gupta Chairperson of the Board EX-10 5 Exhibit 10.19 SECURITY AGREEMENT This Security Agreement (this "Agreement") is made and entered into effective as of September 30, 1996 (the "Effective Date") by and between Alan I. Fraser ("Borrower") and Digital Link Corporation, a California corporation ("Lender"). RECITALS A. Borrower has borrowed the principal amount of $250,000.00 from Lender pursuant to the terms of a certain Secured Promissory Note of Borrower to Lender dated of even date herewith (the "Note"). B. The parties have agreed that Borrower's obligations under the Note will be secured by Borrower's grant to Lender of a security interest in and to certain collateral, pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of loans made or to be made by Lender under the Note, the parties' agreements herein, and for other good and valuable consideration, the parties hereby agree as follows: 1. Security. The payment and performance of Borrower's obligations under the Note (hereinafter collectively referred to as the "Obligations") will at all times be secured as follows: (a) Grant of Security Interest. As security for the due performance and payment of the Obligations, Lender hereby grants to Lender a security interest in the "Collateral" as defined in Section 1(b). (b) Collateral Defined. As used in this Agreement, the term "Collateral" means, collectively, the assets described in Exhibit A attached hereto and all proceeds thereof. Borrower shall deposit the Collateral with Lender and Lender shall keep the Collateral at Lender's principal place of business for the term of this Agreement. (c) Financing Statements. So long as Borrower is indebted to Lender under the Note, Borrower will promptly execute and deliver to Lender such assignments, notices, financing statements, or other documents and papers as Lender may reasonably require in order to perfect and maintain the security interest in the Collateral granted to Lender hereby and to give any third party notice of Lender's interest in the Collateral. Borrower will pay to Lender all expenses incurred by Lender in filing such assignments, notices, financing statements or other documents or papers (and any continuation statements or amendments thereto). Upon the full and final discharge of all of Borrower's Obligations, Lender will execute and deliver such documents as may be reasonably necessary and requested by Borrower to release the Collateral from the security interest granted to Lender in this Agreement. 2. Representations and Warranties of Borrower. Borrower represents and warrants to Lender that: (a) Authority. Borrower has all right, power and authority necessary to make, enter into and perform its obligations under this Agreement and to grant Lender the security interest in the Collateral granted in Section 1 above, without the need for the consent or approval of any other person or entity. Borrower has taken all necessary action to make this Agreement the legal, valid, binding and enforceable obligation of Borrower that it purports to be. (b) No Legal Obstacle to Agreement. To the best of Borrower's knowledge, neither the execution and delivery of this Agreement nor the consummation of any transaction contemplated hereby, nor the fulfillment of the terms of this Agreement or of any other agreement or instrument referred to herein, has constituted or resulted in, or will constitute or result in, a breach of the provisions of any instrument, contract or agreement to which Borrower is a party or by which Borrower and/or the Collateral is bound, or the violation of any law, judgment, decree or governmental or administrative order, rule or regulation applicable to Borrower, or has resulted in or will result in the creation of any lien or claim upon any of the Collateral. No consent of any other person (including without limitation any creditor of Borrower) is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. (c) Title; No Liens or Claims in Collateral. Borrower owns all right, title and interest in and to the Collateral and no other person or entity has any right, title or interest in or to the Collateral, except for statutory liens for the payment of current taxes that are not yet delinquent. All of the Collateral is (and until the Note has been paid in full and all the Obligations are fully satisfied will be) free and clear of all liens, security interests, mortgages, claims, rights, encumbrances and restrictions of any kind except for statutory tax liens and the security interest granted to Lender under this Agreement. (d) No Bankruptcy. Borrower is not subject to any bankruptcy case or insolvency proceedings before any court in any jurisdiction. In the ninety (90) days preceding the effective date hereof, Borrower has not received any threat from any third party to subject Borrower to any involuntary bankruptcy or insolvency proceeding. 3. Covenants of Borrower. Borrower hereby covenants and agrees with Lender as follows: (a) Taxes. Borrower will pay all taxes due and owing by Borrower at such time as they become due. Borrower will keep the Collateral in good condition and repair continuously for so long as Borrower has Obligations to Lender under the Note. (b) Maintenance of Records. Borrower will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral belonging to it. For Lender's further security, Lender will have a security interest in all of the books and records of Borrower pertaining to the Collateral. (c) Notice to Account Debtors. Upon the request of Lender at any time after the occurrence and during the continuance of an Event of Default (as defined below), Borrower shall notify account debtors on all Borrower's accounts that such accounts have been assigned to Lender and that payments in respect thereof shall be made directly to Lender. (d) Moving of Collateral. Borrower will not move or relocate any or all of the Collateral that remains owned by Borrower to any location outside the State of California without Lender's prior written consent, which may be withheld in Lender's sole discretion. Any notice provided by Borrower relating to the movement of Collateral shall indicate in detail the description of the Collateral to be moved or relocated and the location(s) and address(es) to which such Collateral is to be moved. (e) Sale of Collateral. Borrower will not, without Lender's prior written consent, which may be withheld in Lender's sole discretion: (i) sell, lease, assign, transfer or otherwise dispose of the Collateral, any part thereof or any interest therein, or any of Borrower's rights therein, to any person, entity or party other than Lender. 4. Lender' Rights and Remedies Upon Event of Default. (a) General Remedies. In the event of an occurrence of any Event of Default (as that term is defined in the Note, in addition to exercising any other rights or remedies Lender may have under the Note, at law or in equity, or pursuant to the provisions of the California Commercial Code, Lender may, at its option, and without demand first made, exercise any one or all of the following rights and remedies: (i) collect the Collateral and its proceeds; (ii) take possession of the Collateral wherever it may be found, using all reasonable means to do so, or require Borrower to assemble the Collateral and make it available to Lender at a place designated by Lender which is reasonably convenient to Borrower; (iii) proceed with the foreclosure of the security interest in the Collateral granted herein and the sale or endorsement and collection of the proceeds of the Collateral in any manner permitted by law or provided for herein; (iv) sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale; (v) institute a suit or other action against Borrower for recovery on the Note; (vi) exercise any rights and remedies of a secured party under the California Commercial Code; and/or (vii) offset, against any payment due from Borrower to Lender, the whole or any part of any indebtedness of Lender to Borrower. (b) No Election of Remedies. The election by Lender of any right or remedy will not prevent Lender from exercising any other right or remedy against Borrower. (c) Proceeds. If an Event of Default occurs, all proceeds and payments with respect to the Collateral will be retained by Lender (or if received by Borrower will be held in trust and will be forthwith delivered by Borrower to Lender in the original form received, endorsed in blank) and held by Lender as part of the Collateral or applied by Lender to the payment of the Obligations. (d) Sales of Collateral. Any item of Collateral may be sold for cash or other value at public or private sale or other disposition and the proceeds thereof collected by or for Lender. Borrower agrees to promptly execute and deliver, or promptly cause to be executed and delivered, such instruments, documents, assignments, waivers, certificates and affidavits and supply or cause to be supplied such further information and take such further action as Lender may require in connection with any such sale or disposition. Lender will have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Borrower, which right or equity is hereby waived or released. If any notice of a proposed sale, lease, license or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale, lease, license or other disposition. Lender agrees to give Borrower ten (10) days prior written notice of any sale, lease, license or other disposition of Collateral (or any part thereof) by Lender. (e) Application of Proceeds. The proceeds of all sales and collections in respect of the Collateral, the application of which is not otherwise specifically herein provided for, will be applied as follows: (i) first, to the payment of the costs and expenses of such sale or sales and collections and the attorneys' fees and out-of-pocket expenses incurred by Lender relating to costs of collection; (ii) second, any surplus then remaining will be applied first, to the payment of all unpaid interest accrued under the Note, and then to the payment of unpaid principal under the Note; and (iii) third, any surplus then remaining will be paid to Borrower. 5. Notices. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery, three days after deposit in the United States mail by first class mail, one (1) business day after its deposit with any express courier (prepaid), or one (1) business day after transmission by telecopier, in each case addressed to the other party at such party's address (or facsimile number, in the case of transmission by telecopier) as shown below its signature to this Agreement, or to such other address as such party may designate in writing from time to time to the other party. 6. Jurisdiction; Venue. Borrower, by its execution hereof hereby, irrevocably submits to the in personam jurisdiction of the state courts of the State of California and of the United States District Court for the Northern District of California that are located in Santa Clara County, California, for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement. 7. Termination. When all Obligations have been paid and performed in full and discharged, this Agreement and the security interest granted to Lender under this Agreement will terminate. 8. Amendments and Waivers. No amendment or modification of this Agreement may be made or be effective unless and until it is set forth in writing and signed by all parties hereto. No waiver of any right under this Agreement will be effective unless expressly set forth in a writing signed by each party against whom such waiver is asserted. No course of dealing between the parties will operate as a waiver of any party's rights under this Agreement. A waiver on any one occasion will not be construed as a bar to or waiver of any right or remedy on any future occasion. Borrower acknowledges that the giving by Lender of any notice or information to Borrower, or the securing of any consent by Borrower, not required by the express terms hereof to be given or secured, will not by implication constitute an amendment to or waiver or modification of any provision hereof, or impose upon Lender any duty to give any such notice or information or to secure any such consent on any future occasion. 9. Attorneys' Fees. If any party hereto commences or maintains any action at law or in equity (including counterclaims or cross-complaints) against the other party hereto by reason of the breach or claimed breach of any term or provision of this Agreement, then the prevailing party in said action will be entitled to recover its reasonable attorney's fees and court costs incurred therein. 10. Successors and Assigns. The provisions of this Agreement will inure to the benefit of, and be binding on, each party's respective heirs, successors and assigns. 11. Miscellaneous. The invalidity or unenforceability of any term or provision of this Agreement will not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and will not alter or otherwise affect the meaning of this Agreement. This Agreement and the Note and the exhibits thereto, together constitute the entire agreement and understanding of the parties regarding the subject matter hereof and supersede any and all prior understandings and agreements between the parties with respect to such subject matter. 12. Governing Law. This Agreement will be governed by and construed exclusively in accordance with the internal laws of the State of California as applied to agreements between residents thereof and to be performed entirely within such State, without reference to that body of law relating to conflict of laws or choice of law. 13. Execution in Counterparts. This Agreement may be executed in any number of counterparts, which together will constitute one instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the Effective Date. BORROWER: LENDER: \s\ Alan I. Fraser \s\ Stanley E. Kazmierczak Alan I. Fraser Stanley E. Kazmierczak Address: 14403 Donna Lane Title: Chief Financial Officer Saratoga, CA 95070 Address: 217 Humboldt Court Fax No. Sunnyvale, CA 94089 Fax No.: (408) 745-6250 [The remainder of this page has been intentionally left blank] EXHIBIT A DESCRIPTION OF COLLATERAL Option granted to Alan I. Fraser to purchase 370,000 shares of Common Stock of Digital Link Corporation and shares of Common Stock issuable upon exercise of such option. EX-10 6 Exhibit 10.20 SECURED PROMISSORY NOTE Sunnyvale, California $250,000.00 September 30, 1996 1. Obligation. The undersigned, Alan I. Fraser ("Borrower") hereby promises to pay to the order of Digital Link Corporation, a California corporation, ("Lender" or "Holder") on or before September 30, 1999, at Lender's principal place of business at 217 Humboldt Court, Sunnyvale, California 94089, or at such other place as Holder may direct, the principal sum of Two Hundred Fifty Thousand Dollars ($250,000.00), together with all interest accrued on unpaid principal, at a rate of six and two one hundredths percent (6.02%) per annum (calculated on the basis of a 360day year), compounded annually, which rate is not less than the minimum rate established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended, as of the date hereof. As used herein, the term "Holder" shall initially mean Lender, and shall subsequently mean each person or entity to whom this Note is duly assigned. If any payment of principal or interest under this Note becomes due and payable on a day other than a business day then the maturity of such payment will be extended to the next succeeding business day, and with respect to the payment of principal, interest thereon will be payable at the rate set forth herein during the period of such extension. 2. Prepayment. Prepayment of unpaid principal and/or interest due under this Note may be made at any time without penalty. Unless otherwise agreed in writing by Holder, all payments will be made in lawful tender of the United States and will be applied (a) first, to the payment of accrued interest, and (b) second, (to the extent that the amount of such prepayment exceeds the amount of all such accrued interest), to the payment of principal. 3. Security. Payment of this Note is secured by a security interest in assets and properties of Borrower granted pursuant to the terms and conditions of a Security Agreement dated of even date herewith among Borrower and Lender, as such may be amended from time to time (the "Security Agreement"). 4. Default; Acceleration of Obligation. Borrower will be deemed to be in default under this Note and the outstanding unpaid principal balance of this Note, together with all interest accrued thereon, will immediately become due and payable in full, without the need for any further action on the part of Holder, upon the occurrence of any of the following events (each an "Event of Default"): (a) upon Borrower's failure to make any payment when due under this Note; (b) upon any sale, transfer or other disposition of the Collateral by Borrower; (c) upon the filing by or against Borrower of any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors; provided, however, with respect to an involuntary petition in bankruptcy, such petition has not been dismissed within thirty (30) days after the filing of such petition; (d) upon the execution by Borrower of an assignment for the benefit of creditors or the appointment of a receiver, custodian, trustee or similar party to take possession of Borrower's assets or property; or (e) upon any breach, default or violation by Borrower of any term, condition, obligation, representation or covenant of the Security Agreement. 5. Remedies On Default; Acceleration. Upon any Event of Default, Holder will have, in addition to its rights and remedies under this Note, full recourse against any real, personal, tangible or intangible assets of Borrower, and may pursue any legal or equitable remedies that are available to Holder, and may declare the entire unpaid principal amount of this Note and all unpaid accrued interest under this Note to be immediately due and payable in full. 6. Waiver and Amendment. Any provision of this Note may be amended or modified only by a writing signed by both Borrower and Holder. Except as provided below with respect to waivers by Borrower, no waiver or consent with respect to this Note will be binding or effective unless it is set forth in writing and signed by the party against whom such waiver is asserted. No course of dealing between Borrower and Holder will operate as a waiver or modification of any party's rights or obligations under this Note. No delay or failure on the part of either party in exercising any right or remedy under this Note will operate as a waiver of such right or any other right. A waiver given on one occasion will not be construed as a bar to, or as a waiver of, any right or remedy on any future occasion. 7. Waivers of Borrower. Borrower hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. This Note may be amended only by a writing executed by Borrower and Holder. 8. Governing Law. This Note will be governed by and construed in accordance with the internal laws of the State of California as applied to agreements between residents thereof to be performed entirely within such State, without reference to that body of law relating to conflict of laws or choice of law. 9. Severability; Headings. The invalidity or unenforceability of any term or provision of this Note will not affect the validity or enforceability of any other term or provision hereof. The headings in this Note are for convenience of reference only and will not alter or otherwise affect the meaning of this Note. 10. Jurisdiction; Venue. Borrower, by its execution of this Note, hereby irrevocably submits to the in personam jurisdiction of the state courts of the State of California and of the United States District Court for the Northern District of California that are located in Santa Clara County, California, for the purpose of any suit, action or other proceeding arising out of or based upon this Note. 11. Attorneys' Fees. If suit is brought for collection of this Note or enforcement of the Security Agreement, Borrower agrees to pay all reasonable expenses, including attorneys' fees, incurred by Holder in connection therewith whether or not such suit is prosecuted to judgment. 12. Assignment. This Note is freely transferable and assignable by Holder, provided that such transfer is made in compliance with all applicable state and federal securities laws. Any reference to Holder herein will be deemed to refer to any subsequent transferee of this Note at such time as such transferee holds this Note. This Note may not be assigned or delegated by Borrower, whether by voluntary assignment or transfer, operation of law, merger or otherwise. IN WITNESS WHEREOF, Borrower has executed this Note as of the date and year first above written. BORROWER \s\ Alan I. Fraser Alan I. Fraser -----END PRIVACY-ENHANCED MESSAGE-----