-----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, RT4YfJys64D3J+anrt2w/kqpgwkHTqikT+xrAqhbpSPeFpaw53W5KYj/3ErzfaL6 DFytNzyo+ZLMqOrl4Dkazw== 0000810467-97-000005.txt : 19970520 0000810467-97-000005.hdr.sgml : 19970520 ACCESSION NUMBER: 0000810467-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97606680 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 March 31, 1997 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 May 14, 1997 was 9,175,839. DIGITAL LINK CORPORATION INDEX TO FORM 10-Q Page PART I - FINANCIAL INFORMATION: ITEM 1 - Financial Statements Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income for the three months ended March 31, 1997 and March 31, 1996 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and March 31, 1996 5 Notes to Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risks 15 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings 16 ITEM 2 - Changes in Securities 16 ITEM 3 - Defaults Upon Senior Securities 16 ITEM 4 - Submission of Matters to a Vote of Security Holders 16 ITEM 5 - Other Information 16 ITEM 6 - Exhibits and Reports on Form 8-K 17 SIGNATURE(S) 18 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements DIGITAL LINK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share amounts) March 31, Dec. 31, 1997 1996 (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,724 $ 2,043 Short-term marketable securities 22,510 19,585 Accounts receivable, less allowance for doubtful accounts 6,301 6,490 of $527 at 3/31/97 and $465 at 12/31/96 Inventories, net 5,978 5,920 Prepaids and other current assets 1,346 1,131 Deferred income taxes 2,285 2,285 Total current assets 44,144 37,454 Property and equipment at cost, net 2,309 2,147 Long-term marketable securities 16,069 22,420 Other assets 1,013 712 TOTAL ASSETS $ 63,535 $ 62,733 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,973 $ 1,947 Accrued payroll expense 1,809 1,648 Other accrued expenses 3,527 3,795 Income taxes payable 2,016 1,541 Total current liabilities 10,325 8,931 SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized: 5,000,000 shares; Issued and outstanding: None Common stock, no par value: Authorized: 25,000,000 shares; Issued and outstanding: 9,142,931 shares at 3/31/97 and 9,218,150 shares at 12/31/96 30,658 30,913 Unrealized gain on marketable securities 141 257 Retained earnings 22,411 22,632 Total shareholders' equity 53,210 53,802 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,535 $ 62,733 The accompanying notes are an integral part of these consolidated financial statements. DIGITAL LINK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Amounts in thousands, except per share amounts) Three Months Ended March 31, 1997 1996 REVENUES: Net sales $16,038 $10,203 Cost of sales 6,816 4,366 Gross profit 9,222 5,837 EXPENSES: Research and development 3,032 2,050 Selling, general and administrative 4,916 3,584 Total operating expenses 7,948 5,634 Operating income 1,274 203 Other income 641 633 Income before provision for income taxes 1,915 836 Provision for income taxes 583 280 NET INCOME $ 1,332 $ 556 NET INCOME PER SHARE $ 0.14 $ 0.06 Shares used in computing per share amounts 9,577 9,352 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 THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Amounts in thousands) Three Months Ended March 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,332 $ 556 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization 323 315 Provision for doubtful accounts 62 20 Provision for excess and obsolete inventories 58 41 Changes in assets and liabilities: Accounts receivable 127 1,195 Inventories (116) 69 Prepaid and other assets (516) (28) Accounts payable 1,026 252 Accrued payroll and other accrued expenses (107) (336) Income taxes payable 475 (95) Net cash flows provided by operating activities 2,664 1,989 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (1,030) (13,753) Maturities of marketable securities 4,340 18,496 Acquisition of property and equipment (485) (426) Net cash flows provided by investing activities 2,825 4,317 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 138 55 Repurchase of common stock (1,946) 0 Net cash flows provided by (used in) financing activities (1,808) 55 Net increase in cash and cash equivalents 3,681 6,361 Cash and cash equivalents at beginning of period 2,043 2,639 Cash and cash equivalents at end of period $ 5,724 $ 9,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for income taxes $ 43 $ 379 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Unrealized gain (loss) on securities carried at market $ (116) $ 277 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, 1997. The year-end balance sheet at December 31, 1996 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Operating results for the three months ended March 31, 1997 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): March 31, 1997 December 31, 1996 (Unaudited) Raw materials $ 2,392 $ 2,255 Work-in-process 1,933 2,301 Finished goods 1,653 1,364 $ 5,978 $ 5,920 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 is uncertain and there can be no assurance that these assertions will be resolved without costly litigation or in a manner that is not adverse to the Company. While the Company has accrued certain amounts for these matters in prior years, it is currently unable to estimate the possible loss or range of loss regarding these matters. Therefore, the ultimate resolution of these matters could result in payments in excess of the amounts accrued in the accompanying financial statements and require royalty payments in the future which could adversely impact gross margins. In April 1996, a first amended 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 was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. On May 8, 1997, the Superior Court dismissed portions of plaintiff's first amended state court complaint without leave to amend. The Superior Court also sustained the demurrer of certain individual defendants to the other portions of plaintiff's complaint, while it overruled a similar demurrer by the Company and the other individual defendants. The Court has granted plaintiff leave to file another amended complaint. The Company has also moved to dismiss the federal complaint. The Court heard oral argument on defendants' motion on April 18, 1997 and took the motion under submission. The Company believes that both actions are without merit and intends to defend both actions vigorously. However, ligitation 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. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings Per Share" (SFAS 128), and Statement No. 129, "Disclosure of Information About Capital Structure" (SFAS 129). These Statements will be effective for the Company's fiscal year 1997. SFAS 128 requires a revised presentation and calculation of earnings per share (EPS) and that prior periods be restated to conform to that revised presentation and calculation. SFAS 129 requires disclosure about the entity's capital structure and contains no change in disclosure requirements for entities that were subject to the previously existing requirements. Early adoption of these Statements is not permitted and the adoption of SFAS 129 will not have a material affect on the Company's financial position and results of operations. The impact of the adoption of SFAS 128 on the financial statements of the Company has not yet been determined. 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 (the "Exchange Act"). These forward looking statements involve a number of risks, known and unknown, and uncertainties, such as the loss of, or difference in actual from anticipated levels of purchases from, the Company's major customers, the impact of competitive products and pricing and other risks which are described throughout the Company's reports filed with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 1996, and within "Management's Discussion and Analysis of Financial Condition and Results of Operations," including under the title "Other Factors That May Affect Future Operating Results." The actual results that Digital Link Corporation (the "Company" or "Digital Link") achieves may differ materially from any forward looking statements due to such risks and uncertainties. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Due to all the foregoing factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. Similarly, past performances are not necessarily indicative of future results. It is likely that, in some future quarters, the Company's operating results will be below the expectations of stock market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Consequently, the purchase or holding of the Company's Common Stock involves an extremely high degree of risk. Net Sales Net sales for the first quarter of 1997 increased 57% to $16,038,000 from $10,203,000 for the same period of the prior year. This increase in net sales was primarily attributable to an increase in unit sales of both broadband (i.e., transmission rates in excess of T1/E1) products and narrowband (i.e., transmission rates up to T1/E1) products primarily within the Encore product family. These increases were offset in part by decreased average selling prices on certain narrowband and broadband products as a result of price reductions made throughout 1996. The Company does not believe that the percentage change in net sales in the first quarter of 1997 as compared to the same period of the prior year is necessarily indicative of the percentage change in net sales to be expected for the entire fiscal year. Narrowband sales in absolute dollars increased by 21% and decreased to 56% of net sales in the first quarter of 1997 as compared to 72% in the first quarter of 1996. Broadband sales increased in absolute dollars by 151% and increased as a percentage of net sales to 44% in the first quarter of 1997 as compared to 28% in the first quarter of 1996. The changes in narrowband sales and broadband sales as a percentage of net sales were primarily due to higher sales of broadband products to certain domestic carrier customers. International sales (including sales in Canada) represented 14% of net sales in the first quarter of 1997 as compared to 12% in the first quarter of fiscal 1996. This increase was primarily due to an increase in unit sales of the Company's narrowband and broadband products. 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. Gross Profit Gross profit increased 58% in the first quarter of 1997 to $9,222,000 from $5,837,000 for the same period of the prior year. Gross margin increased slightly to 57.5% of net sales in the first quarter of 1997 as compared to 57.2% in the first quarter of 1996. This increase in gross margin is a result of a shift to broadband sales which have higher gross margins than narrowband products, offset by the above mentioned price reductions. Gross margins may vary significantly from quarter to quarter depending on many factors including competitive pricing pressures and changes in the mix of products sold. A significant portion of the Company's business is very price competitive, which has in the past and will in the future require the Company to lower its prices, resulting in fluctuations in the Company's business and operating results. The Company anticipates that this increased pricing pressure will continue during 1997. In addition, the mix of products sold may continue to change to include a higher percentage of narrowband products which generally have lower gross margins and would therefore adversely affect the Company's overall gross margins. Research and Development The primary types of expenses included in research and development ("R&D") expenses are personnel, consulting, prototype materials and professional services. R&D expenses increased 48% to $3,032,000 in the first quarter of 1997 from $2,050,000 in the first quarter of 1996. This increase is primarily due to higher consulting fees related to the Company's DL7100 product (formerly known as W/ATM GateWay) and to a lesser extent material costs for prototype products. As a percentage of net sales, R&D expenses were 18.9% in the first quarter of 1997 as compared to 20.1% in the first quarter of 1996. This decrease as a percentage of net sales was primarily the result of operating efficiencies from higher net sales in the first quarter of 1997. The Company anticipates that its R&D expenses will continue to increase in absolute dollars and as a percentage of sales may remain relatively flat. However, actual results could vary from the foregoing forward looking statement due to, among other factors set forth or referenced in "Other Factors That May Affect Future Operating Reuslts," below, the Company's ability to accelerate or defer operating expenses, achieve revenue levels during such periods and hire new personnel. All of the Company's R&D expenditures to date have been expensed as incurred. In the future, the Company may be required to capitalize a portion of its software development costs pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Selling, General and Administrative The primary types of expenses included in selling, general and administrative (SG&A) expenses are personnel, advertising, other promotional, and travel and entertainment. SG&A expenses increased 37% in the first quarter of 1997 to $4,916,000 from $3,584,000 for the same period of the prior year. The increase in absolute dollars was primarily the result of higher personnel-related expenses, primarily within the sales and marketing organization. As a percentage of net sales, SG&A expenses decreased to 30.7% in the first quarter of fiscal 1997 as compared to 35.1% in the first quarter of fiscal 1996. The decrease as a percentage of net sales was primarily the result of operating efficiencies from higher net sales in the first quarter of 1997. The Company has in the past hired more of its SG&A personnel and incurred increased expenses related to trade shows and other promotional activities during the first half of the year. Accordingly, SG&A expenses as a percentage of net sales are generally higher during the first half of the year. However, any decrease in such expenses as a percentage of net sales in the second half of the year 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 the periods. Other Income Other income includes primarily interest income and purchase discounts. Other income increased 1% in the first quarter of 1997 to $641,000 from $633,000 for the same period of the prior year. This increase was primarily due to higher interest income due to higher cash balances. Provision for Income Taxes The Company's effective tax rate decreased to 30.4% for the first quarter of 1997 compared to 33.5% for the first quarter of 1996. This decrease is due primarily to an increase in R&D credit. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $33.8 million and cash, cash equivalents and marketable securities of $44.3 million at March 31, 1997. Net cash provided by operating activities was $2.7 million for the first three months of 1997, primarily as a result of a net income before depreciation and amortization and an increase in accounts payable offset to some extent by an increase in prepaid and other assets. This compares to net cash provided by operating activities of $2.0 million for the first three months of 1996, primarily as a result of a decrease in accounts receivable and net income before depreciation and amortization offset to some extent by a decrease in accrued payroll and other accrued expenses. Cash provided by investing activities during the first three months of 1997 was primarily from the maturity of marketable securities of $4.3 million offset by additional purchases of $1.0 million. Cash provided by investing activities during the first three months of 1996 was primarily from the maturity of marketable securities of $18.5 million offset by additional purchases of $13.8 million. Leasehold improvements and capital equipment additions were $485,000 in the first quarter of 1997 as compared to $426,000 in the first quarter of 1996. 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 used in financing activities was $1.8 million in the first three months of 1997, primarily from the repurchase of common stock. Net cash provided by financing activities was $55,000 in the first quarter of 1996 from the exercise of stock options. During February and March 1997, the Company repurchased on the open market a total of 117,000 shares of common stock at a price ranging from $15.00 to $17.88 a share. This stock has subsequently been retired. The Company believes that existing cash and cash flows from operations will be sufficient to meet its anticipated cash requirements for working capital and capital expenditures for at least the next 12 months. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS In addition to the factors set forth above in the "Management's Discussion and Analysis of Financial Conditions and Results of Operations," there are a number of other factors that may affect the Company's future operating results. 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, including the completion of the build out of carrier and ISP infrastructures, 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 certain other factors. Other factors that may cause fluctuations in the Company's operating results include the gain or loss of significant customers, seasonal capital spending patterns of large domestic customers, changes in sales volumes through the Company's distribution channels, changes in product mix sold toward narrowband products that yield lower gross margins, the timing of new product announcements and introductions by the Company and its competitors, market acceptance of new or enhanced versions of the Company's products, availability and cost of components from the Company's suppliers and economic conditions generally or in various geographic areas. In addition, the Company's expense levels are based, in part, on its expectations of future revenue. The Company typically operates with limited order backlog, and a substantial majority of its revenues in each quarter result from orders booked in that quarter. If revenue levels are below expectations, the Company may be unable to adjust spending in a timely manner, which would adversely affect operating results. 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, in February 1997, Steve Tabaska joined the Company as Chief Technical Officer and Vice President, Engineering and in April 1997, John Eddon joined the Company as Vice President and General Manager, International. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel to hold important management positions or will be able to successfully integrate any new management personnel. 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 DL7100 product (formerly known as W/ATM GateWay). The Company has experienced delays in the development of the DL7100 product, in part related to technical problems which required some software to be redesigned. This product was shipped to a customer for evaluation in February 1997 and to two additional customers in April 1997. Given its complexity, there can be no assurance that this product will not encounter further technical or other difficulties which could significantly delay its deployment or acceptance or could result in the termination of the development program for this product. If this product becomes available, there can be no assurance that products currently available or under development by competitors would not directly compete with the DL7100 product, that the DL7100 will meet the needs of emerging ATM market or that markets for the DL7100 will continue to develop, any of which would have a material adverse affect on the Company's business and 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. In addition, the Company faces competition from internetworking suppliers, such as routers, and telephone equipment, such as switches, which are including a direct WAN interface in their products that could reduce demand for the Company's products which would have a material adverse affect on the Company's business and operating results. As discussed above, increased competition has also placed increasing pressures on the pricing of the Company's products, which has resulted in lower operating results. The Company anticipates that this increased pricing pressure will continue during 1997. In April 1996, a first amended 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 was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. On May 8, 1997, the Superior Court dismissed portions of plaintiff's first amended state court complaint without leave to amend. The Superior Court also sustained the demurrer of certain individual defendants to the other portions of plaintiff's complaint, while it overruled a similar demurrer by the Company and the other individual defendants. The Court has granted plaintiff leave to file another amended complaint. The Company has also moved to dismiss the federal complaint. The Court heard oral argument on defendants' motion on April 18, 1997 and took the motion under submission. 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. 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 on several occasions expressed its belief that certain of the Company's products, including its CSU/DSUs, may infringe upon patents held by it and has suggested on such occasions that the Company acquire a license to such patents. The Company believes that a license, to the extent required, will be available; however, no assurance can be given that the terms of any offered license would be favorable to the Company. Should a license be unavailable, the Company could be required to discontinue the sale of or to redesign certain of its products. In addition, Larscom, a competitor of the Company, has continued to express its belief that the Company's inverse multiplexer products may infringe a patent jointly owned by Larscom and a third party and has suggested that the Company acquire a license to the patent. See Note 4 of Notes to Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q. There can be no assurance that the 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 any such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. 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. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings Per Share" (SFAS 128), and Statement No. 129, "Disclosure of Information About Capital Structure" (SFAS 129). These Statements will be effective for the Company's fiscal year 1997. SFAS 128 requires a revised presentation and calculation of earnings per share (EPS) and that prior periods be restated to conform to that revised presentation and calculation. SFAS 129 requires disclosure about the entity's captial structure and contains no change in disclosure requirements for entities that were subject to the previously existing requirements. Early adoption of these Statements is not permitted and the adoption of SFAS 129 will not have a material affect on the Company's financial position and results of operations. The impact of the adoption of SFAS 128 on the financial statements of the Company has not yet been determined. ITEM 3. Quantitative and Qualitative Disclosure About Market Risk Not Applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1996, a first amended 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 was filed in the United States District Court for the Northern District of California alleging violations of the federal securities laws. The class period in both of these lawsuits runs from September 12, 1994 through December 29, 1995, and both complaints allege that the defendants concealed and/or misrepresented material adverse information about the Company and that the individual defendants sold shares of the Company's stock based upon material nonpublic information. The complaints seek unspecified monetary damages. On May 8, 1997, the Superior Court dismissed portions of plaintiff's first amended state court complaint without leave to amend. The Superior Court also sustained the demurrer of certain individual defendants to the other portions of plaintiff's complaint, while it overruled a similar demurrer by the Company and the other individual defendants. The Court has granted plaintiff leave to file another amended complaint. The Company has also moved to dismiss the federal complaint. The Court heard oral argument on defendants' motion on April 18, 1997 and took the motion under submission. 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 Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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 March 31, 1997. SIGNATURES Pursuant to the requirements of the Securities and 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: May 15, 1997 /s/ Alan I. Fraser Alan I. Fraser Chief Executive Officer Date: May 15, 1997 /s/ Stanley E. Kazmierczak Stanley E. Kazmierczak Chief Financial Officer EXHIBIT INDEX Exhibits Page 11.01 Statement of Computation of Net Income Per Share. 20 27.01 Financial Data Schedule 21 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 March 31, March 31, 1997 1996 Primary: Net income $ 1,332 $ 556 Weighted average number of shares from: Common shares outstanding 9,191 9,007 Common equivalent shares from stock options outstanding 386 345 Common and common equivalent shares used in computing per share amounts 9,577 9,352 Net income per share $ 0.14 $ 0.06 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 income and consolidated statement of cash flows included in the Company's Form 10-Q for the period ending March 31, 1997, and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 5,724 22,510 6,301 527 5,978 44,144 8,171 5,862 63,535 10,325 0 0 0 30,658 22,552 63,535 16,038 16,038 6,816 14,764 (641) 0 0 1,915 583 1,332 0 0 0 1,332 0.14 0.14
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