-----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, IuA77BnYygHlUuN34Mhazdm9/cyactdrBNpoPupuovHO4JvMadYktASGmZFm9Rtk a1UzJL4y2Igr6UJebcVdTA== 0000810467-98-000007.txt : 19980617 0000810467-98-000007.hdr.sgml : 19980617 ACCESSION NUMBER: 0000810467-98-000007 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980403 ITEM INFORMATION: FILED AS OF DATE: 19980616 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-23110 FILM NUMBER: 98649404 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 8-K/A 1 FORM 8-K/A (AMENDMENT NO. 1) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT (Amendment No. 1) Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 3, 1998 Digital Link Corporation ------------------------------------------ (Exact name of Registrant as specified in its charter) California 0-23110 77-0067742 - ----------------------------- ------------------------ -------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 217 Humboldt Court, Sunnyvale, California 94089 (Address of principal executive offices, including zip code) (408) 745-6200 (Registrant's telephone number, including area code) The undersigned hereby amends Item 7 of its Current Report on Form 8-K filed with the Commission on April 17, 1998 to read as follows: Item 7: Financial Statements, Pro Forma Financial Information and Exhibits.
Page (a) Financial Statements of Business Acquired Report of Independent Accountants 4 Balance Sheets as of December 31, 1997 and 1996 5 Statement of Operations for the years ended December 31, 1997 6 and 1996 Statements of Common Stock, And Other Shareholders' Deficit for 7 the years ended December 31, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1997 8 and 1996 Notes to Financial Statements 9 (b) Pro Forma Financial Information Introduction to Unaudited Pro Forma Financial Statements 22 Unaudited Pro Forma Condensed Combined Statement of 23 Operations for the year ended December 31, 1997 Unaudited Pro Forma Condensed Combined Statement of Operations 24 for the three months ended March 31, 1998 Notes to Unaudited Pro Forma Condensed Combined Statements of Operations 25 Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 1998 26 Notes to Unaudited Pro Forma Condensed Combined Balance Sheet 27 (c) Exhibits The following exhibits are filed herewith: 2.01 Previously filed 4.01 Previously filed
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: June 16, 1998 By: /s/ Stanley E. Kazmierczak ----------------------------- Stanley E. Kazmierczak Vice President, Finance and Administration and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Semaphore Communications Corporation: We have audited the accompanying balance sheets of Semaphore Communications Corporation as of December 31, 1997 and 1996, and the related statements of operations, common stock and other shareholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Semaphore Communications Corporation as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Jose, California May 1, 1998 SEMAPHORE COMMUNICATIONS CORPORATION BALANCE SHEETS -------
December 31, 1997 1996 --------------------- Current assets: Cash and cash equivalents .................................................... $ 153,758 $ 171,542 Accounts receivable, net of allowance for doubtful accounts of $70,000 and $75,143, respectively ................................................ 1,503,759 452,795 Inventories, net ............................................................. 867,058 403,443 Prepaid expenses and other current assets .................................... 105,974 151,079 ------------ ------------ Total current assets ................................................. 2,630,549 1,178,859 Property and equipment, net ..................................................... 711,959 618,960 ------------ ------------ Total assets ...................................................... $ 3,342,508 $ 1,797,819 ============ ============ Current liabilities: Accounts payable ............................................................. $ 489,596 $ 269,056 Deferred licensing revenue ................................................... 196,890 366,000 Accrued expenses ............................................................. 947,778 769,966 Other liabilities ............................................................ 282,549 532,649 Intercompany advances (Note 6) ............................................... 6,912,751 ------------ ------------ Total current liabilities ............................................ 8,829,564 1,937,671 ------------ ------------ Commitments (Note 4) Series A, B, C mandatorily redeemable convertible preferred stock, par value $0.001: Issued and outstanding: 9,687,108 in 1997 and 1996 (Aggregate liquidation value: $13,527,341 at December 31, 1997) .............. 13,507,346 13,507,346 COMMON STOCK, AND OTHER SHAREHOLDERS' DEFICIT Common stock, par value $0.001 Authorized: 15,000,000 shares; Issued and outstanding: 400,111 in 1997 and 366,250 shares in 1996 ....... 400 366 Additional paid-in capital ................................................... 100,379 91,947 Accumulated deficit .......................................................... (19,095,181) (13,739,511) ------------ ------------ Total common stock, and other shareholders' deficit .................. (18,994,402) (13,647,198) ------------ ------------ Total liabilities, mandatorily redeemable stock, common stock, additional and other shareholders' deficit ..................... $ 3,342,508 $ 1,797,819 ============ ============
The accompanying notes are an integral part of these financial statements. SEMAPHORE COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS ------- Year ended December 31, -------------------------------------- 1997 1996 -------------------------------------- Product revenue, net $ 3,588,047 $ 1,564,686 Contract development revenue 415,243 945,845 -------------------------------------- Total revenue 4,003,290 2,510,531 Cost of product revenue 2,392,485 797,729 Cost of contract development revenue 173,758 145,000 -------------------------------------- Gross profit 1,437,047 1,567,802 -------------------------------------- Operating expenses: Research and development 3,477,561 2,527,452 General and administrative 1,640,708 1,255,121 Sales and marketing 1,387,382 1,563,431 -------------------------------------- Total operating expenses 6,505,651 5,346,004 -------------------------------------- Operating loss (5,068,604) (3,778,202) Interest and other income - 40,328 Interest expense 287,066 33,477 -------------------------------------- Net loss $ (5,355,670) $ (3,771,351) ====================================== The accompanying notes are an integral part of these financial statements. SEMAPHORE COMMUNICATIONS CORPORATION STATEMENTS OF COMMON STOCK, AND OTHER SHAREHOLDERS' DEFICIT for the years ended December 31, 1997 and 1996 -------
Additional Paid-In Accumulated Common Stock Capital Deficit Total ---------------------------- -------------- ------------- --------------- Shares Amount ------------ ------------- Balances, January 1, 1996 .......... 38,038 $ 38 $ 10,222 $ (9,968,160) $ (9,957,900) Issuance of common stock for cash 328,212 328 81,725 82,053 Net loss ........................ (3,771,351) (3,771,351) ------------ ------------ ------------ ------------ ------------ Balances, December 31, 1996 ........ 366,250 366 91,947 (13,739,511) (13,647,198) Issuance of common stock for cash 33,861 34 8,432 8,466 Net loss ........................ (5,355,670) (5,355,670) ------------ ------------ ------------ ------------ ------------ Balances, December 31, 1997 ........ 400,111 $ 400 $ 100,379 $(19,095,181) $(18,994,402) ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. SEMAPHORE COMMUNICATIONS CORPORATION STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------- 1997 1996 --------------- ----------------- Cash flows from operating activities: Net loss ..................................................... $(5,355,670) $(3,771,351) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation .............................................. 347,015 191,794 Provision for allowance for doubtful accounts ............. 70,000 9,638 Provision for allowance for excess and obsolete inventories 400,133 Changes in assets and liabilities: Accounts receivable ..................................... (1,120,964) (171,038) Inventories ............................................. (463,615) (499,486) Prepaid expenses and other current assets ............... 45,105 (25,434) Accounts payable ........................................ 220,540 (552,287) Deferred licensing revenue .............................. (169,110) 38,000 Accrued expenses ........................................ 177,812 273,059 Other liabilities ....................................... (250,100) 278,549 Accrued interest ........................................ 282,751 Intercompany advances ................................... 130,000 ----------- ----------- Net cash used in operating activities ................ (6,086,236) (3,828,423) ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment ........................ (440,014) (647,025) ----------- ----------- Net cash used in investing activities ................ (440,014) (647,025) ----------- ----------- Cash flows from financing activities: Intercompany advances ........................................ 6,500,000 Proceeds from issuance of common stock ....................... 8,466 82,053 Net proceeds from issuance of Series C mandatorily redeemable convertible preferred stock .............................. 3,000,000 ----------- ----------- Net cash provided by financing activities ............ 6,508,466 3,082,053 ----------- ----------- Net decrease in cash and cash equivalents ....................... (17,784) (1,393,395) Cash and cash equivalents, beginning of year .................... 171,542 1,564,937 ----------- ----------- Cash and cash equivalents, end of year .......................... $ 153,758 $ 171,542 =========== =========== Supplemental schedule of noncash financing activities: Issuance of Series A convertible preferred stock in exchange for convertible promissory notes and interest ............ $ 3,750,000 Supplemental disclosure of cash flow information: Cash paid for interest ....................................... $ 7,500 $ 33,477
The accompanying notes are an integral part of these financial statements. SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Formation and Business of the Company: Semaphore Communications Corporation (the "Company"), a Xerox New Enterprise Company, is a supplier of security management and virtual private network solutions for Internet/Intranet and frame relay applications. 2. Summary of Significant Accounting Policies: Basis of Presentation: The Company has incurred losses from operations and its current liabilities exceed its current assets. The accompanying financial statements do not include any adjustments related to the Company's ability to continue as a going concern since subsequent to year end, as described in Note 9, substantially all non-cash assets were purchased by Digital Link Corporation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash equivalents: The Company considers all highly liquid investments with maturities of three months or less at the time of purchase and money market funds to be cash equivalents. The Company has deposited its cash and cash equivalents in one major bank. Revenue Recognition: Product revenue is recognized upon shipment of the product if all remaining obligations are insignificant and collection of the resulting receivable is probable. Contract development revenue is recognized using the percentage-of-completion method. Maintenance and support revenue, which is not significant, is recognized over the terms of the agreement. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Inventories: Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market, where market is determined as the lower of replacement cost or net realizable value. Appropriate consideration is given to obsolescence, excessive levels and other factors in determining the value of inventories. Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation. Property and equipment are depreciated on a straight-line basis over their estimated useful lives of generally three years. When assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss on disposal is included in the results of operations. Earnings Per Share: Earnings per share has not been presented as Xerox owns substantially all of the Company's outstanding stock. Income Taxes: Income taxes are accounted for under the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Fair Value of Financial Instruments: Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses approximate fair value due to their short maturities. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Concentration of Credit Risk and Other Risks and Uncertainties: Financial instruments which potentially subject the Company to concentrations of risk consist principally of cash and cash equivalents, accounts receivable and intercompany payables. The Company's cash is invested in deposits with one financial institution. At times, such deposits may be in excess of insured limits. Management believes that the financial institution which hold the Company's cash and cash equivalents is financially sound and, accordingly, minimal credit risk exists with respect to these cash balances. With respect to accounts receivable and revenue, the Company's customer base is dispersed across many different geographic areas. While its customers are dispersed across many industries, a substantial portion of its sales are from international customers. As of and for the year ended December 31, 1997, there were two international customers that accounted for 68% and 13% of accounts receivable and 74% and 9% of revenue, respectively. As of and for the year ended December 31, 1996 one international customer accounted for 38% of accounts receivable and 41% of revenue. In addition, at December 31, 1996, there were two customers that accounted for 12% and 13% of revenue, respectively. Intercompany payables are due to the Company's parent (Note 6). Research and Development Costs: Costs related to research, design and development of products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers provided that research and development activities for the related hardware portion of the product have completed. Generally, the Company's products include hardware and software components that are developed concurrently. As a result, the Company has not capitalized any software development costs since such costs have not been significant. Stock-based Compensation: The Company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro forma disclosure in Note 5 to the financial statements as if the measurement provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," had been adopted. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies, continued: Recent Accounting Pronouncement: In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from nonowner sources. This statement is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. During October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The implementation of SFAS No. 130 and SOP 97-2 are not expected to have a material impact on the financial statements. 3. Balance Sheet Detail: Inventories: December 31, --------------------------------------- 1997 1996 ------------------ ------------------- Raw materials $ 796,707 $ 505,706 Work in process 168,170 38,482 Finished goods 252,181 267,815 ------------------ ------------------- 1,217,058 812,003 Allowance for excess and obsolete inventories (350,000) (408,560) ------------------ ------------------- $ 867,058 $ 403,443 ================== =================== continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 3. Balance Sheet Detail, continued: The Company's products are concentrated in the high-tech encryption industry that is highly competitive and rapidly changing. Significant technological changes in the industry could affect operating results adversely. The Company's inventories include high technology parts and components that may be specialized in nature or subject to rapid technological obsolescence. While the Company has programs to minimize the required inventories on hand and considers technological obsolescence in estimating the required allowance to reduce recorded amounts to market values, such estimates could change in the future. The Company's revenues are concentrated in the sale of two main products. In addition, certain components and subassemblies are presently available only from single sources, and certain other components are presently available or acquired only from a limited number of sources. Property and Equipment: December 31, ------------------------------------ 1997 1996 ----------------- ----------------- Computer equipment and software $ 1,605,339 $ 1,200,070 Machinery and equipment 54,982 20,237 Furniture and fixtures 39,614 39,614 ----------------- ----------------- 1,699,935 1,259,921 Less accumulated depreciation (987,976) (640,961) ----------------- ----------------- $ 711,959 $ 618,960 ================= ================= Accrued Expenses: December 31, ------------------------------- 1997 1996 --------------- -------------- Product warranty $ 210,745 $ 332,000 Accrued consulting 70,482 70,390 Accrued vacation 126,616 93,766 Other 539,935 273,810 --------------- -------------- $ 947,778 $ 769,966 =============== ============== continued SEMAPHORE COMMUNI MENTS 4. Commitments: The Company leases its facilities under a noncancelable operating lease that expires April 2001. In addition to the base rental, the Company is responsible for certain expenses, including insurance, utilities, maintenance and taxes. Future minimum lease payments required under noncancelable operating lease obligations is as follows: 1998 $ 219,381 1999 228,081 2000 236,781 2001 59,739 -------------- $ 743,982 ============== Rent expense was $208,584 and $157,368 for the years ended December 31, 1997 and 1996, respectively. 5. Stock and Option Plans: Mandatorily Redeemable Convertible Preferred Stock: Total Shares Issued and Liquidation Amount Designated Outstanding Preference --------------- ------------ ------------- --------------- Series - --------- A $ 4,757,346 4,371,156 4,371,156 $ 4,687,347 B 2,000,000 1,379,310 1,379,310 2,000,000 C 6,750,000 3,936,642 3,936,642 6,839,994 --------------- ------------ ------------- --------------- $ 13,507,346 9,687,108 9,687,108 $ 13,527,341 =============== ============ ============= =============== The Company has issued a total of 4,371,156 shares of Series A Stock at $1.0723358 per share, 1,379,310 shares of Series B Stock at $1.45 per share and 3,936,642 of Series C Stock at $1.73752 per share. Under the Company's Articles of Incorporation, the Company's convertible preferred stock is issuable in series and the Company's Board of Directors is authorized to determine the rights, preferences and terms of each series. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 5. Stock and Option Plans, continued: Mandatorily Redeemable Convertible Preferred Stock, continued: Redemption: The Company shall redeem all of the Series A, B and C Preferred Stock as follows: For Series A and Series B Preferred Stock, on each November 30th of 2000, 2001 and 2002, except for Series C Preferred Stock which is on each November 30th of 2001, 2002 and 2003, the Company is obligated to redeem at a price per share equal to the Redemption Price of such shares: a) the lesser of the number of shares of the Series A, B and C Preferred Stock outstanding immediately following the Effective Time multiplied by 1/3 or b) all of the shares of Series A, B and C Preferred Stock which then remain outstanding. The redemption price of all shares of Series A, B and C Preferred Stock shall be an amount per share in cash equal to the Series A, B and C Liquidation Value of such share on the Redemption Date. To the extent the Redemption Dates of the Series A, B and C Preferred Stock are the same, the Company shall effect such redemption prorata from the holders of the Series A, B and C Preferred Stock. If required by the shareholders, the redeemable preferred stock payments would be as follows:
Series A Series B Series C Total -------------- -------------- -------------- --------------- November 30, 2000 $ 1,562,449 $ 666,667 $ 2,229,116 November 30, 2001 1,562,449 666,667 $ 2,279,998 4,509,114 November 30, 2002 1,562,449 666,666 2,279,998 4,509,113 November 30, 2003 2,279,998 2,279,998 -------------- -------------- -------------- --------------- $ 4,687,347 $ 2,000,000 $ 6,839,994 $ 13,527,341 ============== ============== ============== ===============
continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 5. Stock and Option Plans, continued: Mandatorily Redeemable Convertible Preferred Stock, continued: Dividends: The holders of the Series A, B and C convertible preferred stock are entitled to receive dividends, out of any assets legally available, prior and in preference to any declaration or payment of any dividend on the common stock of the Company, at the rate of $0.1072, $0.145, and $0.173752 per share per annum, respectively. Such dividends are payable when, and if, declared by the Board of Directors, and are not cumulative. Dividend rates in excess of stated dividend rates can only be made if, at the same time, equivalent dividends are paid to holders of shares of Common Stock. As of December 31, 1997 no dividends have been declared. Liquidation: In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A convertible preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock by reason of their ownership, an amount per share equal to $1.0723358, $1.45 and $1.73752 for each outstanding share of Series A, B and C convertible preferred stock, respectively, plus any declared but unpaid dividends on such shares. After the distributions to the holders of Series A, B, and C convertible preferred stock have been made, the remaining assets of the Company available for distribution to shareholders shall be distributed pro rata among the holders of common stock. Mergers: Upon a merger, reorganization, or sale of all or substantially all of the assets of the Company, in which outstanding shares of the Company are exchanged for securities or other consideration issued by the acquiring corporation, the holders of the convertible preferred stock shall be paid for each share of such stock in cash or in securities received from the acquiring corporation, or in combination thereof. If, upon such an event, the cash and securities distributed to the holders of the Series A, B and C convertible preferred stock shall be insufficient to permit the payment to such holders of the full preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A, C and C convertible preferred stock. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 5. Stock and Option Plans, continued: Mandatorily Redeemable Convertible Preferred Stock, continued: Voting: The holder of each share of Series A, B, and C convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which each share could be converted on the record date for the vote or consent of stockholders, except as otherwise required by law, and has voting rights and powers equal to the voting rights and powers of holders of common stock. Conversion: Each share of Series A, B, and C convertible preferred stock, at the option of the holder, is convertible into an equal number of fully paid and nonassessable shares of Common Stock as is determined: for Series A, B and C Preferred stock by dividing the sum of $1.0723358, $1.45, $1.73752, respectively plus declared but unpaid dividends on the Series A, B and C shares being converted by the Conversion Price, as defined, in effect at the time for such shares. Conversion is automatic upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of common stock in which the aggregate proceeds raised exceed $7,500,000. Common Stock: Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding. Stock Option Plan: The Company has a 1991 Stock Option Plan and a 1995 Stock Incentive Plan (the Plans) under which 15,000,000 shares of common stock have been reserved for issuance. All outstanding stock options issued under the Plans are governed by the terms and conditions of that respective plan. Each Plan expires ten years after its adoption. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 5. Stock and Option Plans, continued: Options granted under the 1991 Stock Option Plan are nonstatutory stock options. Options granted under the 1995 Stock Incentive Plan may be either incentive stock options or nonstatutory stock options, as designated by the Board of Directors. Both Plans provide that the exercise price of options granted must be no less than the fair market of the Company's common stock at the date of grant. The Board of Directors also has the authority to set exercise dates (no longer than ten years from the date of grant), payment terms and other provisions for each grant. Generally, options granted under the Plans become exercisable as to 25% of the shares one year after the grant date and thereafter with respect to an additional 1/48th at the end of each succeeding month. Both Plans also provide for the award of common stock based on performance and the sale of restricted stock to eligible persons at the fair market value of the common stock of the Company at the date of sale or at discounts of up to 15%, as determined by the Board of Directors. All restricted stock awarded under both Plans are subject to a repurchase option that expires over a five year period at the original issuance price. As of December 31, 1997, no restricted stock awards have been issued under the Plan. Information as to activity under the Plans is as follows:
Options Outstanding ---------------------------------------------------- Weighted Average Remaining Shares Number Exercise Contractual Available of Price Aggregate Life in for Grant Shares Per Share Price Years ------------ ------------ ----------- ----------- ------------ Balances, December 31, 1995 1,845,036 1,392,926 $0.25 $ 348,232 - Granted (632,830) 632,830 $0.25 158,208 - Exercised (328,212) $0.25 (82,053) - Canceled 172,181 (172,181) $0.25 (43,045) - ------------ ------------ ----------- Balances, December 31, 1996 1,384,387 1,525,363 $0.25 381,342 - Granted (488,000) 488,000 $0.25 122,000 - Exercised (33,861) $0.25 (8,466) - Canceled 291,588 (291,588) $0.25 (72,897) - ------------ ------------ ----------- Balances, December 31, 1997 1,187,975 1,687,914 $0.25 $ 421,979 8.52 ============ ============ ===========
continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 5. Stock and Option Plans, continued: There were 478,650 and 265,055 options exercisable at December 31, 1997 and 1996, respectively for which the weighted average exercise price was $0.25 for both 1997 and 1996. Stock-Based Compensation: The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Plans been determined based on the fair value at the grant date for awards in 1997 and 1996, according to the provisions of SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: 1997 1996 ----------------- ---------------- Net loss As reported $ 5,355,670 $ 3,771,351 Pro forma 5,382,146 3,787,959 The fair value of each option grant is estimated on the date of grant using the minimum value method with the following weighted average assumptions: Risk-free interest rate 5.94% to 6.39% Expected life 5 years Expected dividends - The weighted average grant date fair value of options granted in 1997 and 1996 are $0.066 and $0.065, respectively. 6. Related Parties: During the years ended December 31, 1997 and 1996, the Company had related party transactions with its parent company, Xerox Corporation consisting of periodic advances received from Xerox for working capital. Such advances bear interest at the prime rate (8.25% at December 31, 1997). It is the intent of the parties to convert the advances to equity. The Company had outstanding advances from Xerox of $6,500,000 and zero at December 31, 1997 and 1996, respectively. In addition, $282,751 of accrued interest charges related to the advances from Xerox at December 31, 1997 and $130,000 in administrative fees to Xerox based on 1% of planned revenue earned for the year ended December 31, 1997 are included in intercompany advances. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 7. Income Taxes: The Company computes its provision (benefit) on a separate return basis for financial reporting purposes. The Company's net deferred tax asset at December 31, 1997 and 1996 comprise $300,445 and $382,692, respectively, in allowances and accruals which have been offset by valuation allowances of $300,445 and $382,692, respectively, exclusive of net operating loss carryforwards, as discussed below. A valuation allowance has been established to the full extent of such amounts since it is more likely than not that such differences will not be realized on a separate return basis. According to the tax sharing agreement between the Company and Xerox, the Company's tax attributes shall be included in Xerox's consolidated tax return. Xerox shall pay the Company for the actual net tax benefit realized by the Xerox Group from utilizing the Company's net operating losses, tax credits, and other tax attributes reflected on any Xerox consolidated tax return. As of December 31, 1997 and 1996, Xerox had fully utilized the Company's net operating losses which amounted to approximately $7.6 million and $5.4 million, respectively. As it is not the intent to settle such amounts, but rather to offset such benefit against future income taxes paid by Xerox on behalf of the Company, no receivables nor tax benefit have been recorded by the Company for the utilization of current and prior net operating losses. The change in the valuation allowance was $82,247 for the year ended December 31, 1997. 8. Employee Benefit Plan: In July 1996, the Company established a defined contribution plan for all employees with more than one month of service that is covered under section 401(k) of the Internal Revenue Code. Each employee may defer a portion of their salary up to the maximum percentage allowed under IRS rules. The contribution percentages can be changed without limit. The Company has the discretion to make contributions to the Plan. For the years ended December 31, 1997 and 1996, the Company made contributions of approximately $143,000 and $99,000, respectively. 9. Subsequent Events: On April 3, 1998, Digital Link Corporation ("Digital Link") entered into an Asset Sale Agreement with the Company, to acquire substantially all of the Company's non-cash assets excluding furniture and fixtures. continued SEMAPHORE COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS 9. Subsequent Events, continued: Under the terms of the purchase agreement, Digital Link issued 291,182 shares of its common stock to the Company on April 3, 1998 and assumed certain liabilities. The number of shares issued was determined by dividing $3,200,000 by the volume-weighted average price per share (as reported by Bloomberg Financial Services) at which Digital Link's common stock traded on the five business days immediately preceding the execution of the Agreement by the parties. Digital Link received $182,000 from the Company with respect to the assumption liabilities. In March 1998, the Company entered into release and settlement agreements with a customer and a manufacturer to terminate a noncancelable purchase order and the related manufacturing arrangement. Under such agreements, the Company paid the manufacturer approximately $600,000 for product and other sunk costs which was reimbursed by the customer. UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed data, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of Semaphore Communications Corporation included elsewhere in this Form 8-K/A and the consolidated financial statements of Digital Link Corporation. The unaudited pro forma combined statements of operations combine Semaphore's results of operations and Digital Link's results of operations for the three months ended March 31, 1998 and the year ended December 31, 1997, giving effect to the acquisition as if it had occurred at January 1, 1997. The unaudited pro forma combined balance sheet data combine Semaphore's and Digital Link's balance sheets as of March 31, 1998, giving effect to the acquisition as if it had occurred on March 31, 1998. The Pro Forma Financial Information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the acquisition been consummated at the beginning of the periods presented, not is it necessarily indicative of future operating results or financial position. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS for the year ended December 31, 1997 (in thousands, except per share data)
Digital Semaphore Link Communications Pro Forma Pro Forma Corporation Corporation Adjustments Combined --------- --------- --------- --------- Sales .............................. $ 66,008 $ 4,003 $ 70,011 Cost of sales ...................... 29,078 2,566 31,644 -------- -------- -------- Gross profit ....................... 36,930 1,437 38,367 -------- -------- -------- Research and development ........... 11,005 3,478 14,483 Selling, general and administrative 22,019 3,028 $ 25(1) 25,072 Purchased, research and development 3,651 3,651 -------- -------- -------- -------- Total expenses ..................... 36,675 6,506 25 43,206 -------- -------- -------- -------- Operating income (loss) ............ 255 (5,069) (25) (4,839) Interest expense ................... 287 287 Other (income) expense, net ........ (2,524) (2,524) -------- -------- -------- -------- Income (loss) before provision for income taxes ................... 2,779 (5,356) (25) (2,602) Provision for income taxes ......... 847 847 -------- -------- -------- -------- Net income (loss) .................. $ 1,932 $ (5,356) $ (25)(1) $ (3,449) ======== ======== ======== ======== Income (loss) per share - basic .... $ 0.21 $ (0.36) Shares used in per share calculation - basic ........................ 9,249 9,540(2) ======== ======== Income (loss) per share - diluted .. $ 0.20 $ (0.36) ======== ======== Shares used in per share calculation - diluted ...................... 9,600 9,540(2) ======== ========
See accompanying notes to unaudited proforma condensed combined statements of operations. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS for the three months ended March 31, 1998 (in thousands, except per share data)
Digital Semaphore Link Communications Pro Forma Pro Forma Corporation Corporation Adjustments Combined -------------- ------------------- ------------- --------------- Sales $ 14,519 $ 486 $ 15,005 Cost of sales 7,204 77 7,281 -------------- ----------------- --------------- Gross profit 7,315 409 7,724 -------------- ----------------- --------------- Research and development 2,822 995 3,817 Selling, general and administrative 5,023 641 $ 6(1) 5,670 -------------- ----------------- ------------- --------------- Total expenses 7,845 1,636 6 9,487 -------------- ----------------- ------------- --------------- Operating income (loss) (530) (1,227) (6) (1,763) Interest expense 151 151 Other (income) expense, net (601) (601) -------------- ----------------- ------------- --------------- Income (loss) before provision for income taxes 71 (1,378) (6) (1,313) Provision for income taxes 22 22 -------------- ----------------- ------------- --------------- Net income (loss) $ 49 $ (1,378) $ (6)(1) $ (1,335) ============== ================= ============= =============== Income (loss) per share - basic $ 0.01 $ (0.14) ============== =============== Shares used in per share calculation - basic 9,383 9,674(2) ============== =============== Income (loss) per share - diluted $ 0.01 $ (0.14) ============== =============== Shares used in per share calculation - diluted 9,436 9,674(2) ============== ===============
See accompanying notes to unaudited proforma condensed combined statements of operations. Notes to Unaudited Pro Forma Condensed Combined Statements of Operations: (1) Adjustment reflects the amortization of the amount of the purchase price allocated to identified intangible assets over 12 months ended December 31, 1997 and 3 months ended March 31, 1998. Intangibles are being amortized over 5 years. (2) Shares used in the per share calculation reflect Digital Link shares issued to Semaphore stockholders as if they were outstanding from the beginning of each period presented and existing Digital Link shares. Shares used in proforma income (loss) per share-basic and diluted calculations for the year ended December 31, 1997 are as follows (in thousands): Digital Link shares issued in asset acquisition 291(4) Existing Digital Link shares 9,249 ------- Shares used in per share calculation - basic and diluted 9,540 ======= Shares used in proforma income (loss) per share calculations for the three months ended March 31, 1998 are as follows (in thousands): Digital Link shares issued in asset acquisition 291(4) Existing Digital Link shares 9,383 ------- Shares used in per share calculation - basic and diluted 9,674 ======= (3) In-process research and development costs in the amount of $2,299, which will be written off immediately after the transaction is completed, have been excluded from these unaudited pro forma condensed combined statements of operations. (4) The number of shares issued was determined by dividing $3,200 by the volume-weighted average price per share (as reported by Bloomberg Financial Services) at which Digital Link's common stock traded on the five business days immediately preceding the execution of the Asset Sale Agreement by the parties. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET as of March 31, 1998 (in thousands, except per share data)
Digital Semaphore Link Communications Pro Forma Pro Forma Corporation Corporation Adjustments Combined ------------- ------------------ --------------- ------------- Cash and cash equivalents $ 7,824 $ 1,561 $ (1,379)(1) $ 8,006 Short-term marketable securities 9,838 9,838 Accounts receivable 6,802 296 (95)(1) 7,003 Inventories 6,984 952 (504)(1) 7,432 Prepaid and other current assets 1,413 39 1,452 Deferred income taxes 2,304 2,304 Intangible assets 126(1) 126 2,299(1)(2) (2,299)(1)(2) Property and equipment 3,281 625 (110)(1) 3,796 Long-term marketable securities 24,799 24,799 Deferred income taxes 2,062 989(2) 3,051 Other 1,149 61 (51)(1) 1,159 ------------- ----------------- --------------- ------------ Total $ 66,456 $ 3,534 $ (1,024) $ 68,966 ============= ================= =============== ============ Current liabilities $ 10,531 $ 10,214 $ (9,594)(1) $ 11,151 Mandatorily redeemable preferred stock 13,507 (13,507)(1) Stockholders' equity (deficit) 55,925 (20,187) 20,187(1) 57,815 3,200(1) 989(2) (2,299)(2) ------------- ----------------- --------------- ------------ Total $ 66,456 $ 3,534 $ (1,024) $ 68,966 ============= ================= =============== ============
See accompanying notes to unaudited proforma condensed combined balance sheet. Notes to Unaudited Pro Forma Condensed Combined Balance Sheet: (1) Reflects the allocation of the purchase price of $3.2 million of Digital Link common stock issued to the identified tangible and intangible assets and liabilities assumed by Digital Link. Based on the Asset Sale Agreement, Digital Link purchased substantially all non-cash assets and assumed certain liabilities from Semaphore. The net working capital provided was $260 as the majority of the current liabilities are intercompany payables to Semaphore's parent and were not assumed. The purchase price allocation is as follows: Cash and cash equivalents $ 182 Accounts receivable 201 Inventories 448 Intangible assets 126 Property and equipment 515 Other assets 49 Current liabilities (620) In-process research and development 2,299 ---------- $ 3,200 ========== (2) Reflects the impact on stockholders' equity of the anticipated write-off of in-process research and development in the amount of $2,299 and the related tax effect of $989. Amount is initially recorded as an intangible asset and then is expensed into accumulated deficit. -----END PRIVACY-ENHANCED MESSAGE-----