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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended September 30, 1996 or
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[ ] 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 0-17972
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DIGI INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1532464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11001 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (612) 912-3444
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
--- ---
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based on a closing price of $14.875 per share as reported on the
National Association of Securities dealers Automated Quotation System -
National Market System on December 13, 1996 was $166,239,400.
Shares of common stock outstanding as of December 13, 1996: 13,344,073.
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DOCUMENTS INCORPORATED BY REFERENCE
The following table shows, except as otherwise noted, the location of
information, required in this Form 10-K, in the Registrant's Annual Report to
Stockholders for the year ended September 30, 1996 and Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled for January 30, 1997, a
definitive copy of which the Registrant anticipates will be filed on or about
January 2, 1997. All such information set forth below under the heading
"Reference" is incorporated herein by reference.
PART I ITEM IN FORM 10-K REFERENCE
- ------ ----------------- ---------
Item 1. Business Business, pages 5 through 10, this
document; Note 10, Notes to Consolidated
Financial Statements Annual Report to
Stockholders
Item 2. Properties Properties, pages 10 and 11, this document;
Item 3. Legal Proceedings Legal Proceedings, page 11, this document
Item 4. Submission of Matters to Submission of Matters to a Vote of Security
a Vote of Security Holders, page 11, this document
Holders
PART II
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Item 5. Market for Registrant's Stock Listing; Dividend
Common Equity and Related Policy, page 32, Annual
Stockholder Matters Report to Stockholders
Item 6. Selected Financial Data Financial Highlights, and Selected
Financial Information, pages 4 and 5,
Annual Report to Stockholders
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Item 7. Management's Discussion Management's Discussion and Analysis
And Analysis of Financial of Financial Condition and Results of
Condition and Results of Operations, pages 16 through 19,
Operations Annual Report to Stockholders
Item 8. Financial Statements and Annual Report to Stockholders, pages 20
Supplementary Data through 30
Item 9. Changes in and Disagree- Changes in and Disagreements with
ments with Accountants on Accountants on Accounting and Financial
Accounting and Financial Disclosure, page 11, this document
Disclosure
PART III ITEM IN FORM 10-K REFERENCE
- -------- ----------------- ---------
Item 10. Directors of the Election of Directors, Proxy Statement
Registrant
Executive Officers of Executive Officers of the Registrant, pages
the Registrant 11 through 14, this document
Compliance with Section Section 16(a) Reporting, Proxy Statement
16(a) of the Exchange Act
Item 11. Executive Compensation Executive Compensation; Election of
Directors, Summary Compensation Table;
Option Grants in Last Fiscal Year;
Aggregated Option Exercises in the Last
Fiscal Year and Year-end Option Values,
Employment Contracts; Severance,
Termination of Employment and Change-in-
Control Arrangements; Performance
Evaluation, Proxy Statement
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Item 12. Security Ownership of Security Ownership of Principal
Certain Beneficial Owners Stockholders and Management, Proxy
and Management Statement
Item 13. Certain Relationships and Certain Relationships and Related
Related Transactions Transactions, Proxy Statement
PART IV
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Item 14. Exhibits, Financial Exhibits, Financial Statement Schedules and
Statement Schedules and Reports on Form 8-K, pages 15 through 17,
Reports on Form 8-K this document
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DIGI INTERNATIONAL INC.
FORM 10-K
Year ended September 30, 1996
PART I
ITEM 1. BUSINESS
Digi International Inc. (the "Company") was formed in 1985 and is a leading
producer of data communications hardware and software products that deliver
solutions for multiuser environments, remote access markets both LAN and
WAN, and the LAN connect market.
The Company's multiuser products connect terminals, PCs running terminal
emulation software, and other serial devices, to a PC-based host. This
pathway enables users to share the processing power of a single host
computer. These products are ideal for companies-or work groups within
companies-that need easy, low-cost system management and high performance
at the lowest cost per user. These products are ideal for point-of-sale
applications, on-line transaction processing, factory automation, dial-
in/dial-out connections and data dissemination.
The Company's multiuser solutions support from one to 224 high-speed serial
ports through a single expansion slot or as many as 1,792 ports through a
single host (eight expansion slots). In addition to maximizing the
capabilities of a multiuser system by enabling hundreds of users to be
connected to a system, an equally important benefit is the product's
ability to quickly and accurately transmit data, eliminating the
information bottlenecks that result when multiple users or devices share
one processing unit.
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In 1994, the Company adopted a strategy to move into two growth areas,
which were compatible with its existing product line, by entering into the
remote access and LAN connect markets. The Company's remote access
products address the need to connect telecomuters and branch offices to
corporate LANs, other branches, other individuals through server-centric
(hard port) and stand alone product solutions (soft port and
internetworking solutions). Only the Company has solutions for each
portion of this large and fast growing market. The Company entered the
stand alone solution market with the acquisition of Lan Access Corporation
in September 1995 in a cash transaction of approximately $5.5 million.
The remote access product line was enhanced in 1996 by the opening of its
Huntsville research and development office, which designs both hardware and
software products and its Redmond, Washington facility which focuses solely
on NT Software related to ISDN.
The Company's ISDN products address the need for high-speed remote access
which is necessary for LAN-to-LAN (WAN) internetworking and for accessing
the Internet.
The Company entered the LAN connect market with its acquisition of MiLAN
Technology Corporation in November 1993. The Company's LAN connect group
provides cost-effective and power-efficient Ethernet, Fast Ethernet and
Token Ring networking products through three groups:
1) The original "physical layer" line of products that allow users
to easily build and expand networks using single and multiport
transceivers, converters, modular microhubs and modular repeaters.
2) Products based on the innovative FastPort line, which makes print
sharing convenient and affordable. The FastPort line includes the
industry's first multiprotocol network print server providing access
to any printer on an Ethernet or Token Ring network without the
inconvenience and expense of spooling through a workstation or server.
3) Network performance enhancement products, including the first
comprehensive family of physical layer connectivity solutions for Fast
Ethernet.
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The Company's products are sold through a network of more than 168
distributors in the United States, Canada and 68 countries worldwide and
through OEM (Original Equipment Manufacturers) contracts.
Committed to the development and evolution of innovative connectivity and
networking solutions, the Company works closely with customers and
marketing partners to meet the changing needs of the communications and
networking marketplace.
The Company markets its products to a broad range of customers, including
major domestic and international distributors, system integrators, VARs and
OEMs. In July 1991, the Company opened a sales support office in Germany
to increase sales support to the European distribution network for its
multiuser products. In October 1993, the Company opened a sales support
office in Singapore to increase sales support to the Pacific Rim
distribution network for its products. In 1996, the Company opened similar
offices in Hong Kong, Australia and Japan.
To serve these markets, the Company (i) offers products that, in the
opinion of management, provide superior performance relative to current
standards and application requirements, (ii) provides products that are
compatible with a broad array of operating systems and microcomputer and
workstation architectures, and (iii) provides, in the opinion of
management, superior technical support, including frequent and timely
product updates and ready access to the Company's support staff.
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The microcomputer industry is characterized by rapid technological advances
and evolving industry standards. The market can be significantly affected
by new product introductions and marketing activities of industry
participants. The Company competes for customers on the basis of product
performance in relation to compatibility, support, quality and reliability,
product development capabilities, price and availability. Many of the
Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing and personnel resources than the
Company. The Company believes that it is the market leader in the
multiuser market segment of the computer industry and is the leader in the
server centric portion of the remote access portion of that market. With
respect to the stand alone portion of the remote access market and the LAN
connect market, the Company believes it commands less than a 5% market
share.
The Company's manufacturing operations procure all parts and certain
services involved in the production of products. The Company subcontracts
most of its product manufacturing to outside firms that specialize in
providing such services. The Company believes that this approach to
manufacturing is beneficial because it permits the Company to reduce its
fixed costs, maintain production flexibility and maximize its profit
margins.
The Company's products are manufactured to its designs with standard and
semi-custom components. Virtually all of these components are available
from multiple vendors.
During fiscal years 1994, 1995 and 1996, the Company's research and
development expenditures were $9,833,859, $14,676,683, and $20,624,274
respectively.
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Due to the rapidly changing technology in the computer industry, the
Company believes that its success depends primarily upon the engineering,
marketing, manufacturing and support skills of its personnel, rather than
upon patent protection. Although the Company may seek patents where
appropriate and has certain patent applications pending for proprietary
technology, the Company's proprietary technology or products are generally
not patented. The Company relies primarily on the copyright, trademark and
trade secret laws to protect its proprietary rights in its products. The
Company has established common law and registered trademark rights on a
family of marks for a number of its products.
Through September 30, 1996, the Company purchased $5.3 million in
secured convertible notes from AetherWorks Corporation, a development
stage company engaged in the development of wireless and dial-up remote
access technology. The Company is obligated to purchase up to an
additional $8.5 million secured convertible notes from time to time at
the request of AetherWorks, based on certain conditions. Secured
convertible notes held by the Company were convertible at September 30,
1996 into 52% of AetherWorks' common stock, and the purchase of $8.5
million additional principal amount of secured notes would increase the
Company's ownership portion upon conversion to 62.7%, based on
AetherWorks' present capitalization. Through September 30, 1996, the
Company has also guaranteed $1.1 million in lease obligations incurred
by AetherWorks. The Company has reported its investment in AetherWorks
on the equity method and has recorded a $3.6 million loss which
represents 100% of the AetherWorks' net loss for the year ended
September 30, 1996. The percentage of AetherWorks' losses included in
the Company's results of operations is based upon the percentage of
financial support provided by the Company (versus other investors) to
AetherWorks during fiscal 1996.
At September 30, 1996, the Company had 698 full-time employees.
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During the year ended September 30, 1996, two customers comprised more than
10% of net sales: Tech Data at 13.9%, and Ingram Micro at 13.4%. For 1995,
two customers accounted for more than 10% of net sales: Ingram Micro at
12.5% and IBM at 11.7%. During 1994, one company (Ingram Micro) accounted
for 11.8% of net sales.
As of November 30, 1996, the Company had backlog orders which management
believed to be firm in the amount of $12.7 million. All of these orders
are expected to be filled in the current fiscal year. Backlog at November
30, 1995 was $11.3 million.
During fiscal years 1994, 1995 and 1996, the Company's net sales to
customers outside the United States, primarily in Europe, amounted to
approximately $28 million, $33 million and $39.9 million respectively.
ITEM 2. PROPERTIES
The Company's headquarters and research facilities are located in a 130,000
square foot office building in Minnetonka, Minnesota which the Company
acquired in August 1995 and has occupied since March 1996. The Company's
primary manufacturing facilities are currently located in a 58,000 square
foot building in Eden Prairie, Minnesota, which the Company purchased in
May 1993 and has occupied since August 1993. Additional office and
research facilities are located in a 17,146 square foot facility in
Nashville, Tennessee, the lease for which expires in August 2000; a 32,000
square foot facility in Twinsburg, Ohio, the lease for which expires in
January 2001; a 46,170 square foot facility in Sunnyvale, California, the
lease for which expires in April 2002; a 10,525 square foot building in
Torrance, California the lease for which expires in January 1997, which
will be renewed for one year in 1997; a 8,028 square foot facility in
Huntsville, Alabama, the lease for which expires February 1999; and a 4,886
square foot facility in Redmond, Washington, the lease for which expires
December, 1998. The Company's sales support office in Germany is located in
a 4,535 square foot office in Cologne, Germany, the lease for which expires
in November 1998. The Company's sales support office in Asia is located in
a 1,560 square foot office in Singapore, the lease for which expires in May
1997. The Company's sales support office in Australia is located in a
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1,000 square foot office in Sydney, the lease for which expires in March
1998. The Company's sales support office in Hong Kong is located in a
1,400 square foot office in Causeway Bay, the lease for which expires in
May 1998. Management believes that the Company's facilities are suitable
and adequate for current office, research and warehouse requirements, and
that its manufacturing facilities provide sufficient productive capacity to
meet the Company's currently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending or threatened legal, governmental,
administrative or other proceedings to which the Company or any of its
subsidiaries is a party or to which any of its or its subsidiaries'
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended September 30, 1996.
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
John P. Schinas 59 Chairman of the Board of Directors
Ervin F. Kamm, Jr. 57 Director, President and Chief Executive
Officer
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David Rzasa 45 Vice President and General Manager Remote
Access PMU
Jonathon E. Killmer 55 Vice President, Chief Financial Officer and
Treasurer
Ray D. Wymer, Jr. 40 Vice President of the Company and General
Manager of the Multi-Connect PMU
Michael D. Kelley 48 Vice President Business Technologies and
Support Services
Douglas J. Glader 53 Vice President of Operations
Dana R. Nelson 48 Vice President of Sales
Mr. Schinas, founder of the Company, retired as Chief Executive Officer
effective January 27, 1992. He has been a member of the Board of Directors
since the Company's inception in July 1985 and was elected Chairman of the
Board of Directors in July 1991. From July 1985 to July 1991, Mr. Schinas
also served the Company as President and Treasurer.
Mr. Kamm has been a member of the Board of Directors since December 1994
and President and Chief Executive Officer of the Company since November 30,
1994. From May 1988 to November 1994, he served as President and Chief
Operating Officer of Norstan Inc., a distributor of telecommunications
products. Mr. Kamm is also a director of Secure Computing Corporation,
Micromedics Inc., Zytec Corporation and the Institute for Advanced
Technology.
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David Rzasa joined the Company in October 1996, as Vice President and
General Manager of Remote Access Product Marketing Unit. From October 1995
until August 1996, Rzasa was Executive Vice President and Chief Operating
Officer for Three Five Systems, Inc., where he was responsible for day to
day operations of the company. Three Five Systems, Inc. is a custom
display module manufacturer focusing on passive LCD and LED technology.
From 1991 through 1995, Mr. Rzasa was President of Rosemount Analytic Inc.,
a division of Emerson Electric Co.
Mr. Killmer joined the Company in October 1996, as Vice President, Chief
Financial Officer and Treasurer. Prior to joining the Company, Killmer had
been a partner in the professional services firm of Coopers & Lybrand
L.L.P., most recently as the Managing Partner of the Minneapolis/St. Paul
office from 1990 until his joining the Company.
Mr. Wymer has been Vice President of the Company since April 1993 when Star
Gate Technologies, Inc. was acquired. From 1984 to September 30, 1995, he
has served as President of Star Gate and currently is General Manager of
Multi-Connect Product Marketing Unit.
Mr. Kelley joined the Company in February 1996 as Vice President-
Business Technologies. In August 1996, Kelley assumed the additional
responsibilities for external Support Services. He served as Executive
Vice President and General Manager- Northern Area, at Norstan
Communications Systems, Inc., Minneapolis, from 1991 to January 1996.
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Mr. Glader was named Vice President of Operations in February 1995.
Before that, he was formerly Director of Manufacturing and Operations for
MiLAN Technology Corporation, which the Company acquired in November 1993.
He began his career with Memorex Corporation and also worked for Measurex
Corporation, Altus Corporation and Direct Incorporated. He founded and was
vice president of operations for Greyhawk Systems, Inc., a manufacturer of
electronic imaging hardware and software.
Mr. Nelson was named Vice President of Sales for the Company effective
June 1995. From 1983 to May 1995, Nelson was with Ascom Timeplex, most
recently as Vice President of Worldwide Sales. Ascom Timplex is a
worldwide leader in LAN and WAN networking solutions.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 10-K
(a) Consolidated Financial Statements and Schedules
1. Incorporated by reference to pages 20 through 30 of the
Company's 1996 Annual Report to Stockholders:
Consolidated Statements of Operations for the fiscal years
ended 1996, 1995 and 1994
Consolidated Balance Sheets as of September 30, 1996 and
1995
Consolidated Statements of Cash Flows for the fiscal years
ended 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
fiscal years ended 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Included in Part II:
Report of Independent Accountants on Financial Statement
Schedule
Report of Independent Accountants on AetherWorks Corporation
Schedule II - Valuation and Qualifying
Accounts
All other schedules are omitted because they are not applicable or are
not required.
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(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 1996.
(c) Exhibits
Exhibit Number Description
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3(a) Restated Certificate of Incorporation of
the Registrant*
3(b) Amended and Restated By-Laws of the
Registrant**
10(a) Stock Option Plan of the Registrant
10(b) Form of indemnification agreement with
directors and officers of the Registrant*
10(c) Amended and Restated Employment Agreement between the Company
and John P.Schinas****
10(d) Restated and Amended Note Purchase Agreement between the Company
and AetherWorks Corporation, dated June 19, 1996
10(e) Employment Arrangement between the Registrant and Mike Kelley,
dated February 7, 1996
10(f) 401(k) Savings and Profit Sharing Plan of Digi International
Inc.***
10(g) Amended and Restated Employment Agreement between the Company
and Ervin F. Kamm, Jr.******
10(h) Consulting Agreement between the Company and Mykola Moroz****
10(i) Employment Arrangement between the Registrant and Jonathon E.
Killmer, dated September 16, 1996
10(j) Employment Arrangement between the Registrant and David Rzasa,
dated September 30, 1996
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10(k) Separation Agreement between the Company and Gerald A. Wall,
dated December 4, 1996
10(n) Employment Agreement with Ray D. Wymer, as amended by Amendment
No. 1 to Employment Agreement ******
10(p) Employment Arrangement between the Registrant and Douglas Glader
******
10(q) Employment Arrangement between the Registrant and Dana R. Nelson
for fiscal 1995 and 1996 ******
10(s) Employee Stock Purchase Plan of the Registrant*****
11 Detail computation of earnings per share
13 1996 Annual Report to Stockholders (only those portions
specifically incorporated by reference herein shall be deemed
filed with the Securities and Exchange Commission)
21 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Data Schedule
* Incorporated by reference to the corresponding exhibit number of the
Company's Registration Statement on Form S-1 (File No.33-30725).
** Incorporated by reference to the corresponding exhibit number of the
Company's Registration Statement on Form S-1 (File No.33-42384).
*** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1991.
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**** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1994 (File no.
0-17972).
***** Incorporated by reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Meeting of Stockholders held on January 31,
1996.
****** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1995 (File No.
0-17972).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DIGI INTERNATIONAL INC.
December 30, 1996 By: /s/ Jonathon E. Killmer
- ---------------------------- -------------------------------------------
Date Jonathon E. Killmer
Vice President & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
December 30, 1996 /s/ Ervin F. Kamm, Jr.*
- ---------------------------- -----------------------------------------
Date Ervin F. Kamm, Jr.
President & Chief Executive Officer
December 30, 1996 /s/ Jonathon E. Killmer
- ---------------------------- -----------------------------------------
Date Jonathon E. Killmer
Vice President & Chief Financial Officer
JOHN P. SCHINAS
WILLIS K. DRAKE
RICHARD E. EICHHORN
ERVIN F. KAMM, JR.
MYKOLA MOROZ A majority of the Board of Directors*
DAVID STANLEY
ROBERT S. MOE
*Jonathon E. Killmer, by signing his name hereto, does hereby sign this
document on behalf of himself and each of the other above named directors
and officer of the registrant pursuant to powers of attorney duly executed
by such persons.
/s/ Jonathon E. Killmer
-------------------------------------
Jonathon E. Killmer, Attorney-in-fact
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INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------- ----------- ----
3(a) Restated Certificate of Incorporation of the Registrant*....
3(b) Amended and Restated By-Laws of the Registrant**............
10(a) Stock Option Plan of the Registrant.........................
10(b) Form of indemnification agreement with directors
and officers of the Registrant*.............................
10(c) Amended and Restated Employment Agreement
between the Company and John P. Schinas****.................
10(d) Restated and Amended Note Purchase Agreement
between the Company and AetherWorks Corporation,
dated June 19, 1996.........................................
10(e) Employment Arrangement between the Registrant
and Mike Kelley, dated February 7, 1996.....................
10(f) 401(k) Savings and Profit Sharing Plan of
Digi International Inc.***..................................
10(g) Amended and Restated Employment Agreement
between the Company and Ervin F. Kamm, Jr.******............
10(h) Consulting Agreement between the Company
and Mykola Moroz****........................................
10(i) Employment Arrangement between the Registrant
and Jonathon E. Killmer, dated September 16, 1996...........
10(j) Employment Arrangement between the Registrant
and David Rzasa, dated September 30, 1996...................
10(k) Separation Agreement between the Company
and Gerald A. Wall, dated December 4, 1996..................
10(n) Employment Agreement with Ray D. Wymer, as
amended by Amendment No. 1 to Employment
Agreement******.............................................
<PAGE>
INDEX TO EXHIBITS
(continued)
Exhibit
Number Description Page
- ------- ----------- ----
10(p) Employment Arrangement between the Registrant
and Douglas Glader******....................................
10(q) Employment Arrangement between the Registrant
and Dana R. Nelson for fiscal 1995 and 1996******...........
10(s) Employee Stock Purchase Plan of the Registrant*****.........
11 Detail computation of earnings per share....................
13 1996 Annual Report to Stockholders (only those
portions specifically incorporated by reference
herein shall be deemed filed with the Securities
and Exchange Commission)....................................
21 Subsidiaries of the Registrant..............................
23.1 Consent of Independent Accountants..........................
23.2 Consent of Independent Accountants..........................
24 Powers of Attorney..........................................
27 Financial Data Schedule.....................................
- --------------
* Incorporated by reference to the corresponding exhibit number of the
Company's Registration Statement on Form S-1 (File No. 33-30725).
** Incorporated by reference to the corresponding exhibit number of the
Company's Registration Statement on Form S-1 (File No. 33-42384).
*** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1991.
**** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1994
(File No. 0-17972).
<PAGE>
INDEX TO EXHIBITS
(continued)
***** Incorporated by reference to Exhibit B to the Registrant's Proxy
Statement for its Annual Meeting of Stockholders held on January 31,
1996.
****** Incorporated by reference to the corresponding exhibit number of the
Company's Form 10-K for the year ended September 30, 1995.
<PAGE>
EXHIBIT 10(a)
STOCK OPTION PLAN OF THE REGISTRANT
<PAGE>
EXHIBIT A
DIGI INTERNATIONAL INC.
STOCK OPTION PLAN
AS AMENDED AND RESTATED*
1. PURPOSE OF PLAN. The purpose of this Digi International Inc. Stock
Option Plan (the "Plan"), is to promote the interests of Digi International
Inc., a Delaware corporation (the "Company"), and its stockholders by providing
key personnel of the Company and its subsidiaries with an opportunity to acquire
a proprietary interest in the Company and thereby develop a stronger incentive
to put forth maximum effort for the continued success and growth of the Company
and its subsidiaries. In addition, the opportunity to acquire a proprietary
interest in the Company will aid in attracting and retaining key personnel of
outstanding ability.
2. ADMINISTRATION OF PLAN. This Plan shall be administered by a committee
of two or more directors (the "Committee") appointed by the Company's board of
directors (the "Board"). No person shall serve as a member of the Committee
unless such person shall be a "disinterested person" as that term is defined in
Rule 16b-3(c), promulgated under the Securities Exchange Act of 1934, as amended
(the "Act"), or any successor statute or regulation comprehending the same
subject matter. A majority of the members of the Committee shall constitute a
quorum for any meeting of the Committee, and the acts of a majority of the
members present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be the
acts of the Committee. Subject to the provisions of this Plan, the Committee may
from time to time adopt such rules for the administration of this Plan as it
deems appropriate. The decision of the Committee on any matter affecting this
Plan or the rights and obligations arising under this Plan or any option granted
hereunder, shall be final, conclusive and binding upon all persons, including
without limitation the Company, stockholders, employees and optionees. To the
full extent permitted by law, no member of the Committee shall be liable for any
action or determination taken or made in good faith with respect to this Plan or
any option granted hereunder.
Notwithstanding any contrary provisions of this Plan, the Committee shall
have no discretion with respect to the granting of options to any Outside
Director (as hereinafter defined) or to alter or amend any terms, conditions and
eligibility requirements of an option granted or to be granted to any Outside
Director under this Plan, it being understood that the granting and terms,
conditions and eligibility requirements of such options are governed solely by
the provisions set forth in this Plan pertaining thereto.
3. SHARES SUBJECT TO PLAN. The shares that may be made subject to options
granted under this Plan shall be authorized and unissued shares of common stock
(the "Common Shares") of the Company, $.01 par value, or Common Shares held in
treasury, and they shall not exceed 3,629,400 in the aggregate, except that, if
any option lapses or terminates for any reason before such option has
- ------------------------
* BOLD TEXT INDICATES AMENDMENT SUBMITTED FOR STOCKHOLDER APPROVAL; [brackets
indicate deletions]; also gives effect to a two-for-one stock split effected
in the form of a stock dividend distributed to stockholders on March 1, 1991,
a three-for-two stock split effected in the form of a stock dividend
distributed to stockholders on March 31, 1992 and all amendments to the Plan
through December 13, 1995.
A-1
<PAGE>
been completely exercised, the Common Shares covered by the unexercised portion
of such option may again be made subject to options granted under this Plan.
Appropriate adjustments in the number of shares and in the purchase price per
share may be made by the Committee in its sole discretion to give effect to
adjustments made in the number of outstanding Common Shares of the Company
through a merger, consolidation, recapitalization, reclassification,
combination, stock dividend, stock split or other relevant change, provided that
fractional shares shall be rounded to the nearest whole share.
4. ELIGIBLE PARTICIPANTS. Options may be granted under this Plan to any
key employee of the Company or any subsidiary thereof, including any such
employee who is also an officer or director of the Company or any subsidiary
thereof. Nonstatutory stock options, as defined in paragraph 5(a) hereof, also
shall be granted to directors of the Company who are not employees of the
Company or any subsidiary thereof (the "Outside Directors") in accordance with
paragraph 6 hereof and may also be granted to other individuals or entities who
are not "employees" but who provide services to the Company or a parent or
subsidiary thereof in the capacity of an advisor or consultant. Options granted
to Outside Directors shall have the terms and conditions specified in paragraph
6 and elsewhere in this Plan (other than paragraph 5) and options granted to
employees and other individuals or entities shall have the terms and conditions
specified in paragraph 5 and elsewhere in this Plan (other than paragraph 6).
References herein to "employment" and similar terms shall include the providing
of services in any such capacity or as a director.
5. TERMS AND CONDITIONS OF EMPLOYEE OPTIONS.
(a) Subject to the terms and conditions of this Plan (other than paragraph
6), the Committee may, from time to time prior to November 29, 2004, grant to
such eligible employees as the Committee may determine options to purchase such
number of Common Shares of the Company on such terms and conditions as the
Committee may determine; provided, however, that no employee may be granted
options with respect to more than 250,000 Common Shares during any calendar
year. In determining the employees to whom options shall be granted and the
number of Common Shares to be covered by each option, the Committee may take
into account the nature of the services rendered by the respective employees,
their present and potential contributions to the success of the Company, and
such other factors as the Committee in its sole discretion shall deem relevant.
The date and time of approval by the Committee of the granting of an option
shall be considered the date and the time of the grant of such option. The
Committee in its sole discretion may designate whether an option is to be
considered an "incentive stock option" (as that term is defined in Section 422
of the Internal Revenue Code of 1986, as amended, or any amendment thereto (the
"Code")) or a nonstatutory stock option (an option granted under this Plan that
is not intended to be an "incentive stock option"). The Committee may grant both
incentive stock options and nonstatutory stock options to the same individual.
However, if an incentive stock option and a nonstatutory stock option are
awarded simultaneously, such options shall be deemed to have been awarded in
separate grants, shall be clearly identified, and in no event shall the exercise
of one such option affect the right to exercise the other. To the extent that
the aggregate Fair Market Value (as defined in paragraph 5(c)) of Common Shares
with respect to which incentive stock options (determined without regard to this
sentence) are exercisable for the first time by any individual during any
calendar year (under all plans of the Company and its parent and subsidiary
corporations) exceeds $100,000, such options shall be treated as nonstatutory
stock options.
(b) The purchase price of each Common Share subject to an option granted
pursuant to this paragraph 5 shall be fixed by the Committee. For nonstatutory
stock options, such purchase price may
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<PAGE>
be set at not less that 50% of the Fair Market Value (as defined below) of a
Common Share on the date of grant. For incentive stock options, such purchase
price shall be no less than 100% of the Fair Market Value of a Common Share on
the date of grant, provided that if such incentive stock option is granted to an
employee who owns, or is deemed under Section 424(d) of the Code to own, at the
time such option is granted, stock of the Company (or of any parent or
subsidiary of the Company) possessing more than 10% of the total combined voting
power of all classes of stock therein (a "10% Stockholder"), such purchase price
shall be no less than 110% of the Fair Market Value of a Common Share on the
date of grant.
(c) For purposes of this Plan, the "Fair Market Value" of a Common Share at
a specified date shall, unless otherwise expressly provided in this Plan, mean
the closing sale price of a Common Share on the date immediately preceding such
date or, if no sale of such shares shall have occurred on that date, on the next
preceding day on which a sale of such shares occurred, on the Composite Tape for
New York Stock Exchange listed shares or, if such shares are not quoted on the
Composite Tape for New York Stock Exchange listed shares, on the principal
United States securities exchange registered under the Act, on which the shares
are listed, or, if such shares are not listed on any such exchange, on the
National Association of Securities Dealers, Inc. Automated Quotation
System/National Market System or any similar system then in use or, if such
shares are not included in the National Association of Securities Dealers, Inc.
Automated Quotation System/National Market System or any similar system then in
use, the mean between the closing "bid" and the closing "asked" quotation of
such a share on the date immediately preceding the date as of which such Fair
Market Value is being determined, or, if no closing bid or asked quotation is
made on that date, on the next preceding day on which a quotation is made, on
the National Association of Securities Dealers, Inc. Automated Quotation System
or any similar system then in use, provided that if the shares in question are
not quoted on any such system, Fair Market Value shall be what the Committee
determines in good faith to be 100% of the fair market value of such a share as
of the date in question. Notwithstanding anything stated in this paragraph, if
the applicable securities exchange or system has closed for the day by the time
the determination is being made, all references in this paragraph to the date
immediately preceding the date in question shall be deemed to be references to
the date in question.
(d) Each option agreement provided for in paragraph 14 hereof shall specify
when each option granted under this Plan shall become exercisable.
(e) Each option granted pursuant to this paragraph 5 and all rights to
purchase shares thereunder shall cease on the earliest of:
(i) ten years after the date such option is granted (or in the case of
an incentive stock option granted to a 10% Stockholder, five years after the
date such option is granted) or on such date prior thereto as may be fixed
by the Committee on or before the date such option is granted;
(ii) the expiration of the period after the termination of the
optionee's employment within which the option is exercisable as specified in
paragraph 8(b) or 8(c), whichever is applicable; or
(iii) the date, if any, fixed for cancellation pursuant to paragraph 9 of
this Plan.
In no event shall any option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
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<PAGE>
6. TERMS AND CONDITIONS OF OUTSIDE DIRECTOR OPTIONS.
(a) Subject to the terms and conditions of this Plan (other than paragraph
5), the Committee shall grant options to each Outside Director who is not on the
date such option would be granted the beneficial owner (as defined in Rule 13d-3
under the Act) of more than 5% of the outstanding Common Shares, on the terms
and conditions set forth in this paragraph 6. During the term of this Plan and
provided that sufficient Common Shares are available pursuant to paragraph 3:
(i) each person who is an Outside Director at the conclusion of each
Annual Meeting of Stockholders HELD PRIOR TO THE DATE OF THE 1996 ANNUAL
MEETING OF STOCKHOLDERS shall be granted a nonstatutory stock option on the
date of such Annual Meeting of Stockholders. The date of such Annual Meeting
of Stockholders also shall be the date of grant for options granted pursuant
to this subparagraph 6(a)(i). The number of Common Shares covered by each
such option shall be 15,000 (7,500 on or after the 1992 Annual Meeting of
Stockholders);
(ii) each person who is elected to be an Outside Director between Annual
Meetings of Stockholders AND PRIOR TO THE DATE OF THE 1996 ANNUAL MEETING OF
STOCKHOLDERS shall be granted a nonstatutory stock option. The date such
person is elected to be an Outside Director of the Company [(the "Date of
Election")] by the Board shall be the date of grant for such options granted
pursuant to this subparagraph 6(a)(ii). The number of Common Shares covered
by each such option shall be 15,000 (7,500 on or after the 1992 Annual
Meeting of Stockholders) multiplied by a fraction, the numerator of which
shall be 12 minus the number of whole 30-day months that have elapsed from
the date of the most recent Annual Meeting of Stockholders to the [Date of
Election of such] DATE SUCH PERSON IS ELECTED TO BE AN Outside Director, and
the denominator of which shall be 12;
(iii) EACH PERSON WHO IS ELECTED TO BE AN OUTSIDE DIRECTOR AT ANY TIME ON
OR AFTER THE DATE OF THE 1996 ANNUAL MEETING OF STOCKHOLDERS AND WHO WAS NOT
AT ANY TIME PREVIOUSLY A DIRECTOR OF THE COMPANY SHALL BE GRANTED A
NONSTATUTORY STOCK OPTION. THE DATE SUCH PERSON IS ELECTED TO BE AN OUTSIDE
DIRECTOR OF THE COMPANY SHALL BE THE DATE OF GRANT FOR SUCH OPTIONS GRANTED
PURSUANT TO THIS SUBPARAGRAPH 6(a)(iii). THE NUMBER OF COMMON SHARES COVERED
BY EACH SUCH OPTION SHALL BE 5,000;
(iv) EACH PERSON WHO IS AN OUTSIDE DIRECTOR AT THE CONCLUSION OF THE 1996
ANNUAL MEETING OF STOCKHOLDERS AND AT THE CONCLUSION OF EACH ANNUAL MEETING
OF STOCKHOLDERS THEREAFTER SHALL BE GRANTED A NONSTATUTORY STOCK OPTION ON
THE DATE OF SUCH ANNUAL MEETING OF STOCKHOLDERS. THE DATE OF SUCH ANNUAL
MEETING OF STOCKHOLDERS SHALL ALSO BE THE DATE OF GRANT FOR OPTIONS GRANTED
PURSUANT TO THIS SUBPARAGRAPH 6(a)(iv). THE NUMBER OF COMMON SHARES COVERED
BY EACH SUCH OPTION SHALL BE 1,500;
(v) EACH PERSON WHO IS ELECTED TO BE AN OUTSIDE DIRECTOR BETWEEN ANNUAL
MEETINGS OF STOCKHOLDERS AND AFTER THE DATE OF THE 1996 ANNUAL MEETING OF
STOCKHOLDERS SHALL BE GRANTED A NONSTATUTORY STOCK OPTION. THE DATE SUCH
PERSON IS ELECTED TO BE AN OUTSIDE DIRECTOR OF THE COMPANY BY THE BOARD
SHALL BE THE DATE OF GRANT FOR SUCH OPTIONS GRANTED PURSUANT TO THIS
SUBPARAGRAPH 6(a)(v). THE NUMBER OF COMMON SHARES COVERED BY EACH SUCH
OPTION SHALL BE 1,500 MULTIPLIED BY A FRACTION, THE NUMERATOR OF WHICH SHALL
BE 12 MINUS THE NUMBER OF WHOLE 30-DAY MONTHS THAT HAVE ELAPSED FROM THE
DATE OF THE MOST RECENT ANNUAL MEETING OF STOCKHOLDERS TO THE DATE SUCH
PERSON IS ELECTED TO BE AN OUTSIDE DIRECTOR, AND THE DENOMINATOR OF WHICH
SHALL BE 12;
(vi) EACH PERSON WHO IS AN OUTSIDE DIRECTOR AT THE CONCLUSION OF THE 1996
ANNUAL MEETING OF STOCKHOLDERS AND EACH ANNUAL MEETING OF STOCKHOLDERS
THEREAFTER MAY ELECT IN WRITING TO BE GRANTED A
A-4
<PAGE>
NONSTATUTORY STOCK OPTION ON THE DATE OF SUCH ANNUAL MEETING OF STOCKHOLDERS
IN LIEU OF ALL CASH COMPENSATION TO WHICH SUCH OUTSIDE DIRECTOR WOULD BE
ENTITLED FOR THE BOARD YEAR OF THE COMPANY COMMENCING WITH SUCH ANNUAL
MEETING OF STOCKHOLDERS. THE DATE OF SUCH ANNUAL MEETING OF STOCKHOLDERS
SHALL ALSO BE THE DATE OF GRANT FOR OPTIONS GRANTED PURSUANT TO THIS
SUBPARAGRAPH 6(a)(vi). THE NUMBER OF COMMON SHARES COVERED BY EACH SUCH
OPTION SHALL BE 6,000. ANY SUCH ELECTION BY AN OUTSIDE DIRECTOR SHALL BE
IRREVOCABLE AND MUST BE RECEIVED BY THE COMPANY AT LEAST SIX MONTHS PRIOR TO
THE DATE IT IS TO BECOME EFFECTIVE, OR SUCH SHORTER PERIOD PRIOR TO THE DATE
IT IS TO BECOME EFFECTIVE AS THE COMMITTEE MAY PERMIT; AND
(vii) EACH PERSON WHO IS ELECTED TO BE AN OUTSIDE DIRECTOR BETWEEN ANNUAL
MEETINGS OF STOCKHOLDERS AND AFTER THE DATE OF THE 1996 ANNUAL MEETING OF
STOCKHOLDERS MAY ELECT IN WRITING TO BE GRANTED A NONSTATUTORY STOCK OPTION
IN LIEU OF ALL CASH COMPENSATION TO WHICH SUCH OUTSIDE DIRECTOR WOULD
OTHERWISE BE ENTITLED FOR THE PERIOD COMMENCING WITH THE DATE SUCH PERSON IS
ELECTED TO BE AN OUTSIDE DIRECTOR OF THE COMPANY BY THE BOARD AND ENDING ON
THE DATE OF THE NEXT ANNUAL MEETING OF STOCKHOLDERS. THE DATE SUCH PERSON IS
ELECTED TO BE AN OUTSIDE DIRECTOR OF THE COMPANY BY THE BOARD SHALL BE THE
DATE OF GRANT FOR SUCH OPTIONS GRANTED PURSUANT TO THIS SUBPARAGRAPH
6(a)(vii). THE NUMBER OF COMMON SHARES COVERED BY EACH SUCH OPTION SHALL BE
6,000 MULTIPLIED BY A FRACTION, THE NUMERATOR OF WHICH SHALL BE 12 MINUS THE
NUMBER OF WHOLE 30-DAY MONTHS THAT HAVE ELAPSED FROM THE DATE OF THE MOST
RECENT ANNUAL MEETING OF STOCKHOLDERS TO THE DATE SUCH PERSON IS ELECTED TO
BE AN OUTSIDE DIRECTOR, AND THE DENOMINATOR OF WHICH SHALL BE 12. SUCH
ELECTION BY AN OUTSIDE DIRECTOR SHALL BE IRREVOCABLE AND MUST BE RECEIVED BY
THE COMPANY AT LEAST SIX MONTHS PRIOR TO THE DATE IT IS TO BECOME EFFECTIVE,
OR SUCH SHORTER PERIOD PRIOR TO THE DATE IT IS TO BECOME EFFECTIVE AS THE
COMMITTEE MAY PERMIT.
(b) The purchase price of each Common Share subject to an option granted to
an Outside Director pursuant to this paragraph 6 shall be the Fair Market Value
of a Common Share on the date of grant.
(c)(i) Subject to the provisions of paragraphs 6(e) and 6(f) hereof, the
options granted to Outside Directors pursuant to subparagraph 6(a)(i) shall
vest and become exercisable in accordance with the following schedule:
<TABLE>
<CAPTION>
ANNUAL MEETING CUMULATIVE PERCENTAGE
OF STOCKHOLDERS BECOMING EXERCISABLE
- ------------------------------------------------------------- ------------------------
<S> <C>
One Year After Grant......................................... 20%
Two Years After Grant........................................ 40%
Three Years After Grant...................................... 60%
Four Years After Grant....................................... 80%
Five Years After Grant....................................... 100%
</TABLE>
A-5
<PAGE>
(ii) Subject to the provisions of paragraph 6(e) hereof, the options
granted to Outside Directors pursuant to subparagraph 6(a)(ii) shall vest
and become exercisable in accordance with the following schedule:
<TABLE>
<CAPTION>
ANNIVERSARY OF THE CUMULATIVE PERCENTAGE
DATE OF GRANT BECOMING EXERCISABLE
- ------------------------------------------------------------- ------------------------
<S> <C>
One Year After Grant......................................... 20%
Two Years After Grant........................................ 40%
Three Years After Grant...................................... 60%
Four Years After Grant....................................... 80%
Five Years After Grant....................................... 100%
</TABLE>
(iii) SUBJECT TO THE PROVISIONS OF PARAGRAPHS 6(e) AND 6(f) HEREOF, (x)
OPTIONS GRANTED TO OUTSIDE DIRECTORS PURSUANT TO SUBPARAGRAPH 6(a)(iv) AND
(vi) AND (y) OPTIONS GRANTED TO OUTSIDE DIRECTORS PURSUANT TO SUBPARAGRAPH
6(a)(iii) IF THE DATE OF GRANT OF SUCH OPTIONS IS THE DATE OF AN ANNUAL
MEETING OF STOCKHOLDERS SHALL VEST AND BECOME EXERCISABLE IN ACCORDANCE WITH
THE FOLLOWING SCHEDULE:
<TABLE>
<CAPTION>
ANNUAL MEETING CUMULATIVE PERCENTAGE
OF STOCKHOLDERS BECOMING EXERCISABLE
- ------------------------------------------------------------- -------------------------
<S> <C>
ONE YEAR AFTER GRANT......................................... 50%
TWO YEARS AFTER GRANT........................................ 100%
</TABLE>
(iv) SUBJECT TO THE PROVISIONS OF PARAGRAPH 6(e) AND 6(f) HEREOF, (x) THE
OPTIONS GRANTED TO OUTSIDE DIRECTORS PURSUANT TO SUBPARAGRAPHS 6(a)(v) AND
(vii) AND (y) OPTIONS GRANTED TO OUTSIDE DIRECTORS PURSUANT TO SUBPARAGRAPH
6(a)(iii) IF THE DATE OF GRANT OF SUCH OPTIONS IS A DATE OTHER THAN THE DATE
OF AN ANNUAL MEETING OF STOCKHOLDERS SHALL VEST AND BECOME EXERCISABLE IN
ACCORDANCE WITH THE FOLLOWING SCHEDULE:
<TABLE>
<CAPTION>
ANNIVERSARY OF THE CUMULATIVE PERCENTAGE
DATE OF GRANT BECOMING EXERCISABLE
- ------------------------------------------------------------- -------------------------
<S> <C>
ONE YEAR AFTER GRANT......................................... 50%
TWO YEARS AFTER GRANT........................................ 100%
</TABLE>
(d) Notwithstanding the terms of paragraphs 6(a), 6(b) and 6(c) hereof,
options shall be granted to Willis K. Drake ("Drake") and to Richard E. Eichhorn
("Eichhorn"), on the effective date of the merger (the "Merger") of Digiboard,
Inc., a Minnesota corporation, with and into the Company, to purchase (i) 15,000
Common Shares at a purchase price of $.50 per share, in substitution for options
previously granted to Drake and Eichhorn on October 1, 1987 (the "1987
Options"), which 1987 Options shall vest and become exercisable in accordance
with the following schedule:
<TABLE>
<CAPTION>
CUMULATIVE PERCENTAGE
DATE BECOMING EXERCISABLE
- ------------------------------------------------------------- ------------------------
<S> <C>
Effective Date of this Plan.................................. 20%
October 1, 1989.............................................. 40%
October 1, 1990.............................................. 60%
October 1, 1991.............................................. 80%
October 1, 1992.............................................. 100%
</TABLE>
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<PAGE>
and (ii) 15,000 Common Shares at a purchase price of $.50 per share, in
substitution for options previously granted to Drake and Eichhorn on October 1,
1988 (the "1988 Options"), which 1988 Options shall vest and become exercisable
in accordance with the following schedule:
<TABLE>
<CAPTION>
CUMULATIVE PERCENTAGE
DATE BECOMING EXERCISABLE
- ------------------------------------------------------------- ------------------------
<S> <C>
October 1, 1989.............................................. 20%
October 1, 1990.............................................. 40%
October 1, 1991.............................................. 60%
October 1, 1992.............................................. 80%
October 1, 1993.............................................. 100%
</TABLE>
(e) Notwithstanding the vesting schedules set forth in paragraphs 6(c) and
6(d) hereof, an option held by an Outside Director shall vest and become
immediately exercisable upon the latest of (i) the date on which such Outside
Director attains 62 years of age, (ii) the date on which such Outside Director
has completed five years of Service (as hereinafter defined) and (iii) the first
anniversary of the date of grant of such option or, if applicable, the Annual
Meeting of Stockholders next succeeding the Annual Meeting at which such option
was granted. Any option granted to an Outside Director on or after the first
accelerated vesting date for such Outside Director shall automatically vest on
the Annual Meeting of Stockholders next succeeding the Annual Meeting at which
such option was granted. As used herein, "Service" shall mean service to the
Company or any subsidiary thereof in the capacity of any advisor, consultant,
employee, officer or director, and Service as a director from an Annual Meeting
of Stockholders to the next succeeding Annual Meeting shall constitute a year of
Service, notwithstanding that such period may actually be more or less than one
year.
(f) Each option granted to an Outside Director pursuant to this paragraph 6
and all rights to purchase shares thereunder shall terminate on the earliest of:
(i) ten years after the date such option is granted; provided, however,
that the 1987 Options shall terminate on September 30, 1997, and the 1988
Options shall terminate on September 30, 1998;
(ii) the expiration of the period specified in paragraph 8(b) or 8(c),
whichever is applicable, after an Outside Director ceases to be a director
of the Company; or
(iii) the date, if any, fixed for cancellation pursuant to paragraph 9 of
this Plan.
In no event shall such option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
7. MANNER OF EXERCISING OPTIONS. A person entitled to exercise an option
granted under this Plan may, subject to its terms and conditions and the terms
and conditions of this Plan, exercise it in whole at any time, or in part from
time to time, by delivery to the Company at its principal executive office, to
the attention of its President, of written notice of exercise, specifying the
number of shares with respect to which the option is being exercised,
accompanied by payment in full of the purchase price of the shares to be
purchased at the time. The purchase price of each share on the exercise of any
option shall be paid in full in cash (including check, bank draft or money
order) at the time of exercise or, at the discretion of the holder of the
option, by delivery to the Company of unencumbered Common Shares having an
aggregate Fair Market Value on the date of exercise equal to the purchase price,
or
A-7
<PAGE>
by a combination of cash and such unencumbered Common Shares. No shares shall be
issued until full payment therefor has been made, and the granting of an option
to an individual shall give such individual no rights as a stockholder except as
to shares issued to such individual.
8. TRANSFERABILITY AND TERMINATION OF OPTIONS.
(a) During the lifetime of an optionee, only such optionee or his or her
guardian or legal representative may exercise options granted under this Plan.
No option granted under this Plan shall be assignable or transferable by the
optionee otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code or Title
I of the Employee Retirement Income Security Act ("ERISA"), or the rules
thereunder.
(b) During the lifetime of an optionee, an option may be exercised only
while the optionee is an employee of the Company or of a parent or subsidiary
thereof, and only if such optionee has been continuously so employed since the
date the option was granted, except that:
(i) an option granted to an individual who is not an Outside Director
shall continue to be exercisable for three months after termination of such
individual's employment but only to the extent that the option was
exercisable immediately prior to such individual's termination of
employment, and an option granted to an individual who is an Outside
Director shall continue to be exercisable after such Outside Director ceases
to be a director of the Company but only to the extent that the option was
exercisable immediately prior to such Outside Director's ceasing to be a
director;
(ii) in the case of an employee who is disabled (within the meaning of
Section 22(e)(3) of the Code) while employed, such individual or his or her
legal representative may exercise the option within one year after
termination of such individual's employment; and
(iii) as to any individual whose termination occurs following a
declaration pursuant to paragraph 9 of this Plan, such individual may
exercise the option at any time permitted by such declaration.
(c) An option may be exercised after the death of the optionee by such
individual's legal representatives, heirs or legatees, but only within one year
after the death of such optionee.
(d) In the event of the disability (within the meaning of Section 22(e)(3)
of the Code) or death of an optionee, any option held by such individual or his
or her legal representative that was not previously exercisable shall become
immediately exercisable in full if the disabled or deceased individual shall
have been continuously employed by the Company or a parent or subsidiary thereof
between the date such option was granted and the date of such disability, or, in
the event of death, a date not more than three months prior to such death.
9. DISSOLUTION, LIQUIDATION, MERGER. In the event of (a) a proposed merger
or consolidation of the Company with or into any other corporation, regardless
of whether the Company is the surviving corporation, unless appropriate
provision shall have been made for the protection of the outstanding options
granted under this Plan by the substitution, in lieu of such options, of options
to purchase appropriate voting common stock (the "Survivor's Stock") of the
corporation surviving any such merger or consolidation or, if appropriate, the
parent corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's Stock
which has a Fair Market Value as of the effective date of such merger or
consolidation equal to the product of (i) the
A-8
<PAGE>
excess of (x) the Event Proceeds per Common Share (as hereinafter defined)
covered by the option as of such effective date, over (y) the option price per
Common Share, times (ii) the number of Common Shares covered by such option, or
(b) the proposed dissolution or liquidation of the Company (such merger,
consolidation, dissolution or liquidation being herein called an "Event"), the
Committee shall declare, at least ten days prior to the actual effective date of
an Event, and provide written notice to each optionee of the declaration, that
each outstanding option, whether or not then exercisable, shall be cancelled at
the time of, or immediately prior to the occurrence of, the Event (unless it
shall have been exercised prior to the occurrence of the Event) in exchange for
payment to each optionee, within ten days after the Event, of cash equal to the
amount (if any), for each Common Share covered by the cancelled option, by which
the Event Proceeds per Common Share (as hereinafter defined) exceeds the
exercise price per Common Share covered by such option. At the time of the
declaration provided for in the immediately preceding sentence, each option
shall immediately become exercisable in full and each optionee shall have the
right, during the period preceding the time of cancellation of the option, to
exercise his or her option as to all or any part of the Common Shares covered
thereby. Each outstanding option granted pursuant to this Plan that shall not
have been exercised prior to the Event shall be cancelled at the time of, or
immediately prior to, the Event, as provided in the declaration, and this Plan
shall terminate at the time of such cancellation, subject to the payment
obligations of the Company provided in this paragraph 9. For purposes of this
paragraph, "Event Proceeds per Common Share" shall mean the cash plus the fair
market value, as determined in good faith by the Committee, of the non-cash
consideration to be received per Common Share by the stockholders of the Company
upon the occurrence of the Event.
10. SUBSTITUTION OPTIONS. Options may be granted under this Plan from time
to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company or a subsidiary of
the Company, or whose employer is about to become a subsidiary of the Company,
as the result of a merger or consolidation of the Company or a subsidiary of the
Company with another corporation, the acquisition by the Company or a subsidiary
of the Company of all or substantially all the assets of another corporation or
the acquisition by the Company or a subsidiary of the Company of at least 50% of
the issued and outstanding stock of another corporation. The terms and
conditions of the substitute options so granted may vary from the terms and
conditions set forth in this Plan to such extent as the Board at the time of the
grant may deem appropriate to conform, in whole or in part, to the provisions of
the stock options in substitution for which they are granted, but with respect
to stock options which are incentive stock options, no such variation shall be
permitted which affects the status of any such substitute option as an incentive
stock option under Section 422A of the Code.
11. TAX WITHHOLDING. Delivery of Common Shares upon exercise of any
nonstatutory stock option granted under this Plan shall be subject to any
required withholding taxes. A person exercising such an option may, as a
condition precedent to receiving the Common Shares, be required to pay the
Company a cash amount equal to the amount of any required withholdings. In lieu
of all or any part of such a cash payment, the Committee may, but shall not be
required to, permit the individual to elect to cover all or any part of the
required withholdings, and to cover any additional withholdings up to the amount
needed to cover the individual's full FICA and federal, state and local income
tax liability with respect to income arising from the exercise of the option,
through a reduction of the number of Common Shares delivered to the person
exercising the option or through a subsequent return to the
A-9
<PAGE>
Company of shares delivered to the person exercising the option; provided,
however, that the Committee is required to permit an Outside Director to make
such an election. Except as set forth in paragraph 11(c) below, any such
election by an individual who is subject to the reporting requirements of
Section 16 of the Act (a "Section 16 Individual"), also is subject to the
following:
(a) Any such election by a Section 16 Individual may be made only during
certain specified time periods, as follows:
(i) the election may be made during the period beginning on the third
business day following the date of public release of the Company's quarterly
or annual financial statements and ending on the twelfth business day
following such date of public release; or
(ii) the election may be made at least six months prior to the date as
of which the amount of tax to be withheld is determined;
provided, however, an election by such a person pursuant to clause (i) or (ii)
may not be made within six months of the date of grant of the option being
exercised unless death or disability of the individual to whom the option was
granted occurs during said six-month period; and
(b) The Committee's approval of such an election by a Section 16 Individual,
if given, may be granted in advance, but is subject to revocation by the
Committee at any time; provided, however, that such an election by a Section 16
Individual who is an Outside Director is not subject to approval nor to
revocation by the Committee. Once such an election is made by a Section 16
Individual, he or she may not revoke it.
(c) Notwithstanding the foregoing, a Section 16 Individual who tenders
previously owned shares to the Company in payment of the purchase price of
shares in connection with an option exercise may also tender previously owned
shares to the Company in satisfaction of any tax withholding obligations in
connection with such option exercise without regard to the specified time
periods set forth in paragraph 11(a) above.
12. TERMINATION OF EMPLOYMENT. Neither the transfer of employment of an
individual to whom an option is granted between any combination of the Company,
a parent corporation or a subsidiary thereof, nor a leave of absence granted to
such individual and approved by the Committee, shall be deemed a termination of
employment for purposes of this Plan. The terms "parent" or "parent corporation"
and "subsidiary" as used in this Plan shall have the meaning ascribed to "parent
corporation" and "subsidiary corporation", respectively, in Sections 424(e) and
(f) of the Code.
13. OTHER TERMS AND CONDITIONS. The Committee shall have the power,
subject to the terms and conditions of paragraph 6 hereof and subject to the
other limitations contained herein, to fix any other terms and conditions for
the grant or exercise of any option under this Plan. Nothing contained in this
Plan, or in any option granted pursuant to this Plan, shall confer upon any
employee holding an option any right to continued employment by the Company or
any parent or subsidiary of the Company or limit in any way the right of the
Company or any such parent or subsidiary to terminate an employee's employment
at any time.
14. OPTION AGREEMENTS. All options granted under this Plan shall be
evidenced by a written agreement in such form or forms as the Committee may from
time to time determine, which agreement shall, among other things, designate
whether the options being granted thereunder are nonstatutory stock options or
incentive stock options under Section 422 of the Code.
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15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time amend,
suspend or discontinue this Plan; provided, however, that the Board shall not
amend paragraph 6 hereof more than once every six months, other than to comport
with changes in the Code, ERISA, or the rules thereunder; and provided, further,
that no amendment by the Board shall, without further approval of the
stockholders of the Company, if required in order for the Plan to continue to
satisfy the conditions of Rule 16b-3 promulgated under the Act, or any successor
statute or regulation comprehending the same subject matter or to meet the
requirements of the Code:
(a) change the class of employees eligible to receive options;
(b) except as provided in paragraph 3 hereof, increase the total number
of Common Shares of the Company which may be made subject to options granted
under this Plan;
(c) except as provided in paragraph 3 hereof, change the minimum
purchase price for the exercise of an option;
(d) increase the maximum period during which options may be exercised or
otherwise materially increase the benefits accruing to participants under
this Plan;
(e) extend the term of this Plan beyond November 29, 2004; or
(f) change the terms, conditions or eligibility requirements of an
option granted or, subject to the right of the Board to discontinue this
Plan, to be granted to each Outside Director under this Plan.
No amendment to this Plan shall, without the consent of the holder of the
option, alter or impair any options previously granted under this Plan.
16. EFFECTIVE DATE. This Plan shall be effective upon the Merger.
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EXHIBIT 10(d)
RESTATED AND AMENDED NOTE PURCHASE AGREEMENT
BETWEEN THE COMPANY AND
AETHERWORKS CORPORATION
DATED JUNE 19, 1996
<PAGE>
AETHERWORKS CORPORATION
RESTATED AND AMENDED
NOTE PURCHASE AGREEMENT
THIS RESTATED AND AMENDED AGREEMENT is made and entered into as of June
19, 1996, by and between AetherWorks Corporation, a Minnesota corporation
(the "Company"), and Digi International Inc., a Delaware corporation
("Digi"), sometimes referred to individually as a "Party" and collectively as
the "Parties."
R E C I T A L S
As of October 10, 1995, the Company and Digi executed a Note Purchase
Agreement (the "1995 Note Purchase Agreement"), pursuant to which Digi
purchased, and the Company issued, a convertible secured promissory note,
dated October 10, 1995, in the original principal amount of $3,353,235 (the
"1995 Convertible Note"). Digi also committed in the 1995 Note Purchase
Agreement to purchase an additional convertible secured promissory note in
the original principal amount of $1,433,290.
Digi has held two seats on the Company's Board of Directors (the "Board
of Directors" or the "Board") since October 10, 1995, and has participated in
the decisions of the Board, including the election of the fifth member of the
Board, the appointment of senior management of the Company, and Board-level
decisions regarding the development of the ARMs and Jeeves, and the decision
to acquire and develop V.Mach Technology (as hereinafter defined), which was
not contemplated at the time of execution of the 1995 Note Purchase Agreement.
Digi has expressed interest in purchasing, and the Company desires to
have Digi purchase, in part for the development and commercial exploitation
of V.Mach Technology, convertible promissory notes of the Company, in the
aggregate principal amount of $9,000,000, in addition to one for $1,433,290
originally to be issued pursuant to the 1995 Note Purchase Agreement and the
1995 Convertible Note previously issued pursuant to the 1995 Note Purchase
Agreement.
In light of the mutual commercial opportunity presented by the V.Mach
Technology, in recognition of the greater familiarity and closer relationship
of the Parties and in order to provide for the additional development
contemplated by the Parties, the Parties desire to amend and restate in its
entirety the 1995 Note Purchase Agreement, most particularly to eliminate
milestones set forth in the 1995 Note Purchase Agreement and the rights and
obligations of the Parties in connection with such milestones, and to
delineate the Parties' respective rights and obligations with respect to the
V.Mach Technology.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing premises and the
Parties' respective rights and obligations set forth in this Agreement, the
Company and Digi hereby agree as follows:
1. AMENDMENT TO 1995 NOTE PURCHASE AGREEMENT AND COROLLARY DOCUMENTS.
The 1995 Note Purchase Agreement shall be, and hereby is, amended and
restated in its entirety by this Agreement. The 1995 Convertible Note shall
be restated and amended in the form attached to this Agreement as Exhibit 1
upon execution of such form (and, as restated and amended, shall for purposes
of this Agreement hereinafter be referred to as the "Amended 1995 Note").
Each of the Security Agreement, Manufacturing Agreement and Shareholder
Voting Agreement issued pursuant to the 1995 Note Purchase Agreement shall
<PAGE>
be amended and restated in its entirety in the forms attached to this
Agreement as Exhibits 3, 4 and 5, respectively, upon execution of such forms
(and, as restated and amended in their entirety, shall, for purposes of this
Agreement, hereinafter be referred to as the "Security Agreement,"
"Manufacturing Agreement" and "Shareholder Voting Agreement," respectively).
Each of this Agreement, the Amended 1995 Note, the Notes to be issued under
this Agreement, the Security Agreement, the Manufacturing Agreement, the
Technology Transfer Agreement and the Shareholder Voting Agreement may be
referred to individually a "Transaction Document" and collectively, as the
"Transaction Documents". The Parties expressly intend that the
representations, warranties and agreements of the Principal Shareholder
(Jonathan A. Henrikssen Sachs, Ph.D.) set forth in the Note Purchase
Agreement dated October 9, 1995 shall expire upon execution of this
Agreement.
2. SALE AND PURCHASE OF CONVERTIBLE NOTES. Subject to the terms and
conditions hereof, the Company agrees to issue and to sell to Digi, and Digi
agrees to purchase from the Company, the convertible notes described in this
Section 2 (each a "Note" and together, the "Notes"). The term "Notes" as used
herein shall mean the (a) convertible notes issued pursuant to this
Agreement, (b) where such term is used to refer to an issued Note, the
Amended 1995 Note and (c) all notes of the Company issued in exchange or
substitution for the foregoing.
2.1 PRINCIPAL AMOUNT OF NOTES AND TIMING OF PURCHASES. The Notes
to be purchased by Digi subsequent to the date of this Agreement shall be in
the amounts set forth below and shall, subject to satisfaction of the
conditions set forth in Section 3 and elsewhere in this Agreement, be
purchased according to the following schedule:
(a) Upon the execution of this Agreement, a Note of the Company,
dated June 19, 1996, in the principal amount of $1,433,290; and
(b) Within ten business days of the Company's written request, in one
or more additional Notes as and when requested by the Company, whose
principal amounts shall be in lawful money of the United States and in
integral increments of $1,000,000, provided that the aggregate principal
amount of such Notes to the exclusion of the 1995 Convertible Note and the
Note in 2.1(a) above, shall not exceed $9,000,000.
2.2 TERMS OF EACH NOTE. Each Note shall be in substantially the
form set forth in Exhibit 2 to this Agreement (the "Form of Note"). The
Notes shall be convertible into shares of the Company's Common Stock, par
value $.01 per share (the "Common Stock"), in accordance with the terms set
forth in the Form of Note, provided that conversion of any of the Notes
issued pursuant to this Agreement shall not release Digi from its obligation
to purchase additional Notes pursuant to this Section 2. The shares of
Common Stock into which the Notes are convertible and all shares of Common
Stock of the Company issued in exchange or substitution therefor are
hereinafter sometimes referred to as the "Conversion Stock." Each Note shall
be secured by a lien on those assets identified in, and in accordance with
the terms of the Security Agreement. Each Note shall be due and payable on
December 31, 1998. Interest on each Note shall accrue at the rate set forth
in the Form of Note and shall be due and payable on the earlier of December
31, 1998 or from the proceeds of the Company's Initial Public Offering (as
defined below) as provided in the Form of Note. AetherWorks shall have the
option, upon written notice sixty (60) days prior to such date as interest
becomes due and payable, to convert interest accrued on the Notes into either
(a) Common Stock of the Company at the same rate and upon the same terms as
the principal amount of the Notes issued on a Subsequent Closing as that term
is defined in Section 3 or issued according to Section 2.1(b), or (b)
principal evidenced by a new note bearing interest at the same rate, with
principal and interest payable on mutually acceptable terms.
For all purposes under this Agreement, the term "Initial Public
Offering" shall mean the
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closing of the first public offering of the Company of shares of Common Stock
of the Company registered under the Securities Act in which (1) the aggregate
public offering price of the securities sold for cash by the Company in the
offering is at least $20,000,000, and (2) the offering is underwritten on a
firm commitment basis by an underwriter, or a group of underwriters presented
by an underwriter or underwriters, which is a member of the New York Stock
Exchange. For this purpose, the term "closing" shall mean the delivery by
the Company to the underwriters of certificates representing the shares of
Common Stock offered to the public against delivery to the Company by the
underwriters of payment therefor, and the term "firm commitment basis" with
respect to the underwriting of such public offering shall mean a commitment
pursuant to a written underwriting agreement under which the nature of the
underwriters' commitment is such that all securities will be purchased by
such underwriters if any securities are purchased by such underwriters.
3. CLOSING. The closing of the sale to, and purchase by Digi, of the
Notes to be purchased pursuant to Section 2.1(a) of this Agreement (the
"Initial Closing") shall occur at the offices of Digi International at 1:00
p.m. on June 19, 1996, or on such other day or at such other time or place as
Digi and the Company shall agree upon (the "Initial Closing Date"). The
closing of the sale of each Note to be purchased pursuant to the provisions
of Section 2.1(b) subsequently by Digi (each a "Subsequent Closing") shall
occur within ten business days of the Company's request therefor at such time
and place as Digi and the Company shall agree upon (each a "Subsequent
Closing Date"). The term "Closing" as used herein shall mean, as applicable,
the Initial Closing or any Subsequent Closing. The term "Closing Date" as
used herein shall mean, as applicable, the Initial Closing Date or any
Subsequent Closing Date. At the Initial Closing, the Company will deliver to
Digi the Note to be purchased at such closing in the original principal
amount of $1,433,290, dated June 19, 1996, and Digi shall deliver Digi's
certified or bank cashier's check drawn on Norwest Bank Minnesota, National
Association, in the principal amount of $1,433,290. At each Subsequent
Closing, the Company will deliver to Digi the Note to be purchased by Digi at
such Closing against delivery to the Company of Digi's certified or bank
cashier's check drawn on Norwest Bank Minnesota, National Association, in the
principal amount of such Note, in payment of the total purchase price of such
Note.
4. CONDITIONS TO THE PURCHASE OF EACH NOTE. The obligation to
purchase and pay for each Note which Digi has agreed to purchase on the
Initial Closing Date is subject to the fulfillment prior to or on such
Initial Closing Date of the conditions set forth in Section 4.1 through 4.11,
inclusive. The obligation to purchase and pay for each Note which Digi has
agreed to purchase on a Subsequent Closing Date is subject to the fulfillment
prior to or on such Subsequent Closing Date of the conditions set forth in
Sections 4.1 through 4.4, inclusive, and Sections 4.6 and 4.11.
4.1 NO ERRORS, ETC. The representations and warranties of Section
6 of this Agreement shall be true in all material respects as of each Closing
Date.
4.2 COMPLIANCE WITH AGREEMENT. The Company shall have performed
and complied with all material agreements or conditions required by this
Agreement to be performed and complied with by it prior to or as of each
Closing Date, the nonperformance or noncompliance with which would have a
material adverse effect on the operation of the Company's business.
4.3 NO EVENT OF DEFAULT. There shall exist at the time of each
Closing, no condition or event which would constitute an Event of Default of
the Company (as defined in Section 11) or which, after notice or lapse of
time or both, would constitute an Event of Default of the Company.
4.4 CERTIFICATE OF OFFICERS. The Company shall have delivered to
Digi a certificate, dated the Initial Closing Date or the Subsequent Closing
Date, as the case may be, executed by the Chief Executive Officer and the
senior financial officer of the Company and certifying to the satisfaction of
the
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<PAGE>
conditions specified in Sections 4.1, 4.2 and 4.3 hereof.
4.5 OPINION OF COUNSEL. The Company shall have delivered to Digi
an opinion or opinions of Briggs and Morgan, P.A., counsel for the Company in
form acceptable to counsel for Digi, dated June 20, 1996.
4.6 QUALIFICATION UNDER STATE SECURITIES LAWS. All registrations,
qualifications, permits and approvals required under applicable state
securities laws for the lawful execution and delivery of this Agreement and
the offer, sale, issuance and delivery of the Notes and the offer of the
Conversion Stock shall have been obtained.
4.7 SECURITY AGREEMENT. Digi and the Company shall have executed
the Security Agreement covering all of the Company's inventory, equipment,
accounts arising from licenses and other transfers of V.Mach Wireline
Technology (as defined in the Technology Transfer Agreement), and general
intangibles arising from such technology, in substantially the form of
Exhibit 3 hereto.
4.8 MANUFACTURING AGREEMENT. Digi and the Company shall have
executed the Manufacturing Agreement, in substantially the form of Exhibit 4
hereto.
4.9 SHAREHOLDER VOTING AGREEMENT. Digi, and each of William H.
Costigan, Robert C. Lind, Ph.D., Jonathan A. Henrikssen Sachs, Ph.D., each a
shareholder of the Company, shall have entered into the Shareholder Voting
Agreement in substantially the form of Exhibit 5 hereto.
4.10 V.MACH TECHNOLOGY TRANSFER AGREEMENT. Digi and the Company
shall have entered into a Technology Transfer Agreement (the "Technology
Transfer Agreement") governing the technology known to the Parties as V.Mach,
which agreement shall be in substantially the form of Exhibit 6 hereto.
4.11 BUSINESS PLAN. Prior to the Initial Closing Date, management
of the Company shall have caused to be prepared product development schedules
for each of the Company's Arm, Jeeves, and V.Mach products and services.
Prior to the next Subsequent Closing Date, management of the Company shall
have caused to be prepared and the Company's Board of Directors shall have
approved, the business plan contemplated by Section 7.4 of this Agreement.
5. REPRESENTATIONS AND WARRANTIES BY COMPANY. Except as
disclosed in the disclosure schedule attached as Schedule A (the "Disclosure
Schedule"), and subject to the provisions of Section 13 hereof, the Company
represents and warrants to Digi that:
5.1 ORGANIZATION, STANDING, ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Minnesota, and has the requisite corporate power and authority to own its
properties and to carry on its business in all material respects as it is now
being conducted. The Company has the requisite corporate power and authority
to issue the Notes and the Conversion Stock, and to otherwise perform its
obligations under this Agreement and the Notes. The copies of the Articles
of Incorporation and Bylaws of the Company delivered to Digi or their agents
prior to the execution of this Agreement are true and complete copies of the
duly and legally adopted Articles of Incorporation and Bylaws of the Company
in effect as of the date of this Agreement. As of the date of this
Agreement, the Company does not have any direct or indirect equity interest
in any other firm, corporation, partnership, joint venture association or
other business organization.
5.2 QUALIFICATION. To the best of its knowledge, the Company is
duly qualified or licensed as a foreign corporation in good standing in each
jurisdiction wherein the nature of its activities or
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<PAGE>
of its properties owned or leased makes such qualification or licensing
necessary and failure to be so qualified or licensed would have a material
adverse impact on its business.
5.3 FINANCIAL STATEMENTS. Attached hereto as Schedule B is an
unaudited balance sheet dated April 30, 1996 (the "Balance Sheet Date"),
together with the related unaudited statements of operations, shareholders'
equity and cash flow for the fiscal period then ended (such financial
statements hereinafter referred to as the "Financial Statements"). Such
Financial Statements (i) are in accordance with the books and records of the
Company, (ii) present fairly the financial condition of the Company at the
Balance Sheet Date and the results of its operations for the period therein
specified, and (iii) have, in all material respects, been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with prior accounting periods; provided, however, that the
unaudited financial statements omit the footnotes required under generally
accepted accounting principles, including the description of business,
summary of accounting policies, notes payable, income taxes, employment
agreements, stock options and warrants, proposed issuance of convertible
notes, and other necessary disclosures arising from this Agreement and the
Notes, and do not reflect the leases, the payments on which might be
capitalized under generally accepted accounting principles. Specifically, but
not by way of limitation, to the Company's best knowledge and belief, the
unaudited financial statements disclose all of the debts, liabilities and
obligations of any nature (whether absolute or accrued) of the Company at the
Balance Sheet Date which, individually or in the aggregate, are material and
which in accordance with generally accepted accounting principles would be
required to be disclosed in such unaudited financial statements, and the
omission of which would, in the aggregate, have a material adverse impact on
the Company. The unaudited balance sheet includes appropriate reserves for
all taxes incurred through such Balance Sheet date.
5.4 TAX RETURNS AND AUDITS. To the best of the Company's
knowledge, all required federal, state and local tax returns or appropriate
extension requests of the Company have been filed, and all federal, state and
local taxes required to be paid with respect to such returns have been paid
or due provision for the payment thereof has been made. To the best of the
Company's knowledge, the Company is not delinquent in the payment of any such
tax or in the payment of any assessment or governmental charge. The Company
has not received notice of any tax deficiency proposed or assessed against
it, and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax. None of the Company's tax returns has
been audited by governmental authorities in a manner to bring such audits to
the Company's attention. To the best of the Company's knowledge, the Company
does not have any tax liabilities except those reflected in the Financial
Statements hereto and those incurred in the ordinary course of business since
the Balance Sheet Date.
5.5 CHANGES, DIVIDENDS, ETC. Except for the transactions
contemplated by this Agreement or transactions disclosed to the Company's
Board of Directors prior to the date of this Agreement, since the Balance
Sheet Date, the Company has not: (a) incurred any debts, obligations or
liabilities, absolute, accrued or contingent, except current liabilities
incurred in the ordinary course of business, which (individually or in the
aggregate) will not materially and adversely affect the business, properties
or prospects of the Company; (b) paid any obligation or liability other than,
or discharged or satisfied any liens or encumbrances other than those
securing current liabilities, in each case in the ordinary course of
business; (c) mortgaged, pledged or subjected to lien, charge, security
interest or other encumbrance any of its assets, tangible or intangible,
except in the ordinary course of business; (d) sold, transferred or leased
any of its assets except in the ordinary course of business; (e) canceled or
compromised any debt or claim, or waived or released any right of material
value; (f) suffered any physical damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the properties,
business or prospects of the Company; (g) entered into any transaction other
than in the ordinary course of business; (h) encountered any labor
difficulties or labor union organizing activities; (i) increased the
compensation payable, or to become payable, to any of its directors or
employees, or made
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<PAGE>
any bonus payment or similar arrangement with any directors or employees or
increased the scope or nature of any fringe benefits provided for its
employees or directors; or (j) agreed to do any of the foregoing other than
pursuant hereto. Except as disclosed to the Company's Board of Directors
there has been no material adverse change in the financial condition,
operations, results of operations or business of the Company since the
Balance Sheet Date. For all purposes under this Agreement, "disclosed to the
Company's Board of Directors" shall mean discussed in a duly convened Board
meeting or reflected in written actions of the Board in lieu thereof.
5.6 TITLE TO PROPERTIES AND ENCUMBRANCES. To the best of its
knowledge and belief, the Company has good and marketable title to all its
owned properties and assets, including without limitation the properties and
assets reflected in the Financial Statements and the properties and assets
used in the conduct of its business, except for property leased by or
disposed of in the ordinary course of business since the Balance Sheet Date,
which properties and assets are not subject to any mortgage, pledge, lease,
lien, charge, security interest, encumbrance or restriction, except (a) those
incurred in the ordinary course of the Company's business, (b) which are
shown and described in the Financial Statements or the notes thereto, or (c)
Permitted Liens (as hereinafter defined). The offices and equipment owned
and leased by the Company have been kept in good condition and repair in the
ordinary course of business, and the Company has not been threatened with any
action or proceeding under any building or zoning ordinance, law or
regulation. For the purposes of this Agreement, "Permitted Liens" shall mean
(a) liens for taxes and assessments or governmental charges or levies not at
the time due or in respect of which the validity thereof shall currently be
contested in good faith by appropriate proceedings; (b) liens in respect of
pledges or deposits under worker's compensation laws or similar legislation,
carriers', warehousepersons', mechanics', laborers' and materialpersons',
landlords' and statutory and similar liens, if the obligations secured by
such liens are not then delinquent or are being contested in good faith; (c)
liens and encumbrances incidental to the conduct of the business of the
Company which were not incurred in connection with the borrowing of money or
the obtaining of advances or credits and which do not in the aggregate
materially detract from the value of its property or materially impair the
use thereof in the operation of its business; and (d) Permitted Encumbrances
(as defined in the Security Agreement).
5.7 LITIGATION; GOVERNMENTAL PROCEEDINGS. There are no legal
actions, suits, arbitration or other legal, administrative or governmental
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company, its properties, assets or business, and
except as previously disclosed to Digi, the Company is not aware of any facts
which are likely to result in or form the basis for any such action, suit or
other proceeding. The Company is not in default with respect to any
judgment, order or decree of any court or any governmental agency or
instrumentality. The Company has not been threatened with any action or
proceeding under any business or zoning ordinance, law or regulation.
5.8 COMPLIANCE WITH APPLICABLE LAWS AND OTHER INSTRUMENTS. To the
best of the Company's knowledge: The business and operations of the Company
have been and are being conducted in accordance with all applicable laws,
rules and regulations of all governmental authorities; neither the execution
nor delivery of, nor the performance of or compliance with the Transaction
Documents nor the consummation of the transactions contemplated hereby or
thereby will conflict with, or, with or without the giving of notice or
passage of time, result in any breach of, or constitute a default under, or
result in the imposition of any lien or encumbrance upon any asset or
property of the Company pursuant to, any applicable law, administrative
regulation or judgment, order or decree of any court or governmental body,
any agreement or other instrument to which the Company is a party or by which
it or any of its properties, assets or rights is bound or affected, and will
not violate the Articles of Incorporation or Bylaws of the Company; the
Company is not in violation of its Articles of Incorporation or its Bylaws
nor in violation of, or in default under, any lien, indenture, mortgage,
lease, agreement, instrument, commitment or arrangement in any material
respect other than as otherwise disclosed herein.
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5.9 CONVERSION STOCK. The Conversion Stock has been reserved for
issuance, and when issued upon conversion will be duly authorized, validly
issued and outstanding, fully paid, nonassessable and free and clear of all
pledges, liens, encumbrances and restrictions. The certificates representing
the Conversion Stock to be delivered upon the conversion of the Notes will be
genuine, and the Company has no knowledge of any fact which would impair the
validity thereof.
5.10 SECURITIES LAWS. Based in part upon the representations and
warranties contained in Section 6 hereof and the advice of the Company's
counsel, no consent, authorization, approval, permit or order of or filing
with any governmental or regulatory authority is required under current laws
and regulations in connection with the execution and delivery of the
Transaction Documents or the offer, issuance, sale or delivery of the Notes
or the offer of the Conversion Stock other than the qualification thereof, if
required, under applicable state securities laws, which qualification has
been or will be effected as a condition of these sales. The Company has not,
directly or through an agent, offered the Notes or the Conversion Stock, or
any similar securities for sale to, or solicited any offers to acquire such
securities from, persons other than Digi. Based on the advice of the
Company's counsel, under the circumstances contemplated hereby, the offer,
issuance, sale and delivery of the Notes and the offer of the Conversion
Stock will not under current laws and regulations require compliance with the
prospectus delivery or registration requirements of the Securities Act.
5.11 PATENTS AND OTHER INTANGIBLE RIGHTS. To the best of the
Company's knowledge, the Company (a) owns or has the right to use, free and
clear of all material liens, claims and restrictions, except in favor of
Digi, all patents, trademarks, service marks, trade names, copyrights,
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to be conducted, (b) is not obligated
or under any liability requiring but not having received the approval of the
Company's Board of Directors to make any payments of a material nature by way
of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any patent, trademark, trade name, copyright or other intangible
asset, with respect to the use thereof or in connection with the current
conduct of its business or otherwise, (c) owns or has sufficient rights to
use all trade secrets, including know-how, inventions, designs, processes,
computer programs and technical data necessary to the development, operation
and sale of all products and services sold or proposed to be sold by it and
(d) the Company is not, to the best of its knowledge, nor has it received
notice with respect to, infringing upon or otherwise acting adversely to any
known right or claimed right of any person under or with respect to any
patents, trademarks, service marks, trade names, copyrights, licenses or
rights with respect to the foregoing.
5.12 CAPITAL STOCK. The authorized capital stock of the Company
consists of 10,000,000 common shares, of which 1,126,700 shares are issued
and outstanding; all of these shares were duly authorized, validly issued and
are fully paid and nonassessable. In addition, there are outstanding
warrants to purchase 39,166 common shares, additional options and warrants
may be issued to purchase up to 10,000 common shares pursuant to a Private
Placement Memorandum previously authorized by the Company's Board of
Directors, and options have been and will be granted to one of the members of
the Company's Board of Directors. Other than the foregoing and the Amended
1995 Note, there are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, or other securities which are at any time
directly or indirectly convertible or exchangeable for shares of common stock
of the Company (collectively, "Convertible Securities") or other agreements
or arrangements of any character or nature whatever, except as otherwise
disclosed in the Disclosure Schedule or as contemplated by this Agreement,
under which the Company is or may be obligated to issue capital stock or
other securities of any kind representing an ownership interest or contingent
ownership interest in the Company. Except for the foregoing, neither the
offer nor the issuance or sale of the Notes or the Conversion Stock
constitutes an event, under any anti-dilution provisions of any securities
issued or issuable by the Company or any agreements with respect to the
issuance of securities by the Company, which will either increase the
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number of shares issuable pursuant to such provisions or decrease the
consideration per share to be received by the Company pursuant to such
provisions. No holder of any security of the Company is entitled to any
preemptive or similar rights to purchase securities from the Company except
as otherwise contemplated by this Agreement, provided, however, that nothing
in this Section 5.12 shall affect, alter or diminish any right granted to
Digi in this Agreement. To the best of the Company's knowledge, all
outstanding securities of the Company have been issued in full compliance
with an exemption or exemptions from the registration and prospectus delivery
requirements of the Securities Act and from the registration and
qualification requirements of all applicable state securities laws.
5.13 OUTSTANDING DEBT. The Company has no indebtedness for
borrowed money except as otherwise set forth in Schedule B. Except as
otherwise disclosed in the Disclosure Schedules, the Company is not in
default in the payment of the principal of or interest or premium on any such
indebtedness for borrowed money, and no event has occurred or is continuing
under the provisions of any instrument, document or agreement evidencing or
relating to any such indebtedness for borrowed money which with the lapse of
time or the giving of notice, or both, would constitute an event of default
thereunder. As used herein, the phrase "indebtedness for borrowed money"
shall include only indebtedness of the Company incurred as the result of a
direct borrowing of money and shall not include any other indebtedness,
including indebtedness with respect to trade accounts.
5.14 MATERIAL CONTRACTS. The Company has disclosed to its Board of
Directors prior to the date of this Agreement each material contract, lease,
commitment or other arrangements required to be disclosed to its Board of
Directors to which it is a party or by which it is otherwise bound. Except
as previously disclosed to its Board of Directors or in the Disclosure
Schedules, the Company has in all material respects substantially performed
all obligations required to be performed by it to date under such agreements.
All of the foregoing agreements are in effect and enforceable according to
their respective terms (except as the enforceability thereof may be limited
by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the enforcement of creditors' rights generally, and except for
judicial limitations on the enforcement of the remedy of specific performance
and other equitable remedies), and there is not under any of such agreements
any existing material default or event of default or event which, with notice
or lapse of time or both, would constitute an event of default thereunder.
All parties having material contractual arrangements with the Company are in
substantial compliance therewith and none are in material default in any
respect thereunder.
5.15 CORPORATE ACTS AND PROCEEDINGS. This Agreement has been duly
authorized by all necessary corporate action on behalf of the Company, and
has been duly executed and delivered by authorized officers of the Company.
All corporate action necessary to the authorization, creation, issuance and
delivery of the Notes, the Conversion Stock and the Security Agreement has
been taken on the part of the Company, or will be taken by the Company on or
prior to the Closing Date. This Agreement is, and each of the Notes when
issued pursuant to the terms of this Agreement will be, and the Security
Agreement and the Manufacturing Agreement when executed and delivered
pursuant to the terms of this Agreement will be, a valid and binding
agreement of the Company enforceable in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or other similar laws affecting the enforcement of
creditors' rights generally, and except for judicial limitations on the
enforcement of the remedy of specific enforcement and other equitable
remedies.
5.16 ACCOUNTS RECEIVABLE. To the extent that they exceed the
reserves for doubtful accounts set forth in the Financial Statements, the
accounts receivable of the Company which are reflected in the Financial
Statements and all of its accounts receivable which have arisen since the
Balance Sheet Date (except such accounts receivable as have been collected
since the Balance Sheet Date) are valid and enforceable claims, and the goods
and services sold and delivered which gave rise to such accounts were sold
and delivered in conformity with the applicable purchase orders, agreements
and specifications. Such
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accounts receivable are subject to no valid defense or offsets except routine
customer complaints or warranty demands of an immaterial nature. The reserve
for doubtful accounts that is included in the Financial Statements is
adequate.
5.17 INVENTORIES. The inventories of the Company which are
reflected in the Financial Statements and all inventory items which have been
acquired since the Balance Sheet Date consist of raw materials, supplies,
work-in-process and finished goods of such quality and in such quantities as
are currently useable or saleable in the ordinary course of its business.
5.18 INSURANCE COVERAGE. There are in full force policies of
insurance issued by insurers of recognized responsibility insuring the
Company, its properties and business against such losses and risks, and in
such amounts, as in the Company's best judgment, after advice from its
insurance broker, are acceptable for the nature and extent of its business
and the Company's resources.
5.19 NO BROKERS OR FINDERS. Other than the International Business
Group, which is owed $130,299.09 pursuant to the agreement with the Company
dated 24 July 1995, the fees and reimbursable expenses of which shall be the
sole obligation of the Company, no person, firm or corporation has or will
have, as a result of any act or omission of the Company, any right, interest
or valid claim against or upon the Company or Digi for any commission, fee or
other compensation as a finder or broker, or in any similar capacity, in
connection with the transactions contemplated by this Agreement.
The Company will indemnify and hold Digi harmless against any and
all liability with respect to any such commission, fee or other compensation
which may be payable or determined to be payable as a result of the actions
of the Company in connection with the transactions contemplated by this
Agreement.
5.20 LICENSES. To the best of the Company's knowledge, the Company
possesses from the appropriate agency, commission, board and government body
and authority, whether state, local or federal, all licenses, permits,
authorizations, approvals, franchises and rights which (a) are necessary for
it to engage in the business currently conducted by it, and (b) if not
possessed by the Company, would have an adverse impact on the Company's
business. The Company has no knowledge that would lead it to believe that it
will not be able to obtain all licenses, permits, authorizations, approvals,
franchises and rights that may be required for any business the Company
proposes to conduct.
5.21 REGISTRATION RIGHTS. Other than under this Agreement, the
Company has not agreed to register any of its authorized or outstanding
securities under the Securities Act.
5.22 EMPLOYEE PLANS. Each plan in which any of the Company's
employees participate that is subject to any provisions of the employee
Retirement Income Security act of 1974 and the regulations adopted pursuant
thereto ("ERISA") is operated in accordance with applicable law, including
ERISA and the Internal Revenue Code and regulations promulgated thereunder
(the "Code"), and each such plan intended to be tax qualified is so
qualified. Each plan which is a "group health plan" as defined in the Code
has not failed to comply in any material respect with the continuation
coverage requirements imposed by the Code.
5.23 ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's
knowledge: The Company is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and
no material expenditures are or will be required in order to comply with any
such existing statute, law or regulation; the operations of the Company do
not involve any hazardous substances or materials including, but not limited
to, hazardous substances or materials under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund
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Amendments and Reauthorization Act, the Resource Conservation and Recovery
Act, the Minnesota Environmental Response and Liability Act, or any other
federal, state or local statute, regulation, code or ordinance.
5.24 EMPLOYEES. To the best of the Company's knowledge: No
officer of the Company or employee of the Company whose annual compensation
is in excess of $20,000 has any plans to terminate his or her employment with
the Company; the Company has complied in all material respects with all laws
relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and payment of Social
Security and other taxes, and the Company has not encountered any material
labor difficulties; the Company does not have any worker's compensation
liabilities, except those reflected in the Financial Statements.
5.25 ABSENCE OF RESTRICTIVE AGREEMENTS. To the best of the
Company's knowledge: No employee of the Company is subject to any secrecy or
non-competition agreement or any agreement or restriction of any kind that
would impede in any way the ability of such employee to carry out fully all
activities of such employee in furtherance of the business of the Company; no
employer or former employer of any employee of the Company has any claim of
any kind whatsoever in respect of any of the rights described in Section 5.10
hereof.
5.26 DISCLOSURE. The Company has not knowingly withheld from Digi
any material facts relating to the assets, business, operations, financial
condition or prospects of the Company. No representation or warranty in this
Agreement or in any certificate, schedule, written statement or other
document furnished to Digi pursuant hereto or in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact or omits to state any material fact required to be stated herein or
therein or necessary to make the statements herein or therein not misleading.
6. REPRESENTATIONS AND WARRANTIES OF DIGI. Digi represents and
warrants that:
6.1 INVESTMENT INTENT. The Notes being acquired and to be
acquired by Digi hereunder are being purchased or will be purchased, and the
Conversion Stock acquired by Digi upon conversion of such Notes will be
acquired, for Digi's own account and not with the view to, or for resale in
connection with, any distribution or public offering thereof within the
meaning of the Securities Act. Digi understands that the Notes and the
Conversion Stock have not been registered under the Securities Act or any
applicable state laws by reason of their issuance or contemplated issuance in
a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act and such laws, and that the reliance of
the Company upon this exemption is predicated in part upon this
representation and warranty. Digi further understands that the Notes and
Conversion Stock may not be transferred or resold without (a) registration
under the Securities Act and any applicable state securities laws, or (b) an
exemption from the requirements of the Securities Act and applicable state
securities laws.
Digi understands that an exemption from such registration is not
presently available pursuant to Rule 144 promulgated under the Securities Act
by the Securities and Exchange Commission (the "Commission") and that in any
event Digi may not sell any securities pursuant to Rule 144 prior to the
expiration of a two-year period after Digi has acquired the securities. Digi
understands that any sales pursuant to Rule 144 may only be made in full
compliance with the provisions of Rule 144.
6.2 LOCATION OF PRINCIPAL OFFICE AND QUALIFICATION AS ACCREDITED
INVESTOR. Digi's principal office is located in Minnetonka, Minnesota. Digi
qualifies as an accredited investor within the meaning of Rule 501 under the
Securities Act. Digi has such knowledge and experience in financial and
business matters that Digi is capable of evaluating the merits and risks of
the investment to be made hereunder by Digi. Digi has and has had access to
all of the Company's material books and records and
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access to the Company's executive officers has been provided to Digi or to
Digi's agents.
6.3 ACTS AND PROCEEDINGS. The Transaction Documents have been
duly authorized by all necessary action on the part of Digi, have been duly
executed and delivered by Digi, and are valid and binding agreements upon the
part of Digi.
6.4 NO BROKERS OR FINDERS. No person, firm or corporation has or
will have, as a result of any act or omission by Digi, any right, interest or
valid claim against the Company for any commission, fee or other compensation
as a finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this Agreement. Digi will indemnify and hold
the Company harmless against any and all liability with respect to any such
commission, fee or other compensation which may be payable or determined to
be payable as a result of the actions of Digi in connection with the
transactions contemplated by this Agreement.
7. AFFIRMATIVE COVENANTS. Subject to the provisions of Section 13
hereof, the Company covenants and agrees that:
7.1 CORPORATE EXISTENCE. The Company will maintain its corporate
existence in good standing and comply with all applicable laws and
regulations of the United States or of any state or states thereof or of any
political subdivision thereof and of any governmental authority where failure
to so comply would have a material adverse impact on the Company or its
business or operations.
7.2 BOOKS OF ACCOUNT AND RESERVES. The Company will keep books of
record and account in which full, true and correct entries are made of all of
its and their respective dealings, business and affairs, in accordance with
generally accepted accounting principles. The Company will employ certified
public accountants selected by the Board of Directors of the Company who are
"independent" within the meaning of the accounting regulations of the
Securities and Exchange Commission ("Commission") and who are one of the
so-called "Big Six" accounting firms, and have annual audits made by such
independent public accountants in the course of which such accountants shall
make such examinations, in accordance with generally accepted auditing
standards, as will enable them to give such reports or opinions with respect
to the financial statements of the Company as will satisfy the requirements
of the Commission in effect at such time with respect to certificates and
opinions of accountants.
7.3 FURNISHING OF FINANCIAL STATEMENTS AND INFORMATION. The
Company will deliver to Digi:
(a) as soon as practicable, but in any event within 30 days after the
close of each month, unaudited consolidated balance sheets of the Company
as of the end of such month, together with the related consolidated
statements of operations and cash flow for such month, all in reasonable
detail and certified by the principal accounting officer of the Company;
and
(b) as soon as practicable, but in any event within 90 days after the
end of each fiscal year, a consolidated balance sheet of the Company as of
the end of such fiscal year, together with the related consolidated
statements of operations, shareholders' equity and cash flow for such
fiscal year, all in reasonable detail and duly certified by the Company's
independent public accountants, which accountants shall have given the
Company an opinion, unqualified as to the scope of the audit, regarding
such statements, provided that the audit may contain a qualification
regarding the Company's ability to continue as a going concern or any other
generally accepted qualifications for a similar ongoing concern; and
(c) concurrently with the delivery in each year of the financial
statements referred
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to in paragraph (b) of this Section 7.3, a statement and report signed by
the independent public accountants who certified such financial statements
to the effect that they have read this Agreement and that in the course of
the audit upon which their certificate was based they became aware of no
condition or event which constituted an Event of Default of the Company (as
hereinafter defined) or which, after notice or lapse of time or both, would
constitute an Event of Default of the Company or if such accountants did
become aware of any such condition or event, specifying the nature and
period of existence thereof.
(d) with reasonable promptness, such other financial data relating to
the business, affairs and financial condition of the Company as is
available to the Company and as Digi from time to time may reasonably
request.
7.4 PREPARATION AND APPROVAL OF BUSINESS PLAN AND BUDGETS. On or
before the next scheduled meeting of the Company's Board of Directors
following execution of this Agreement, the Company shall prepare a business
plan to be presented for approval by its Board of Directors at such meeting.
In addition, prior to the beginning of the fiscal year ending September 30,
1996, and thereafter of each fiscal year of the Company, the Company shall
prepare and submit to the Board of Directors of the Company, for its review
and approval, an annual plan for such year, which shall include capital and
operating expense budgets, cash flow statements and profit and loss
projections itemized in such detail as the Board of Directors of the Company
may reasonably request. The business and annual plans shall be modified as
often as is necessary in the judgment of the Board of Directors of the
Company and the Company's executive officers to reflect changes required as a
result of operating results and other events that occur, or may be reasonably
expected to occur, during the year covered by the annual plan.
7.5 PAYMENT OF TAXES AND MAINTENANCE OF PROPERTIES. The Company
will:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly when due and payable, all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or upon any of its
properties, as well as all material claims of any kind (including claims
for labor, material and supplies) which, if unpaid, might by law become a
lien or charge upon its property; provided, however, that the Company shall
not be required to pay any such tax, assessment, charge, levy or claim if
the amount, applicability or validity thereof shall currently be contested
in good faith by appropriate proceedings and if the Company shall have set
aside on its books reserves (segregated to the extent required by generally
accepted accounting principles) deemed adequate by it with respect thereto;
and
(b) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition, and from time to
time make, or cause to be made, all repairs and renewals and replacements
which in the opinion of the Company are necessary and proper so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times; the Company will maintain or cause
to be maintained back-up copies of all valuable papers and software.
7.6 INSURANCE. The Company will obtain and maintain in force such
property damage, public liability, business interruption, worker's compensation,
indemnity bonds and other types of insurance as the Company's executive
officers, after consultation with an accredited insurance broker, shall
determine to be necessary or appropriate to protect the Company from the
insurable hazards or risks associated with the conduct of the Company's
business. The Company's executive officers shall periodically report to the
Board of Directors on the status of such insurance coverage. All insurance
shall be maintained in at least such amounts and to such extent as shall be
determined to be reasonable by the Board of Directors; and all such insurance
shall be effected and maintained in force under a policy or
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policies issued by insurers of recognized responsibility, except that the
Company may effect worker's compensation or similar insurance in respect of
operations in any state or other jurisdiction either through an insurance
fund operated by such state or other jurisdiction or by causing to be
maintained a system or systems of self-insurance which is in accord with
applicable laws.
7.7 PAYMENT OF INDEBTEDNESS AND DISCHARGE OF OBLIGATIONS. The
Company will pay or cause to be paid the principal of and interest and
premium, if any, on all indebtedness for borrowed money heretofore or
hereafter incurred or assumed by it when and as the same shall become due and
payable, unless such indebtedness for borrowed money is renewed or extended,
except in the case of the existing notes the holders of which will be offered
the right to convert the indebtedness evidenced thereby to Common Stock
pursuant to the terms of the Private Placement Memorandum previously approved
by the Company's Board of Directors. The Company will faithfully observe,
perform and discharge all of the material covenants, conditions and
obligations which are imposed on it by any and all indentures and other
agreements securing or evidencing such indebtedness for borrowed money or
pursuant to which such indebtedness for borrowed money is issued, and will
not permit the continuance of any act or omission which is or under the
provisions thereof may be declared to be a material default thereunder,
unless such default is waived pursuant to the provisions thereof. The
Company shall not be required to make any payment or to take any other action
by reason of this Section 7.7 at any time while it shall be currently
contesting in good faith by appropriate proceedings its obligations to make
such payment or to take such action provided that the Company shall have set
aside on its books reserves (segregated to the extent required by generally
accepted accounting principles) deemed adequate by it with respect thereto.
For purposes of this Section 7.7, the phrase "indebtedness for borrowed
money" shall have the meaning ascribed to it pursuant to Section 5.13 of this
Agreement.
7.8 DIRECTORS' AND SHAREHOLDERS' MEETINGS. Until the earliest to
occur of (i) repayment in full of the Notes if the Notes are not converted,
or (ii) the date of the Company's Initial Public Offering, the Company shall
have a Board of Directors the composition of which shall be determined as
follows: (a) so long as it is the holder of any Notes or Conversion Stock,
Digi shall be entitled to designate two fifths (2/5) of the directors of the
Company and to exercise any right of removal or replacement of any such
director, (b) the holders of a majority of the outstanding Common Stock
exclusive of Digi shall be entitled to designate two fifths (2/5) of the
directors of the Company and to exercise any right of removal or replacement
of any such director, (c) the remaining director or directors must be
approved by both Digi and by the holders of a majority of the outstanding
Common Stock exclusive of Digi and shall be a person (or persons) who is
(are) not otherwise affiliated with the Company or Digi or any officer or
other director of the Company or Digi, and (e) Digi and the Company agree
that in submitting to the Company's shareholders or Board of Directors the
names of nominees for election as directors or in filling interim vacancies,
each will use its best efforts to cause any person designated pursuant to
this Section 7.8 to be elected as a director. Failure of any of the persons
so designated by the Company or Digi to be so elected shall be an Event of
Default of the Company or an Event of Default of Digi respectively within the
meaning of Section 11 hereof.
The Company shall reimburse all directors elected for the reasonable
out-of-pocket expenses incurred by them pursuant to this Section 7.8 in
connection with the attending of meetings by their director designee or
carrying out any other duties by such director designee that may be specified
by the Board of Directors; shall maintain at all times, director and officer
liability insurance in an amount of not less than $1 million from a carrier
reasonably acceptable to the Board of Directors of the Company; and shall
maintain as part of its Articles of Incorporation or Bylaws a provision for
the indemnification of its directors to the full extent permitted by law.
7.9 RESERVATION OF SHARES; REPLACEMENT OF NOTES OR CERTIFICATES
REPRESENTING CONVERSION STOCK. The Company shall at all times have authorized
and reserved a sufficient number of
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shares of its Common Stock for the purpose of issue upon the conversion of
the Notes. Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of any Notes or certificates
representing Conversion Stock, and, in the case of any such loss, theft or
destruction, upon delivery of a bond of indemnity satisfactory to the
Company, or, in the case of any such mutilation, upon surrender and
cancellation of the Notes or certificates representing Conversion Stock, as
the case may be, the Company will issue new Notes or certificates
representing Conversion Stock of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Notes or certificates representing Conversion Stock.
7.10 APPLICATION OF PROCEEDS. Unless otherwise approved by the
Company's Board of Directors, the net proceeds received by the Company from
the sale of the Notes shall be used to pay the existing payables and
indebtedness, for general operating purposes, and for the development of the
ARMs, Jeeves and V.Mach. Pending such use of the proceeds, they shall be
deposited in a bank or banks having deposits of $150,000,000 or more,
invested in money market mutual funds having assets of $500,000,000 or more,
or invested in securities issued or guaranteed by the United States
Government or the agencies or instrumentalities thereof.
7.11 RETIREMENT PLANS. The Company will cause each retirement plan
of the Company in which any employees of the Company participate that is
subject to the provisions of ERISA and the documents and instruments
governing each such plan to be conformed to when necessary, and to be
administered in a manner consistent with, those provisions of ERISA which
may, from time to time, become effective and operative with respect to such
plans; and at such time as such insurance shall be available at rates deemed
commercially reasonable by the Company, maintain insurance against the
contingent liability against the net worth of the Company imposed in respect
of each such plan by the provisions of ERISA.
7.12 FILING OF REPORTS. The Company will, from and after such time
as it has securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, or has securities registered pursuant to
the Securities Act, make timely filing of such reports as are required to be
filed by it with the Commission so that Rule 144 under the Securities Act or
any successor provision thereto will be available to the security holders of
the Company who are otherwise able to take advantage of the provisions of
such Rule.
7.13 PATENTS AND OTHER INTANGIBLE RIGHTS. The Company will apply
for, or obtain assignments of, or licenses to use, all patents, trademarks,
trademark rights, trade names, trade name rights and copyrights which in the
opinion of a prudent and experienced businessperson operating in the industry
in which the Company is operating are desirable or necessary for the conduct
and protection of the business of the Company.
7.14 RULE 144A. The Company agrees that, upon Digi's request, the
Company shall promptly provide (but in any case within 15 days of a request)
to Digi the following information: (a) a brief statement of the nature of
the business of the Company and the products and services it offers; (b) the
Company's most recent consolidated balance sheets and profit and loss and
retained earnings statements, and similar financial statements for such part
of the two preceding fiscal years prior to such request as the Company has
been in operation (such financial information shall be audited, to the extent
reasonably available); and (c) such other information about the Company and
its business, financial condition and results of operations as the requesting
person shall specify in order to comply with Rule 144A promulgated under the
Securities Act and the anti-fraud provisions of the federal and state
securities laws.
The Company hereby represents and warrants to any such requesting person
that the information provided by the Company pursuant to this Section 7.14
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in light of the
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circumstances under which they were made, not misleading.
8. NEGATIVE COVENANTS. Subject to the provisions of Section 13
hereof, the Company will be limited and restricted as follows:
8.1 CONSOLIDATION, MERGER, ACQUISITION, ETC. Without the prior
approval of Digi, (a) the Company will not sell, lease, license or otherwise
dispose of all or substantially all of its assets or any asset or assets in a
manner which would require shareholder approval, and (b) the Company will not
consolidate with or merge into any other corporation or entity, or permit any
other corporation or entity to consolidate or merge into the Company, or
enter into a plan of exchange with any other corporation or entity, or
otherwise acquire any other corporation or entity; provided that the
foregoing shall not apply to any transaction between the Company and a
wholly-owned subsidiary.
8.2 DIVIDENDS ON OR REDEMPTION OF CAPITAL STOCK. Without the
prior approval of Digi, which approval shall not be unreasonably withheld,
the Company will not declare or pay any dividend or make any other
distribution on any shares of capital stock or purchase, redeem or otherwise
acquire for any consideration, or set aside a sinking fund or other fund for
the redemption or repurchase of any shares of capital stock or any warrants,
rights or options to purchase shares of capital stock.
8.3 ISSUANCE OF SECURITIES. Except as provided in the Disclosure
Schedules, as disclosed to the Company's Board of Directors prior to the date
of this Agreement or pursuant to a stock option plan approved by the
Company's Board of Directors, the Company will not, without the prior
approval of Digi, issue (i) any additional capital stock of the Company of
any class, or securities convertible into any such class, or (ii) any
options, warrants or other rights to purchase capital stock of the Company of
any class, or securities convertible into shares of any such class.
8.4 CHANGE IN THE NATURE OF THE COMPANY'S BUSINESS. The Company
will not, without the prior approval of Digi, which approval shall not be
unreasonably withheld, make any material change in the nature of its business
as carried on or as proposed to be carried out as of the date of this
Agreement.
8.5 FUTURE REGISTRATION RIGHTS. Except for any registration
expressly permitted by Section 10 hereof, the Company will not, without the
prior approval of the Company's Board of Directors, agree with the holders of
any securities issued or to be issued by the Company to register such
securities under the Securities Act nor will it grant any incidental
registration rights.
8.6 OTHER RESTRICTIONS. The Company will not without the prior
approval of the Company's Board of Directors:
(a) guarantee, endorse or otherwise be or become contingently liable
in connection with the obligations, securities or dividends of any person,
firm, association or corporation, other than endorse negotiable instruments
for collection in the ordinary course of business; or
(b) make loans or advances to any person (including without
limitation to any officer, director or shareholder of the Company), firm,
association or corporation, except loans and advances to the Company and
advances to suppliers and employees made in the ordinary course of
business; or
(c) purchase or invest in the stock or obligations of any other
person, firm or corporation; or
(d) pay compensation, whether by way of salaries, bonuses,
participations in
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pension or profit sharing plans, fees under management contracts or for
professional services or fringe benefits to any officer in excess of
amounts fixed by the Board of Directors of the Company prior to any payment
to such officer.
9. RESTRICTION ON TRANSFER OF SECURITIES.
9.1 RESTRICTIONS. The Notes and the Conversion Stock are
transferable only pursuant to (a) a public offering registered under the
Securities Act, (b) Rule 144 (or any similar rule then in effect) adopted
under the Securities Act, if such rule is available, and (c) subject to the
conditions elsewhere specified in this Section 9, any other legally available
means of transfer.
9.2 LEGEND. Each Note shall be endorsed with the following legend:
"The securities evidenced hereby may not be transferred without
(i) the opinion of counsel satisfactory to the Company that such
transfer may be lawfully made without registration under the Federal
Securities Act of 1933 and all applicable state securities laws or
(ii) such registration."
Upon the conversion of any Notes, unless the Company receives an opinion of
counsel from Digi satisfactory to the Company to the effect that a sale,
transfer, assignment, pledge or distribution of the Conversion Stock issuable
upon such conversion may be made without registration, or unless such
Conversion Stock is being disposed of pursuant to registration under the
Securities Act and any applicable state act, the same legend shall be
endorsed on the certificate evidencing such Conversion Stock.
9.3 STOP TRANSFER ORDER. A stop transfer order shall be placed
with the Company's transfer agent preventing transfer of any of the
securities subject to the legend referred to in Section 9.2 above pending
compliance with the conditions set forth in any such legend.
9.4 REMOVAL OF LEGEND. Any legend endorsed on a certificate or
instrument evidencing a security pursuant to Section 9.2 hereof shall be
removed, and the Company shall issue a certificate or instrument without such
legend to Digi, if such security is being disposed of pursuant to
registration under the Securities Act and any applicable state acts or
pursuant to Rule 144 or any similar rule then in effect, or if Digi provides
the Company with an opinion of counsel satisfactory to the Company to the
effect that a sale, transfer, assignment, offer, pledge or distribution for
value of such security may be made without registration and that such legend
is not required to satisfy the applicable exemption from registration.
10. REGISTRATION OF SECURITIES.
10.1 DIGI DEMAND FOR REGISTRATION. If the Company shall receive a
written request therefor from Digi, the Company shall prepare and file a
registration statement under the Securities Act covering the Conversion Stock
which is the subject of such request and shall use its best efforts to cause
such registration statement to become effective; provided, however, Digi may
not make such a request prior to the expiration of six (6) months from the
date of this Agreement. In addition, if the registration requested by Digi
would result in the Company's first registration of securities under the
Securities Act, the Company shall have the right to defer filing such
registration for a period of not more than twelve (12) months after the
Company's receipt of Digi's request. The Company shall be obligated to
prepare, file and cause to become effective only one registration statement
(other than on Form S-3 or any successor form promulgated by the Commission
("Form S-3")) pursuant to this Section 10.1, and to pay the expenses
associated with such registration statements; notwithstanding the foregoing,
Digi may require, pursuant to this Section 10.1, the Company to file, and to
pay the expenses associated with, any number of registration
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statements on Form S-3, if such form is then available for use by the Company
and such record holder or holders. In the event that Digi determines for any
reason not to proceed with a registration at any time before a registration
statement has been declared effective by the Commission, and such
registration statement, if theretofore filed with the Commission, is
withdrawn with respect to the Conversion Stock covered thereby, and Digi
agrees to bear its own expenses incurred in connection therewith and to
reimburse the Company for the expenses incurred by it attributable to the
registration of such Conversion Stock, then Digi shall not be deemed to have
exercised its right to require the Company to register Conversion Stock
pursuant to this Section 10.1, provided, however, that in such event Digi may
not exercise its deferral rights under Section 10.2 should the Company
determine to continue with such a registration.
If, at the time any written request for registration is received by the
Company pursuant to this Section 10.1, the Company has determined to proceed
with the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any
of its securities by it or any of its security holders, such written request
shall be deemed to have been given pursuant to Section 10.2 hereof rather
than this Section 10.1, and the rights of Digi covered by such written
request shall be governed by Section 10.2 hereof.
10.2 INCIDENTAL REGISTRATION. Each time the Company shall
determine to proceed with the actual preparation and filing of a registration
statement under the Securities Act in connection with the proposed offer and
sale for cash of any of its securities by it or any of its security holders
(other than a registration statement on a form that does not permit the
inclusion of shares by its security holders), the Company will give written
notice of its determination to Digi. If the registration which is the
subject of the notice to Digi by the Company would result in the Company's
first registration of securities under the Securities Act, Digi shall have
the right to defer filing such registration for a period of not more than
twelve (12) months after Digi's receipt of the Company's notice. Upon the
written request of Digi given within 30 days after receipt of any such notice
from the Company, the Company will, except as herein provided, cause all
Conversion Stock for which Digi has requested registration to be included in
such registration statement, all to the extent requisite to permit the sale
or other disposition by Digi of such Conversion Stock; provided, however,
that nothing herein shall prevent the Company from, at any time, abandoning
or delaying any such registration initiated by it; provided further, however,
that if the Company determines not to proceed with a registration after the
registration statement has been filed with the Commission and the Company's
decision not to proceed is primarily based upon the anticipated public
offering price of the securities to be sold by the Company, and if Digi so
requests the Company shall promptly complete the registration for Digi's
benefit and Digi shall bear all expenses in excess of $25,000 incurred by the
Company as the result of such registration after the Company has decided not
to proceed. If any registration pursuant to this Section 10.2 shall be
underwritten in whole or in part, the Company may require that the Conversion
Stock requested for inclusion pursuant to this Section 10.2 be included in
the underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters. In the event that the Conversion Stock
requested for inclusion pursuant to this Section 10.2 would constitute more
than 25% of the total number of shares to be included in a proposed
underwritten public offering, and if in the good faith judgment of the
managing underwriter of such public offering the inclusion of all of the
Conversion Stock originally covered by a request for registration would
reduce the number of shares to be offered by the Company or interfere with
the successful marketing of the shares of stock offered by the Company, the
number of Conversion Stock otherwise to be included in the underwritten
public offering may be reduced. Conversion Stock which is thus excluded from
the underwritten public offering shall be withheld from the market by Digi
for a period not to exceed 90 days, which the managing underwriter reasonably
determines is necessary in order to effect the underwritten public offering.
10.3 REGISTRATION PROCEDURES. If and whenever the Company is
required by the
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provisions of Section 10.1 or 10.2 hereof to effect the registration of
Conversion Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed nine months;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such
securities, not to exceed nine months;
(c) furnish to Digi and to the underwriters of the securities being
registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
underwriters may reasonably request in order to facilitate the public
offering of such securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as Digi may reasonably request in writing
within 20 days following the original filing of such registration
statement, except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified;
(e) notify Digi, promptly after it shall receive notice thereof, of
the time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration statement
has been filed;
(f) notify Digi promptly of any request by the Commission for the
amending or supplementing of such registration statement or prospectus or
for additional information;
(g) prepare and file with the Commission, promptly upon the request
of Digi, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for Digi (and concurred in by
counsel for the Company), is required under the Securities Act or the rules
and regulations thereunder in connection with the distribution of the
Conversion Stock by Digi;
(h) prepare and promptly file with the Commission and promptly notify
Digi of the filing of such amendment or supplement to such registration
statement or prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such securities is
required to be delivered under the Securities Act, any event shall have
occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in the light of the circumstances in which they were made, not misleading;
(i) advise Digi, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order should be issued;
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<PAGE>
(j) not file any amendment or supplement to such registration
statement or prospectus to which Digi shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at
least five business days prior to the filing thereof, unless in the opinion
of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable
law; and
(k) at the request of Digi, furnish: (i) an opinion, dated as of the
closing date, of the counsel representing the Company for the purposes of
such registration, addressed to the underwriters, if any, and to Digi,
covering such matters as such underwriters and Digi may reasonably request;
and (ii) letters dated as of the effective date of the registration
statement and as of the closing date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and to
Digi, covering such matters as such underwriters and Digi may reasonably
request.
10.4 EXPENSES. With respect to each registration, including
registrations pursuant to Form S-3, requested pursuant to Section 10.1 hereof
(except as otherwise provided in such Section with respect to registrations
voluntarily terminated at the request of Digi) and with respect to each
inclusion of Conversion Stock in a registration statement pursuant to Section
10.2 hereof (except as otherwise provided in Section 10.2 with respect to
registrations initiated by the Company but with respect to which the Company
has determined not to proceed), the Company shall bear the following fees,
costs and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or Digi are required to bear such fees and
disbursements), all internal Company expenses, all legal fees and
disbursements and other expenses of complying with state securities or blue
sky laws of any jurisdictions in which the securities to be offered are to be
registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering.
Fees and disbursements of counsel and accountants for Digi, underwriting
discounts and commissions and transfer taxes relating to the shares included
in the offering by Digi, and any other expenses incurred by Digi not
expressly included above, shall be borne by Digi.
10.5 INDEMNIFICATION. In the event that any Conversion Stock is
included in a registration statement under Section 10.1 or 10.2 hereof:
(a) The Company will indemnify and hold harmless Digi pursuant to the
provisions of this Section 10, its directors and officers, and any
underwriter (as defined in the Securities Act) for Digi and each person, if
any, who controls Digi or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse Digi and each such
underwriter and controlling person with respect to, any and all loss,
damage, liability, cost and expense to which Digi or any such underwriter
or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses
are caused by any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, damage, liability, cost or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so
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<PAGE>
made in conformity with information furnished by Digi, such underwriter or
such controlling person in writing specifically for use in the preparation
thereof.
(b) Digi will indemnify and hold harmless the Company, its directors
and officers, any controlling person and any underwriter from and against,
and will reimburse the Company, its directors and officers, any controlling
person and any underwriter with respect to, any and all loss, damage,
liability, cost or expense to which the Company or any controlling person
and/or any underwriter may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses
are caused by any untrue or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was so made in
reliance upon and in strict conformity with written information furnished
by Digi specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 10.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, or if there is a conflict of interest
which would prevent counsel for the indemnifying party from also
representing the indemnified party, the indemnified party or parties shall
have the right to select separate counsel to participate in the defense of
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party pursuant to the provisions of said paragraph (a) or
(b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall
have employed counsel in accordance with the proviso of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
11. DEFAULT.
11.1 EVENTS OF DEFAULT BY THE COMPANY. Each of the following events
shall be an event of default by the Company for purposes of this Agreement (an
"Event of Default of the Company"):
(a) if default shall be made in the punctual payment of interest on
the Notes, and
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<PAGE>
such default shall have continued for a period of 15 days after written
notice thereof to the Company by Digi;
(b) if default shall be made in the punctual payment of the principal
of the Notes;
(c) if any judgment, writ or warrant of attachment or of any similar
process in an amount in excess of $250,000 shall be entered or filed
against the Company or against any of its property or assets and either
remains unpaid, unvacated, unbonded or unstayed for a period of 30 days or
adequate reserves are not established on the Company's books;
(d) if an order for relief shall be entered in any Federal bankruptcy
proceeding in which the Company is the debtor; or if bankruptcy,
reorganization, arrangement, insolvency, or liquidation proceedings, or
other proceedings for relief under any bankruptcy or similar law or laws
for the relief of debtors, are instituted by or against the Company and, if
instituted against the Company, are consented to or, if contested by the
Company, are not dismissed by the adverse parties or by an order, decree or
judgment within 60 days after such institution;
(e) if the Company shall default in any material respect in the due
and punctual performance of any covenant or agreement in any note
(including without limitation any of the Notes), bond, indenture, loan
agreement, note agreement, mortgage, security agreement including without
limitation the Security Agreement) or other instrument evidencing or
related to indebtedness for borrowed money, other than the outstanding
notes described in Section 7.7 hereof, and such default shall continue for
more than the period of notice and/or grace, if any, therein specified and
shall not have been waived;
(f) (i) if any representation or warranty made by or on behalf of the
Company in this Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof or thereof shall prove to
have been untrue or incorrect in any material respect as of the date of
this Agreement or as of any Closing Date, or (ii) if any report,
certificate, financial statement or financial schedule or other instrument
prepared or purported to be prepared by the Company or any officer of the
Company furnished or delivered under or pursuant to this Agreement after
any such Closing Date shall prove to be untrue or incorrect in any material
respect as of the date it was made, furnished or delivered;
(g) if any of Digi's designees to the Company's Board of Directors
shall fail to be elected to the Board of Directors in the manner and under
the terms and conditions set forth in Section 7.8 hereof; or
(h) if default shall be made by the Company in the due and punctual
performance or observance of any other term contained in this Agreement or
in any other Transaction Document, and such default shall not have been
remedied, or the Company shall have not taken steps to remedy such default
to Digi's reasonable satisfaction, within 15 days after written notice
thereof to the Company by Digi.
11.2 EVENTS OF DEFAULT BY DIGI. Each of the following events shall be
an event of default by Digi for purposes of this Agreement (an "Event of Default
of Digi"):
(a) Digi does not purchase a Note when required by the terms and
conditions contained in this Agreement;
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<PAGE>
(b) if default shall be made by Digi in any material respect in the
performance or observance of any other term contained in this Agreement or
in any other Transaction Document, and such default shall not have been
remedied, or Digi shall have not taken steps to remedy such default to the
Company's reasonable satisfaction, within 15 days after written notice
thereof to Digi by the Company;
(c) (i) if any representation or warranty made by or on behalf of
Digi in this Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof or thereof shall prove to
have been untrue or incorrect in any material respect as of the date of
this Agreement or (ii) if any report, certificate, financial statement or
financial schedule or other instrument prepared or purported to be prepared
by Digi or any officer of Digi furnished or delivered under or pursuant to
this Agreement after any such Closing Date shall prove to be untrue or
incorrect in any material respect as of the date it was made, furnished or
delivered.
11.3 REMEDIES UPON EVENTS OF DEFAULT OF THE COMPANY. Upon the
occurrence of an Event of Default of the Company as herein defined, then, unless
such Event of Default shall have been waived by Digi, Digi shall be entitled so
long as such Event of Default of the Company continues unremedied, by notice to
the Company (a) to declare the principal of and any accrued interest on the
Notes, to be immediately due and payable, and thereupon the Notes, including
both principal and interest shall become immediately due and payable (provided,
however, that when any Event of Default of the Company described in
Section 11.1(d) hereof has occurred, the Notes shall immediately become due and
payable without presentment, demand or notice of any kind), and (b) to designate
a majority of the Board of Directors of the Company, as provided in Section 11.4
below.
11.4 DESIGNATION OF MAJORITY OF BOARD OF DIRECTORS. In the event Digi
is entitled to designate a majority of the Board of Directors of the Company
pursuant to Section 11.3 hereof, the Company shall, immediately upon receiving
written notice from Digi, call a special shareholders' meeting to be held as
soon as possible, but in any event within fifteen days of the date of the notice
of such meeting. At such special shareholders' meeting a majority of the
directors of the Company shall be elected from designees nominated by Digi. Any
right of Digi to continue to designate a majority of the Board of Directors of
the Company shall expire, and a shareholders' meeting to elect new directors
shall be called, six months after the later of (a) the curing of the Event of
Default upon which the right was exercised, or (b) the curing of any Event of
Default occurring after the Event of Default upon which such right was
exercised.
11.5 NOTICE OF DEFAULTS. When, to its knowledge, any Event of Default
of the Company has occurred or exists, the Company agrees to give prompt written
notice of such Event of Default of the Company, to Digi, but in any event within
ten business days. When, to its knowledge, any Event of Default of Digi has
occurred or exists, Digi agrees to give prompt written notice of such Event of
Default of Digi, to the Company, but in any event within ten business days.
11.6 SUITS FOR ENFORCEMENT; REMEDIES CUMULATIVE AND NOT WAIVED. In
case an Event of Default of the Company shall have occurred and be continuing,
unless such Event of Default of the Company shall have been waived in the manner
provided in Section 13 hereof, Digi may proceed to protect and enforce its
rights under this Section 11 by suit in equity or action at law. In case an
Event of Default of Digi shall have occurred and be continuing, unless such
Event of Default of Digi shall have been waived in the manner provided in
Section 13 hereof, the Company may proceed to protect and enforce its rights
under this Agreement by suit in equity or action at law. No right, power or
remedy conferred upon either Party hereto shall be exclusive, and each such
right, power or remedy shall be cumulative and in addition to every other right,
power or remedy, whether conferred hereby or by any such security or now or
hereafter available at law or in equity or by statute or otherwise. No course
of dealing between the
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Company and Digi and no delay in exercising any right, power or remedy
conferred hereby or by any such security or now or hereafter existing at law
or in equity or by statute or otherwise, shall operate as a waiver of or
otherwise prejudice any such right, power or remedy; provided, however, that
this sentence shall not be construed or applied so as to negate the
provisions and intent of any statute which is otherwise applicable.
12. TERMINATION OF CERTAIN COVENANTS. The obligations of the Company
under Sections 7 (other than its obligations under Sections 7.8, 7.9 and 7.14
hereof), 8 and 11.1 of this Agreement and the obligations of Digi under section
11.2 shall notwithstanding any provisions hereof apparently to the contrary,
terminate and be of no further force or effect from and after the earlier of the
repayment in full of the Notes or the Initial Public Offering of the Company.
The obligation of Digi to purchase Notes of the Company shall terminate upon the
earlier of December 31, 1988 or the Initial Public Offering of the Company.
13. CONSENTS; WAIVERS AND AMENDMENTS. With the written consent of either
Party hereto, any obligation of the other Party to this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), and by mutual written consent the Parties may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement or of any
supplemental agreement or modifying in any manner the rights and obligations of
either Party.
14. CHANGES, WAIVERS, ETC. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the Party against which enforcement of the
change, waiver, discharge or termination is sought.
15. PAYMENT OF FEES AND EXPENSES. Each Party will bear the out-of-pocket
expenses incurred by it in connection with the transactions herein contemplated,
including without limitation the fees and out-of-pocket expenses of agents,
finders (if any) and counsel.
16. NOTICES. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be delivered, or
mailed first-class postage prepaid, registered or certified mail,
(a) if to Digi, addressed to it at 11001 Bren Road East, Minnetonka
MN 55343, Attn: Chief Financial Officer, or at such other address as Digi
may specify by written notice to the Company, or
(b) if to the Company, addressed to it at 10000 West 76th Street,
Eden Prairie, MN 55344-3767, Attn: Dr. Jonathan A. Henrikssen Sachs, with
a copy to William T. Dolan, Esq., Briggs and Morgan P.A., 2400 IDS Center,
Minneapolis, Minnesota 55402 or to such other addresses as the Company may
specify by written notice to Digi,
and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by certified mail, when received.
17. PARTIES IN INTEREST. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the Parties hereto.
18. HEADINGS. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
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<PAGE>
19. CHOICE OF LAW. It is the intention of the Parties that the laws of
Minnesota shall govern the validity of this Agreement, the construction of its
terms and the interpretation of the rights and duties of the Parties.
20. COUNTERPARTS. This Agreement may be executed concurrently in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
DIGI INTERNATIONAL INC.
By /s/ ERVIN F. KAMM, JR.
-----------------------------------------
Name: Ervin F. Kamm, Jr.
Its: President & C.E.O.
AETHERWORKS CORPORATION
By /s/ JONATHAN A. HENRIKSSEN SACHS, Ph.D.
-----------------------------------------
Name: Jonathan A. Henrikssen Sachs, Ph.D.
Its: President & C.E.O.
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EXHIBIT 10(e)
EMPLOYMENT ARRANGEMENT BETWEEN THE REGISTRANT
AND MIKE KELLEY, DATED FEBRUARY 7, 1996
<PAGE>
[LOGO] Digi International
6400 Flying Cloud Drive
Eden Prairie, MN 55344
612-943-9020 tel
612-943-5398 fax
February 7, 1996
Mr. Mike Kelley
3895 Bayside Road
Long Lake, MN 55364
Dear Mike:
This letter is to confirm your acceptance of Digi International's offer as Vice
President, Business Technologies, reporting directly to me. In this capacity,
you will be totally responsible for identifying Digi's information system needs,
development of a plan for implementation, and for the actual implementation. Mr.
Ed Gull, MIS Director and Digi's MIS department will report to you.
Additionally, you will be responsible for the company's oversight of our
investment in Aetherworks Corporation.
Your starting base salary will be $135,000 per year. You will also be eligible
for an annual cash bonus with a target payout of 100% of your base salary. Any
bonus payout is based solely upon Digi International Inc. meeting after-tax
earnings targets. In the first year of employment, you will be guaranteed a
bonus payout of 75% of base salary, which will be paid in November 1996
consistent with the bonus payout to all employees.
You will also receive a stock option for 20,000 shares of Digi Common Stock,
vesting over five years, at the market price on the day you join the company.
In addition, Digi offers a comprehensive benefit program which includes medical,
dental and disability insurance, a 401(k) savings plan and a medical and
dependent care reimbursement plan. You will accrue vacation at a rate of four
weeks per year.
We have also agreed that in the event Norstan does not pay you your earned bonus
for FY96, that Digi will advance you these funds in the form of a non-interest
bearing promissory note. This note will be self liquidating over your
employment at Digi and fully paid after five (5) years of employment, except
that, should you leave Digi for any reason of your choosing within the first
three years, the note will be due in full on your last day of employment.
You will also be eligible for participation in Digi's health insurance programs
on the first day of the month following 90 days employment with the company.
You will be eligible for participation in the 401(k) plan on the first quarter
following 90 days employment. In addition, you may elect to become a
participant in Digi's Employee Stock Purchase Plan which was approved at our
company's recent Annual Stockholder's Meeting on January 31, 1996.
Participation in the Employee Stock Purchase Plan will commence April 1, 1996.
Please feel free and contact either Tuffy Bryant or Jerry Nichols in Human
Resources if you have any questions with regard to benefits.
<PAGE>
Mr. Mike Kelley
Page 2
I am very pleased that you are willing to take on the challenge of our
infrastructure at Digi. I see this position as a first step for you toward
greater Senior Management responsibilities. Great things are happening at Digi,
and I am delighted that you will be joining our team. Please sign and return
one copy signing your acceptance. Welcome aboard!
Sincerely,
/s/ ERVIN F. KAMM, JR.
Ervin F. Kamm, Jr.
President and Chief Executive Officer
Accepted: /s/ MIKE KELLEY 2-9-96
--------------------------- --------------------------
Mike Kelley Date
<PAGE>
EXHIBIT 10(i)
EMPLOYMENT ARRANGEMENT BETWEEN THE REGISTRANT
AND JONATHON E. KILLMER DATED SEPTEMBER 16, 1996
<PAGE>
[LOGO]
September 16, 1996
PERSONAL AND CONFIDENTIAL
Jonathon E. Killmer
10512 Rigby Drive
Eden Prairie, MN 55347
Re: Terms of Employment
Dear Jon:
I am pleased to send you this letter confirming the terms of your
acceptance of Digi's offer of employment offer that we have discussed.
Your title will be Vice President, Chief Financial Officer & Treasurer,
effective October 1, 1996. In this capacity you will report directly to me.
Your duties will include being fully responsible for all aspects of Digi's
financial reporting, administration and systems. Additionally, the legal,
investor relations and facilities functions will report directly to you. You
know well my concerns over the timely and accurate reporting of information and
the effectiveness of our communications with the investment community. Your
responsibilities will also include development and monitoring of annual and
strategic budgets.
Your base salary for your initial year will be $150,000 per year, subject
to review and adjustment annually, and you will have a bonus potential of 100%
of your base salary, depending solely upon Digi meeting its profit targets.
During the first year of employment 2/3 of your bonus will be guaranteed and
will be paid monthly. You will also be awarded a stock option of 30,000 shares
at a price of $14.50 per share. The stock will vest over five (5) years with
20% (i.e. 6,000 shares) vesting on each of your first through fifth anniversary
dates. Additionally, you will be eligible to receive future stock option
awards, based on annual performance.
We also will support your continued involvement in civic and charitable
organizations, including the Minneapolis Downtown Council, the Minnesota
Orchestral Association, and the Salvation Army, recognizing that at the times
these organizations will require your time during normal working hours.
<PAGE>
Jonathon E. Killmer
September 16, 1996
Page 2
In addition you will be entitled to all of the standard medical and other
employee benefits provided to Digi employees. I note that Digi's benefits plans
provide employees a certain benefit allowance. Employees can either apply the
amount to pay for the portion of benefits offered but not paid directly by Digi
or they can receive the unused portion of the allowance in cash.
Jon, the Board of Directors and I are very pleased to attract of person of
your stature, experience, and reputation, who is also heavily involved in making
a real commitment to our community. We are confident that your joining Digi
will have a highly positive influence on both the investment community and the
local community as well. I am personally excited to attract someone who shares
a common platform in terms of philosophy and values.
Please signify your acceptance of these terms by signing in the space
provided below and returning a signed copy to me. If you have any questions
regarding the above please feel free to contact me.
Very truly, yours,
/s/ Erv F. Kamm, Jr.
---------------------------------------
Erv F. Kamm, Jr.
President and Chief Executive Officer
ACCEPTED:
/s/ Jonathon E. Killmer
- ---------------------------
Jonathon E. Killmer
Dated: 9/19/96
---------------------
<PAGE>
EXHIBIT 10(j)
EMPLOYMENT ARRANGEMENT BETWEEN THE REGISTRANT
AND DAVID RZASA, DATED SEPTEMBER 30, 1996
<PAGE>
[LOGO]
September 30, 1996
PERSONAL AND CONFIDENTIAL
David M. Rzasa
12180 E. Paradise Drive
Scottsdale, AZ 85259
Re: Terms of Employment
Dear David:
I am pleased to send you this letter confirming the terms of the employment
offer that we have discussed.
Your title will be Vice President and General Manager - Remote Access PMU.
In this capacity you will report directly to me. Your duties will include being
fully responsible for all aspects of the Remote Access PMU.
Your base salary will be $150,000.00 per year, and it will be reviewed
annually. You will have a bonus potential of one hundred ten percent (110%) of
your base salary. Your bonus will be earned solely on the basis of meeting
Digi's approved net earnings goal for FY 97. One-third (1/3) of the first
year's bonus is guaranteed and will be paid quarterly.
Your start date will be October 14, 1996. You will be entitled to all of
the standard medical and other employee benefits at Digi. I understand that you
have concerns about the waiting period before you are eligible for Digi's
benefits. Although we cannot change the waiting period I am willing to address
this issue once you advise me of the details of your insurance situation with
your current employer. If appropriate, Digi is willing to pay for your COBRA
payments during the 90 day waiting period before you are eligible for the
standard employee benefits.
In addition you will be granted an option to purchase 30,000 shares of Digi
stock. The strike price will be the price of Digi stock at the close of the day
you accept employment at Digi. The stock will vest over five (5) years at a
rate of twenty percent (20%) per year on each of the first through fifth
anniversaries of your start date at Digi, i.e. 6,000 shares per year.
<PAGE>
David M. Rzasa
September 30, 1996
Page 2
In addition Digi will pay for your direct relocation expenses, including
the cost of moving your household goods and closing costs for the sale of your
present home and the purchase of a new home, such as real estate brokers'
commissions. Digi will also pay for up to three months of your interim living
expenses, if necessary. Also, if necessary, Digi will help you obtain interim
or bridge financing, at no cost to you, for the purchase of your new home for
the period of time between closing on the purchase of your new home and the
closing on the sale of your present home (up to a maximum of 90 days). More
specifically, Digi will pay any lender's fees and interest on the bridge loan
for the purchase of your new home up to a maximum of 90 days. In the event that
you obtain both a bridge loan (for the amount of your equity in your present
home) and a permanent loan for the remainder of your purchase price of your new
home, Digi will pay both the bridge loan lender's fees and expenses for up to 90
days plus the mortgage payments on the permanent financing for 90 days. If
necessary Digi's help will be in the form of guaranty by Digi of such interim or
bridge financing and, at Digi's option, such guaranty may be secured by your
present home.
In the event that Digi were to terminate your employment before October 21,
1997, for any reason other than "cause", Digi will pay you severance of
$112,500. The definition of "cause" is attached for your information.
Please signify your acceptance of these terms by signing in the space
provided below and returning a signed copy to me no later than Friday, October
4, 1996. If you have any questions regarding the above please feel free to
contact me.
Dave, let me also state my distinct pleasure to have you on our management
team. I thought we would get together after we first met over a year ago. I'm
proud that it is now a reality.
Very truly, yours,
/s/ Erv F. Kamm, Jr.
---------------------------------------
Erv F. Kamm, Jr.
President and Chief Executive Officer
ACCEPTED:
/s/ David M. Rzasa
- ---------------------------
David M. Rzasa
Dated: 10-4-96
---------------------
<PAGE>
DEFINITION OF CAUSE
For the purpose of Erv Kamm's letter of September 30, 1996, "cause shall
mean only the following :
(i) indictment or conviction of, or a plea of nolo contendre to (a) any
felony (other than a felony arising out of negligence) or any
misdemeanor involving moral turpitude, or (b) any crime or offense
involving dishonesty with respect to Digi International, Inc. or
any of its subsidiaries, (collectively, the "Company");
(ii) theft or embezzlement of Company property or commission of similar
acts involving dishonesty or moral turpitude;
(iii) repeated material negligence in the performance of your duties;
(iv) your failure to devote substantially all of your working time and
efforts during normal business hours to the Company;
(v) knowing engagement in conduct which is materially injurious to the
Company;
(vi) knowing failure, for your own benefit, to comply with the Company's
policies concerning confidentiality;
(vii) knowingly providing materially misleading information concerning
the Company to the Company's Chief Executive Officer or Board of
Directors, any governmental body or regulatory agency or any
lender or other financing source or proposed financing source of
the Company; or
(viii) nonperformance resulting from your disability) which failure is
not cured within thirty (30) days after written notice from the
Chairman of the Board or the Chief Executive Officer of the
Company specifying the act of nonperformance or within such
longer period (but no longer than ninety (90) days in any event)
as is reasonably required to cure such nonperformance.
<PAGE>
EXHIBIT 10(k)
SEPARATION AGREEMENT BETWEEN THE COMPANY
AND GERALD A. WALL DATED DECEMBER 4, 1996
<PAGE>
SEPARATION AGREEMENT
This Separation Agreement ("Agreement") is made and entered into by
and between Gerald A. Wall ("Wall") and Digi International Inc. (the "Company")
on the dates set forth below.
WHEREAS, Wall has been employed by the Company since August 1989; and
WHEREAS, the Company and Wall have agreed that it was in their mutual
interests that Wall resign as Vice President, Chief Financial Officer and
Treasurer ("CFO") as of September 30, 1996; and
WHEREAS, Wall was replaced as CFO on October 1, 1996; and
WHEREAS, Wall ceased to be an officer of the Company as of
September 30, 1996; and
WHEREAS, Wall's employment relationship with the Company will
terminate in accordance with the provisions of this Agreement; and
WHEREAS, the parties are attempting to conclude their employment
relationship amicably, but mutually recognize that any significant employment
relationship may give rise to potential claims or liabilities; and
WHEREAS, Wall and the Company expressly deny that they may be liable
to each other on any basis or that they have engaged in any improper or unlawful
conduct or wrongdoing against each other; and
WHEREAS, Wall and the Company desire to resolve all issues potentially
in dispute between them; and
<PAGE>
WHEREAS, Wall and the Company have agreed to a full settlement of all
issues potentially in dispute between them;
NOW, THEREFORE, in consideration of the mutual promises and provisions
contained in this Agreement and the General Release referred to below, the
parties agree as follows:
1. RELEASE OF CLAIMS BY WALL. At the same time Wall executes this
Agreement, he also will execute a General Release, in the form attached to
this Agreement as Exhibit A, in favor of the Company, its insurers,
subsidiaries, divisions, joint venture partners, committees, directors,
officers, employees, agents, predecessors, successors, and assigns (the
"General Release"). Wall will re-execute the General Release as of the later
of June 30, 1997 or the date upon which the last payment will be made to Wall
under this Agreement as set forth in paragraph 4 of this Agreement (the
"Termination Date"). This Agreement will not be interpreted or construed to
limit in any manner the General Release. The existence of any dispute
respecting the interpretation of this Agreement will not nullify or otherwise
affect the validity or enforceability of the General Release.
2. RESIGNATIONS BY WALL. Wall hereby acknowledges that as of
September 30, 1996 he resigned as an officer of the Company and as an officer
and/or director of any of the Company's subsidiaries or affiliates.
3. SALARY AND VACATION PAY. The Company has paid Wall his base
salary and for any earned and accrued vacation pay, less all applicable
payroll withholding, through November 15, 1996. Such amounts fully
compensate Wall for all his earned and accrued vacation pay.
-2-
<PAGE>
4. ADDITIONAL PAYMENTS. Provided that (i) Wall has not rescinded
this Agreement or the General Release within the applicable rescission
period, (ii) the Company has received written confirmation from Wall, in the
form attached to this Agreement as Exhibit B, dated not earlier than the day
after the expiration of the applicable rescission period, that Wall has not
rescinded and will not rescind this Agreement or the General Release, and
(iii) Wall has not breached his obligations pursuant to this Agreement or the
General Release, then the Company will pay Wall $74,712.00 in 15 equal
bi-weekly installments of $4,981.00, less all applicable payroll withholding.
Such amount will be paid to Wall commencing on the Company's first regular
payroll date after the expiration of the applicable rescission period and
ending on the date upon which the last payment is made to Wall under this
Agreement. Each installment payment will be directly deposited into Wall's
bank account in accordance with past practice.
5. STOCK OPTIONS. The Company will accelerate the exercisability
of all unvested options to purchase shares of the Company's stock held by
Wall, which acceleration will be deemed to have occurred immediately prior to
the termination of his employment. Assuming that Mr. Wall remains
continuously employed by the Company through the Termination Date, such
options must be exercised on or before three months after the Termination
Date, in accordance with the terms of the Company's Stock Option Plan and
applicable stock option agreements between Wall and the Company, at which
time all unexercised options held by Wall will lapse. Wall understands that
he will be solely responsible for the tax consequences of the exercise of his
options, and he acknowledges that he is not relying on any representations by
the Company regarding such tax consequences.
-3-
<PAGE>
6. WALL'S CONSULTANT RELATIONSHIP WITH THE COMPANY. Until the
Termination Date, Wall will serve as a consultant to the Company during
regular business hours for reasonable amounts of time, and he will complete
in a timely fashion work suitable to his skills and abilities that will be
assigned to him from time to time by the Company's Chief Executive Officer
("CEO"), CFO or the Audit Committee of the Company's Board of Directors.
7. INSURANCE CONTINUATION. Wall's current group medical and life
insurance coverages will remain in effect until the Termination Date.
Thereafter, Wall will be entitled to continue his group medical and life
insurance under such terms as are made available to similarly situated former
employees of the Company, provided that Wall pays the entire cost of such
insurance as provided by law.
8. SAVINGS AND PROFIT SHARING PLAN. Wall is a participant in the
Company's 401-K Savings and Profit Sharing Plan (the "Plan"). Wall
acknowledges that no further salary reduction contributions will be made to
the Plan from his compensation after November 15, 1996, and that he will not
be eligible for any matching or profit sharing contributions to the Plan for
1996. Wall will continue to be a participant in the Plan in accordance with
the terms and conditions set forth in the Plan. Wall will be entitled to
begin receiving benefits from his Plan account or to roll-over the amount in
his account at the times and under the terms and conditions set forth in the
Plan.
9. EMPLOYEE BENEFITS. Except as expressly provided in this
Agreement, Wall will not be eligible to participate in any of the Company's
employee benefit plans after November 15, 1996.
-4-
<PAGE>
10. REFERENCES. The Company will provide Wall with a letter of
reference in the form attached to this Agreement as Exhibit C promptly after
the expiration of the applicable rescission period. It is Wall's
responsibility to direct or cause to be directed all future official requests
for references concerning him to the Chief Executive Officer or the Director
of Human Resources of the Company. The Chief Executive Officer or the
Director of Human Resources of the Company will respond to all future
official reference requests concerning Wall by confirming the dates of his
employment, identifying the positions he held, and, upon Wall's request,
confirming his final salary while he worked at the Company.
11. NON-DISCLOSURE AGREEMENT.
A. TRADE SECRETS AND CONFIDENTIAL INFORMATION. Wall will
not disclose to any person, other than an officer of the Company, any trade
secrets of the Company. Wall will not, without the written consent of the
Company, disclose to any person, other than an employee of the Company or any
of its subsidiaries, except where such disclosure may be required by law, any
confidential information obtained by him while in the employ of the Company
with respect to any of the Company's products, technology, know-how,
services, customers, methods, or future plans, all of which Wall acknowledges
are valuable, special, and unique assets the disclosure of which Wall
acknowledges may be materially damaging to the Company. Wall acknowledges
that the Company's remedy at law for any breach or threatened breach by him
of this subparagraph will be inadequate. Therefore, the Company will be
entitled to injunctive and other equitable relief restraining Wall from
violating the provisions of this subparagraph, in addition to any other
remedies that may be available to the Company under this Agreement or
applicable law.
-5-
<PAGE>
B. SCOPE OF RESTRICTIONS. The parties intend that, if any
court of competent jurisdiction holds that any restriction in subparagraph 10.a.
exceeds the limit of restrictions that are enforceable under applicable law,
then the restriction will nevertheless apply to the maximum extent that is
enforceable under applicable law.
12. FUTURE EMPLOYMENT. Except for Wall's consultant relationship
with the Company as provided for in paragraph 5 of this Agreement, Wall will
not apply for or seek re-employment at any time in the future with the
Company. Wall also will not apply for or seek employment at any time in the
future with any of the Company's present or future subsidiaries.
13. RECORDS, DOCUMENTS, AND PROPERTY. Wall acknowledges that he has
returned to the Company all records, correspondence, documents, financial
data, plans, computer disks, computer tapes, keys, credit cards, and other
tangible property in his possession belonging to the Company.
14. MUTUAL CONFIDENTIALITY.
A. GENERAL STANDARD. It is the intent of the parties that
the terms of Wall's separation from the Company, including the provisions of
this Agreement and General Release (collectively "Confidential Separation
Information"), will be forever treated as confidential. Accordingly, Wall
and the Company will not disclose Confidential Separation Information to
anyone at any time, except as provided in subparagraph 14.b.
-6-
<PAGE>
B. EXCEPTIONS.
I. It will not be a violation of this Agreement for
Wall to disclose Confidential Separation Information to his immediate family,
his attorneys, his accountants or tax advisors, or any federal or state tax
authority, or as may be required by law.
II. It will not be a violation of this Agreement for
Wall to disclose to employers and/or prospective employers that he is
constrained from disclosing trade secrets or confidential information as a
result of the terms of subparagraph 10.a. of this Agreement.
III. It will not be a violation of this Agreement for the
Company to disclose Confidential Separation Information to its auditors, its
attorneys, and its employees and agents who have a legitimate reason to
obtain the Confidential Separation Information in the course of performing
their duties or responsibilities for the Company, or as may be required by
law, including all applicable securities laws.
IV. If Wall or a senior executive officer of the Company
is asked by any person about any matters related to the termination of Wall's
employment, it will not be a violation of this Agreement to say in response
only that "all matters relating to Wall's separation from the Company were
amicably and satisfactorily resolved" and/or that Wall and the Company have
"agreed not to discuss Wall's separation from the Company."
15. NON-DISPARAGEMENT. Wall will not disparage, defame, or besmirch
the reputation, character, image, products, or services of the Company, or
the reputation or character of its directors, officers, employees, or agents.
The Company will not disparage, defame, or besmirch the reputation, character,
or image of Wall.
-7-
<PAGE>
16. CLAIMS INVOLVING THE COMPANY. Wall will not recommend or
suggest to any potential claimants or plaintiffs or their attorneys or agents
that they initiate claims or lawsuits against the Company, any of its
subsidiaries or divisions, or any of its or their directors, officers,
employees, or agents, nor will Wall voluntarily aid, assist, or cooperate
with any claimants or plaintiffs or their attorneys or agents in any claims
or lawsuits now pending or commenced in the future against the Company, any
of its subsidiaries or divisions, or any of its or their directors, officers,
employees, or agents; provided, however, that this paragraph will not be
interpreted or construed to prevent Wall from giving testimony in response to
questions asked pursuant to a legally enforceable subpoena, deposition
notice, or other legal process, during any legal proceedings involving the
Company, any of its subsidiaries or divisions, or any of its or their
directors, officers, employees, or agents.
17. INDEMNIFICATION. Notwithstanding Wall's separation from the
Company, with respect to events that occurred during his tenure as an
employee or officer of the Company, Wall will be entitled, as a former
employee or officer of the Company, to the same rights as are afforded to
senior executive officers of the Company now or in the future, to
indemnification and advancement of expenses provided in the charter documents
of the Company, under applicable law, and under the Company's indemnification
agreement with Wall, and to coverage and a legal defense under any applicable
general liability and/or directors' and officers' liability insurance
policies maintained by the Company.
18. WALL REPRESENTATION. Wall represents that, during the entire
period that he was an employee or officer of the Company, he acted in good
faith, had no reasonable cause to believe that his conduct was unlawful, and
reasonably believed that his conduct was
-8-
<PAGE>
in the best interests of the Company. The parties intend that the terms used
in this paragraph will have the same meaning as the same terms used in
Section 145 of the Delaware General Corporation Law.
19. COMPANY REPRESENTATION. The Company represents that, at the
time it executes this Agreement, the members of its Board of Directors and
its senior executive officers are not aware of the existence of any facts
upon which any claim or cause of action could be asserted against Wall.
20. TIME TO CONSIDER AGREEMENT. Wall understands that he may take
at least 21 calendar days to decide whether to sign this Agreement and the
General Release, which 21-day period will commence on the date on which Wall
first receives copies of this Agreement and the General Release for review.
Wall represents that if he signs this Agreement and the General Release
before the expiration of the 21-day period, it is because he has decided that
he does not need any additional time to decide whether to sign this Agreement
and the General Release.
21. RIGHT TO RESCIND OR REVOKE. Wall understands that he has the
right to rescind or revoke this Agreement and the General Release for any
reason within 15 calendar days after he signs them. Wall understands that
this Agreement and the General Release will not become effective or
enforceable unless and until he has not rescinded this Agreement and the
General Release and the applicable rescission period has expired. Wall
understands that if he wishes to rescind, the rescission must be in writing
and hand-delivered or mailed to the Company. If hand-delivered, the
rescission must be: (a) addressed to Ervin F. Kamm, Jr., Chief Executive
Officer, Digi International Inc., 11011 Bren Road East, Minnetonka, MN
-9-
<PAGE>
55343 and (b) delivered to Ervin F. Kamm, Jr. within the 15-day period. If
mailed, the rescission must be: (a) postmarked within the 15-day period; (b)
addressed to Ervin F. Kamm, Jr., Chief Executive Officer, Digi International
Inc., 11001 Bren Road East, Minnetonka, MN 55343 and (c) sent by certified
mail, return receipt requested. Whether hand-delivered or mailed, Wall will,
in addition, simultaneously provide a copy of his rescission to the Company's
Director of Human Resources, at the address of the Company listed in this
paragraph.
22. WALL'S DUTY TO INFORM COMPANY OF DECISION TO REVOKE. If Wall
decides to rescind or revoke this Agreement and the General Release by mail,
as provided for in paragraph 21, he will inform Chief Executive Officer Ervin
F. Kamm, Jr. of his decision by telephone before 5:00 p.m. on the 15th day of
the rescission period.
23. FULL COMPENSATION. Wall understands that the payments made and
other consideration provided by the Company under this Agreement will fully
compensate Wall for and extinguish any and all of the claims Wall is
releasing in the General Release, including, but not limited to, his claims
for attorneys' fees, costs, and disbursements, and any and all claims for any
type of equitable or legal relief.
24. NO ADMISSION OF WRONGDOING. Wall understands that this
Agreement does not constitute an admission that the Company has violated any
local ordinance, state or federal statute, or principle of common law, or
that the Company has engaged in any improper or unlawful conduct or
wrongdoing against Wall. Wall will not characterize this Agreement or the
payment of any money or the giving of other consideration in accordance with
this
-10-
<PAGE>
Agreement as an admission that the Company has engaged in any improper or
unlawful conduct or wrongdoing against him.
25. AUTHORITY. Wall represents that he has the authority to enter
into this Agreement and the General Release, and that no causes of action,
claims, or demands released pursuant to this Agreement and the General
Release have been assigned to any person or entity not a party to this
Agreement.
26. REPRESENTATION. Wall acknowledges that he has had a full
opportunity to consult with his own attorney in this matter, that he has had
a full opportunity to consider this Agreement and the General Release, that
he has had a full opportunity to ask any questions that he may have
concerning this Agreement and the General Release, or the settlement of his
claims against the Company, and that he has not relied upon any statements or
representations made by the Company or its attorneys, written or oral, other
than the statements and representations that are explicitly set forth in this
Agreement, the General Release, and the Plan.
27. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the parties and their respective heirs,
representatives, successors, and assigns, but will not be assignable by
either party without the prior written consent of the other party.
28. INVALIDITY. In the event that any provision of this Agreement
or the General Release is determined by a court of competent jurisdiction to
be invalid, illegal, or unenforceable in any respect, such a determination
will not affect the validity, legality, or enforceability of the remaining
provisions of this Agreement or the General Release, and the
-11-
<PAGE>
remaining provisions of this Agreement and the General Release will continue
to be valid and enforceable, and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid and enforceable.
29. ENTIRE AGREEMENT. Before executing this Agreement, the parties
had several discussions, including negotiations, and generated certain
documents, in which the parties discussed the matters that are the subject of
this Agreement and the General Release. In such discussions and documents,
the parties may have expressed their judgments and beliefs concerning the
intentions, capabilities, and practices of the parties, and may have forecast
future events. The parties recognize, however, that all business
transactions, including the transactions upon which the parties' judgments,
beliefs, and forecasts are based, contain an element of risk, and that it is
normal business practice to limit the legal obligations of contracting
parties only to those promises and representations that are essential to the
transaction so as to provide certainty as to their respective future rights
and remedies. Accordingly, this Agreement, the General Release, the Plan,
and the parties' indemnification agreement are intended to define the full
extent of the legally enforceable undertakings of the parties, and no
promises or representations, written or oral, that are not set forth
explicitly in this Agreement, the General Release, the Plan, or the parties'
indemnification agreement are intended by either party to be legally binding,
and all other agreements and understandings between the parties are hereby
superseded.
30. HEADINGS. The descriptive headings of the paragraphs and
subparagraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement.
-12-
<PAGE>
31. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an original, but all
of which together will constitute one and the same instrument.
32. GOVERNING LAW. This Agreement and the General Release will be
interpreted and construed in accordance with, and any dispute or controversy
arising from any breach or asserted breach of this Agreement or the General
Release will be governed by, the laws of Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates indicated at their respective signatures below.
Dated: November 21, 1996. /s/ Gerald A. Wall
--------------------------------
GERALD A. WALL
Dated: December 4, 1996. DIGI INTERNATIONAL INC.
By: /s/ Ervin F. Kamm, Jr.
-----------------------------
Ervin F. Kamm, Jr.
Its: President and Chief Executive
Officer
-13-
<PAGE>
EXHIBIT 11
DETAIL COMPUTATION OF EARNINGS PER SHARE
<PAGE>
Digi International
Exhibit 11
Detail Computation of Earnings Per Share
Years Ended September 30:
---------------------------------------
1994 1995 1996
---- ---- ----
PER SHARE DATA
Net income $16,701,092 $19,331,093 $ 9,300,220
----------- ----------- -----------
----------- ----------- -----------
Net income per common
and common equivalent share:
Primary $1.15 $1.38 $0.69
----- ----- -----
----- ----- -----
Fully diluted $1.15 $1.38 $0.67
----- ----- -----
----- ----- -----
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
Primary:
Weighted average of common
shares outstanding 14,262,206 13,656,150 13,323,564
Dilutive stock options, using
treasury stock method 248,363 400,959 199,341
----------- ----------- -----------
14,510,569 14,057,109 13,522,905
----------- ----------- -----------
----------- ----------- -----------
Fully diluted:
Weighted average of common
shares outstanding 14,262,206 13,656,150 13,323,564
Dilutive stock options, using
treasury stock method 245,690 611,033 557,583
----------- ----------- -----------
14,507,896 14,267,183 13,881,147
----------- ----------- -----------
----------- ----------- -----------
NOTE: The calculation of fully diluted earnings per share is submitted in
compliance with Regulation S-K Item 601(b)(11) although not required by
footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in
less than 3% dilution.
Page 1
<PAGE>
Corporate Headquarters
11001 Bren Road East
Minnetonka, MN 55343
(612) 912-3444 Tel
(612) 912-4991 Fax
(800) 344-4273 Sales/Technical Support
Manufacturing Operations
10000 West 76th Street
Eden Prairie, MN 55344
(612) 912-4700 Tel
(612) 912-4905 Fax
Digi International Amsterdam
Keizersgracht 62-64
1015 CS Amsterdam
The Netherlands
+31 20 5207 566 Tel
+31 20 5207 972 Fax
Digi International GmbH
Domkloster 1
50667 Cologne (Kn)
Germany
+49 0 221 920 52-0 Tel
+49 0 221 920 52-10 Fax
Digi International Asia Pte. Ltd.
13-06 Tower A
391A Orchard Road
Ngee Ann City
Singapore, 238837
+65 732 1318 Tel
+65 732 1312 Fax
Digi International GmbH Denmark
Hejreskovvej 18c, 1.9.8
DK-3490 Kvistgaard
Denmark
+45-4917-7090 Tel
+45-4917-7091 Fax
Digi International Australia
121 Walker Street
Ste. 201 Level 2
North Sydney
NSW 2060
Australia
+61-2-99-29-0299 Tel
+61-2-99-29-0445 Fax
Digi International Japan
No. 404 Crest Court Sadohara
2-1-4 Ichigaya-Sadohara
Shinjyuku-ku
162 Tokyo, Japan
+81 3 3266 1092 Tel
+81 3 3266 8273 Fax
Digi International (HK) Limited
Unit 1002, 10 Floor
Sino Plaza, 256-257 Gloucester Road
Causeway Bay, Hong Kong
(852) 2833-1008 Tel
(852) 2572-9989 Fax
Digi International Federal Systems
2231 Crystal Drive, Suite 500
Arlington, VA 22202
(703) 553-2560 Tel
(703) 486-5763 Fax
Regional Offices
618 Grassmere Park Drive, Suite 6
Nashville, TN 37211
(615) 834-8000 Tel
(615) 834-5399 Fax
(800) 366-8844 Sales/Technical Support
2450 Edison Boulevard
Twinsburg, OH 44087
(216) 425-0723 Tel
(216) 425-2492 Fax
(800) 782-7428 Sales/Technical Support
2730 Monterey Street, Suite 105
Torrance, CA 90503
(310) 328-9700 Tel
(310) 328-9696 Fax
1299 Orleans Drive
Sunnyvale, CA 94089
(408) 744-2775 Tel
(408) 744-2793 Fax
6703 Odyssey Drive, Suite 303
Huntsville, AL 35806
(205) 922-9440 Tel
(205) 922-9437 Fax
Westpark, Building M, Second Floor
8440 154th Avenue NE
Redmond, WA 98052
(206) 867-3893 Tel
(206) 867-0954 Fax
<PAGE>
GROSS MARGIN GRAPH
The first graph on page 4 shows gross margin in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Gross margin dollars for 1992 were $40.7, for
1993 were $52.4, for 1994 were $67.8, for 1995 were $86.0, and, for 1996 were
$102.7.
OPERATING INCOME GRAPH
The second graph on page 4 shows operating income in millions of dollars for
fiscal 1992, 1993, 1994, 1995 and 1996. Operating income dollars for 1992 were
$16.7, for 1993 were $20.8, for 1994 were $24.3, for 1995 were $27.4, and, for
1996 were $20.1.
WORKING CAPITAL GRAPH
The third graph on page 4 shows working capital in millions of dollars for
fiscal 1992, 1993, 1994, 1995 and 1996. Working capital dollars for 1992 were
$56.1, for 1993 were $69.6, for 1994 were $72.7, for 1995 were $74.1, and, for
1996 were $69.7.
NET SALES/EMPLOYEE GRAPH
The fourth graph on page 4 shows net sales per employee in thousands of
dollars for fiscal 1992, 1993, 1994, 1995 and 1996. Net sales per employee for
1992 were $290, for 1993 were $312, for 1994 were $343, for 1995 were $322,
and, for 1996 were $281.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 195,833 $ 164,978 $ 130,945 $ 93,385 $ 70,867
AetherWorks Corporation net loss (3,624) -- -- -- --
Income before taxes 16,805 29,366 25,351 22,510 18,256
Net income 9,300 19,331 16,701 14,905 12,555
Net income per share .69 1.38 1.15 1.03 .87
Average shares outstanding 13,523 14,048 14,511 14,564 14,443
Working capital $ 69,696 $ 74,061 $ 72,671 $ 69,648 $ 56,147
Total assets 129,939 126,043 102,758 88,859 69,788
Stockholders' equity 109,943 105,827 91,113 80,467 64,076
Book value per share 8.24 7.82 6.64 5.68 4.58
Return on sales 4.8% 11.7% 12.8% 16.0% 17.7%
Number of employees 698 605 430 333 266
- -----------------------------------------------------------------------------------------------
</TABLE>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS, PERCENTAGES AND NUMBER OF EMPLOYEES.)
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 195,833 $ 164,978 $ 130,945 $ 93,385 $ 70,867
% change 19% 26% 40% 32% 39%
Net income 9,300 19,331 16,701 14,905 12,555
% change (52) 16 12 19 54
Net income per share .69 1.38 1.15 1.03 .87
% change (50) 20 12 18 36
Total assets 129,939 126,043 102,758 88,859 69,788
% change 3 23 16 27 24
Stockholders' equity 109,943 105,827 91,113 80,467 64,076
% change 4 16 13 26 25
- -------------------------------------------------
</TABLE>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES. PERCENTAGE CHANGE
REPRESENTS PERCENT INCREASE (DECREASE) OVER PREVIOUS YEAR.)
<PAGE>
NET SALES GRAPH
The first graph on page 5 shows net sales in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Net sales dollars for 1992 were $70.9, for
1993 were $93.4, for 1994 were $130.9, for 1995 were $165.0, and, for 1996
were $195.8.
NET INCOME GRAPH
The second graph on page 5 shows net income in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Net income dollars for 1992 were $12.6, for
1993 were $14.9, for 1994 were $16.7, for 1995 were $19.3, and, for 1996 were
$9.3.
NET INCOME PER SHARE GRAPH
The third graph on page 5 shows net income per share in the following amounts
for fiscal 1992, 1993, 1994, 1995 and 1996: for 1992, $. 87; for 1993, $1.03;
for 1994, $1.15; for 1995 were $1.38; and, for 1996; $ .69.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following table sets forth selected information derived from the
Company's Consolidated Statements of Operations expressed as percentage of
net sales.
PERCENTAGE
YEAR ENDED INCREASE/
SEPTEMBER 30 (DECREASE)
- ------------------------------------------------------------------------------
1996 1995
over over
1996 1995 1994 1995 1994
- ------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 18.7% 26.0%
Cost of sales 47.5 47.8 48.2 18.0 25.1
- ------------------------------------------------------------------------------
Gross margin 52.5 52.2 51.8 19.4 26.8
Operating expenses:
Sales & marketing 22.5 19.1 17.2 39.9 39.9
Research & development 10.5 8.9 7.5 40.5 49.2
General & administrative 9.2 7.6 8.6 43.7 11.3
- ------------------------------------------------------------------------------
42.2 35.6 33.3 40.9 34.6
Operating income 10.3 16.6 18.5 (26.6) 12.8
Other income, principally interest .2 1.2 .9 (83.1) 84.4
AetherWorks Corporation net loss (1.9) 100.0
- ------------------------------------------------------------------------------
Income before income taxes 8.6 17.8 19.4 (42.8) 15.8
Provision for income taxes 3.8 6.1 6.6 (25.2) 16.0
- ------------------------------------------------------------------------------
Net income 4.8% 11.7% 12.8% (51.9%) 12.1%
- ------------------------------------------------------------------------------
NET SALES
- ------------------------------------------------------------------------------
The increase in net sales from 1995 to 1996 of $30.9 million and from 1994 to
1995 of $34.0 million spanned all product markets as follows:
PRODUCT MARKET PERCENT OF ANNUAL SALES ANNUAL SALES INCREASE
- ------------------------------------------------------------------------------
1996 1995 1994 1996 1995
- ------------------------------------------------------------------------------
Multiuser 64.4% 67.8% 74.2% 13% 17%
Remote Access 16.7% 13.8% 10.7% 43% 63%
LAN Connect 18.9% 18.4% 15.1% 22% 54%
- ------------------------------------------------------------------------------
16
<PAGE>
Sales increases are primarily due to volume, not price increases.
Sales to original equipment manufacturers (OEMs) increased from 20.6% in 1994
to 22.9% in 1995 and decreased to 20.0% in 1996. Sales to the distribution
markets increased from 57.9% of net sales for 1994 to 61.2% and 65.9% for
1995 and 1996, respectively. The Company sees these markets continuing to
grow.
The Company believes that revenue from its Remote Access and LAN Connect
markets will continue to show rapid growth, while the multiuser market growth
will slow.
NET SALES GRAPH
The first graph on page 17 shows net sales in millions of dollars for fiscal
1994, 1995 and 1996. Net sales dollars for 1994 were $130.9, for 1995 were
$165.0, and, for 1996 were $195.8.
COST OF SALES GRAPH
The second graph on page 17 shows cost of sales in millions of dollars for
fiscal 1994, 1995 and 1996. Cost of sales dollars for 1994 were $63.1, for
1995 were $78.9, and, for 1996 were $93.1.
GROSS MARGIN
Gross margin increased slightly from 52.2% of net sales in 1995 to 52.5% in
1996. Gross margin increased from 51.8% to 52.2% from 1994 to 1995, due
primarily to purchasing efficiencies and product redesign.
GROSS MARGIN GRAPH
The third graph on page 17 shows gross margin as a percent of net sales for
fiscal 1994, 1995 and 1996. Gross margin for 1994 was 51.8%, for 1995 was
52.2%, and, for 1996 was 52.5%.
OPERATING EXPENSES
Operating expenses for 1996 increased 40.9% over such expenses for 1995 and
increased as a percent of sales to 42.2% for 1996 as compared to 35.6% for
1995. Operating expenses for 1995 had increased 34.6% over 1994, while such
expenses as a percent of sales, increased from 33.3% in 1994. The 1996
increases were primarily due to increases in research and development for new
products, including the effect of the acquisition of LAN Access Corporation
located in Torrance, Calif., late in fiscal 1995, the opening of two new
research and development facilities in Huntsville, Ala. and Redmond, Wash.,
as well as additional marketing costs in connection with new product
introductions, programs for the establishment of the Company in the Remote
Access and LAN Connect markets, and the consolidation, under the "Digi"
brand, of products previously sold under the identities of subsidiaries of
the Company. The 1996 general and administrative expenses increased due to
expansion of and upgrades to the Company's infrastructure, including a new
corporate headquarters, three new research and
17
<PAGE>
development sites, three additional international sales offices and increased
systems capabilities. The 1995 increases in operating expenses were due
primarily to increased research and development spending for new products and
markets, principally for Remote Access and LAN Connect markets, plus
increased staffing levels. The Company expects to continue the funding levels
for new product development, but also expects the marketing costs to level
off after the first quarter of fiscal 1997.
SALES AND MARKETING GRAPH
This graph shows sales and marketing expenses in millions of
dollars for fiscal 1994, 1995 and 1996. Sales and marketing dollars for 1994
were $22.5, for 1995 were $31.5, and, for 1996 were $44.1.
GENERAL AND ADMINISTRATIVE GRAPH
This graph shows general and administrative expenses in millions of
dollars for fiscal 1994, 1995 and 1996. General and administrative dollars for
1994 were $11.2, for 1995 were $12.5, and, for 1996 were $17.9.
RESEARCH AND DEVELOPMENT GRAPH
This graph shows research and development expenses in millions of
dollars for fiscal 1994, 1995 and 1996. Research and development dollars for
1994 were $9.8, for 1995 were $14.7, and, for 1996 were $20.6.
TOTAL OPERATING EXPENSES GRAPH
This graph shows total operating expenses in millions of dollars
for fiscal 1994, 1995 and 1996. Total operating dollars for 1994 were $43.6,
for 1995 were $58.6, and, for 1996 were $82.6.
OTHER INCOME
Other income for 1996 declined by 83% from 1995 levels due primarily to lower
interest income resulting from a decrease in invested funds as well as the
loss on disposal of capital assets. The increase in other income from 1994 to
1995 resulted from an increase of available funds and an increase in interest
rates.
AETHERWORKS CORPORATION OPERATING LOSSES
During 1996, the Company purchased secured convertible notes from AetherWorks
Corporation, a development stage company engaged in the development of
wireless and dial-up remote access technology. The Company has reported its
investment in AetherWorks on the equity method and has recorded a $3.6
million loss representing 100% of the AetherWorks losses for 1996. The
percentage of the AetherWorks losses recorded by the Company is based upon
the percentage of financial support provided by the Company (versus other
investors) to AetherWorks during the year. The Company anticipates that
AetherWorks' losses for 1997 will be greater than 1996 levels.
INCOME TAXES
The Company's effective income tax rate increased from 34.2% in 1995 to 44.7%
in 1996 due primarily to the non-deductibility of the AetherWorks losses. The
effective tax rate in the fourth quarter of 1996, excluding Aetherworks was
36.7%. The increase in the effective rate from 1994 to the 1995 rate of 34.2%
resulted primarily from a decrease in the federal R&D credit.
INFLATION AND OTHER
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition.
Due principally to anticipated OEM (original equipment manufacturer) revenue
shortfalls and delays in new product rollouts, the Company believes it will
likely report earnings in fiscal first quarter 1997 lower than analyst
expectations. The range of estimates for first quarter 1997 earnings per
share is $.23 - $.27 per share, according to First Call.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds remaining from earlier public stock offerings.
During 1996, the Company sold in excess of $27.9 million in marketable
securities to finance growth in accounts receivable and inventories, as well
as to fund new product technology. The increase in accounts receivable for
1996 was due primarily to increased sales volume, particularly late in the
1996 fiscal year. The 1996 inventory increase is reflective of expanded
product lines and anticipated increased sales levels.
Investing activities for 1996 consisted primarily of the redemption of
maturing investments offset by purchases of property and equipment, and the
purchase of $5.3 million in secured convertible notes from AetherWorks
Corporation. The Company is obligated to purchase up to an additional $8.5
million secured convertible notes from time
18
<PAGE>
to time at the request of AetherWorks, based on certain conditions. Secured
convertible notes held by the Company are presently convertible into 52% of
AetherWorks' common stock, and the purchase of $8.5 million additional
principal amount of secured notes would increase the Company's ownership
portion upon conversion to 62.7% based on AetherWorks' present
capitalization. In connection with the financing arrangement, the Company
has also guaranteed $1.1 million in lease obligations incurred by
AetherWorks. Subsequent to September 30, 1996, the Company purchased $1.5
million in additional secured notes.
During 1996, the Company made open market purchases of the Company's common
stock aggregating $7.3 million pursuant to a 1-million-share repurchase
program authorized by the Company's Board of Directors on March 27, 1995. On
January 31, 1996, the Board of Directors authorized a separate 500,000-share
repurchase program for the purpose of purchasing Common Stock to be utilized
for the Company's Employee Stock Purchase Plan, which purchase will be funded
through employee withholding. The Company's Board of Directors suspended all
existing stock purchase programs at its October 1996 board meeting.
Investing activities for 1995 included new investments of excess cash,
reinvestment of maturing investments, $4.5 million for purchase of a new
office and research facility plus the acquisition of LAN Access Corporation.
At September 30, 1996, the Company had working capital of $69.7 million and
no debt. The Company has negotiated a $5 million unsecured line of credit
with its bank, but has not utilized such line. The Company's management
believes that current financial resources, cash generated from operations and
the Company's potential capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.
FORWARD-LOOKING STATEMENTS
Certain statements made above, which are summarized below, are
forward-looking statements that involve risks and uncertainties, and actual
results may be materially different. Factors that could cause actual results
to differ include those identified below:
- - CONTINUED GROWTH IN SALES OF THE COMPANY'S REMOTE ACCESS AND LAN
CONNECT PRODUCTS - General market conditions and competitive conditions
within these markets, development and acceptance of new products offered by
the Company, and the introduction of products by competitors in these
markets.
- - THAT SALES OF THE COMPANY'S MULTIUSER PRODUCTS MAY GROW AT A
REDUCED RATE - Potential market penetration in emerging third world
countries and the development of new applications for these products
in existing markets.
- - CONTINUED INCREASE IN OEM SALES - OEM orders are subject to
cancellation at the option of the customer, and are subject to greater
quarterly fluctuations than sales through the Company's other channels,
as well as competitive conditions in markets served by the Company's OEM
customers. OEM sales could also be adversely impacted by component
shortages.
- - THE EXPECTATION THAT MARKETING EXPENSES WILL LEVEL OFF AFTER THE
FIRST QUARTER OF FISCAL 1997 - This expectation may be adversely impacted
by presently unanticipated expenses or opportunities.
- - THE EXPECTATION THAT THE AETHERWORKS CORPORATION LOSSES FOR 1997
WILL BE GREATER THAN 1996 LEVELS - This expectation may be impacted by
presently unanticipated revenue opportunities or by unanticipated
expenses.
- - THE EXPECTATION THAT EARNINGS WILL BE LOWER THAN ANALYST EXPECTATIONS FOR
FISCAL FIRST QUARTER 1997 - This expectation may be impacted by presently
unanticipated revenue opportunities or by unanticipated expenses.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -------------------------------------------------------------------------------------------
FISCAL YEARS ENDED SEPTEMBER 30 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 195,832,640 $ 164,978,018 $ 130,945,343
Cost of sales 93,108,624 78,933,221 63,100,733
- -------------------------------------------------------------------------------------------
GROSS MARGIN 102,724,016 86,044,797 67,844,610
- -------------------------------------------------------------------------------------------
Operating expenses:
Sales & marketing 44,079,859 31,497,005 22,518,353
Research & development 20,624,274 14,676,683 9,833,859
General & administrative 17,922,536 12,472,581 11,208,071
- -------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 82,626,669 58,646,269 43,560,283
- -------------------------------------------------------------------------------------------
OPERATING INCOME 20,097,347 27,398,528 24,284,327
Other income, principally interest 331,789 1,967,565 1,066,765
AetherWorks Corporation net loss (3,623,776)
- -------------------------------------------------------------------------------------------
Income before income taxes 16,805,360 29,366,093 25,351,092
Provision for income taxes 7,505,140 10,035,000 8,650,000
- -------------------------------------------------------------------------------------------
NET INCOME $ 9,300,220 $ 19,331,093 $ 16,701,092
- -------------------------------------------------------------------------------------------
Income per common and
common equivalent share: $ .69 $ 1.38 $ 1.15
- -------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 13,522,905 14,057,109 14,510,569
- -------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -----------------------------------------------------------------------------
AS OF SEPTEMBER 30 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 8,943,390 $ 5,103,731
Marketable securities, at cost 27,968,775
Accounts receivable, net 42,874,898 31,960,936
Inventories, net 33,372,164 27,019,085
Income tax refunds receivable 1,675,626 130,165
Other 2,825,828 2,094,893
- -----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 89,691,906 94,277,585
- -----------------------------------------------------------------------------
Property, equipment and improvements, net 24,230,101 17,716,819
Intangible assets, net 10,854,845 11,633,305
Investment in AetherWorks Corporation 1,672,749
Other 3,489,228 2,415,755
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 129,938,829 $ 126,043,464
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,549,738 $ 12,106,515
Accrued expenses
Advertising 3,761,619 2,235,946
Compensation 1,622,549 4,932,987
Other 2,061,782 941,469
- -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,995,688 20,216,917
- -----------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000
shares authorized; none outstanding
Common stock, $.01 par value; 60,000,000
shares authorized; 14,677,150 and
14,562,958 shares outstanding 146,772 145,630
Additional paid-in capital 42,866,758 41,306,320
Retained earnings 90,904,746 81,604,526
- -----------------------------------------------------------------------------
133,918,276 123,056,476
Unearned stock compensation (295,156) (598,387)
Treasury stock, at cost, 1,338,894
and 1,032,729 shares (23,679,979) (16,631,542)
- -----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 109,943,141 105,826,547
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,938,829 $ 126,043,464
- -----------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,300,220 $ 19,331,093 $ 16,701,092
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation of property and equipment 5,017,735 2,289,554 1,491,964
AetherWorks Corporation net loss 3,623,776
Amortization of intangibles 1,320,457 1,132,006 1,139,076
Loss on sale of fixed assets 238,222
Provision for losses on accounts receivable 262,164 243,895 608,001
Provision for inventory obsolescence 1,455,895 716,300 1,071,741
Deferred income taxes (393,153) (84,750) (80,000)
Stock compensation 204,973 166,667 153,076
Changes in operating assets and liabilities:
Accounts receivable (11,176,126) (10,457,106) (7,452,502)
Inventories (7,808,974) (4,043,377) (9,785,911)
Income taxes payable/receivable (1,545,461) (1,157,823) 279,746
Other assets (1,953,252) (1,266,098) (345,891)
Accounts payable 443,223 7,420,550 (833,303)
Accrued expenses (664,452) 1,365,901 (363,231)
- ----------------------------------------------------------------------------------------------------------
Total adjustments (10,974,973) (3,674,281) (14,117,234)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,674,753) 15,656,812 2,583,858
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,902,436) (9,573,995) (3,944,632)
Proceeds from sale of fixed assets 1,133,197
Proceeds from held-to-maturity marketable securities 20,640,962 25,004,985 41,480,965
Proceeds from available-for-sale marketable securities 13,060,000
Purchases of held-to-maturity marketable securities (482,187) (21,751,326) (31,194,880)
Purchases of available-for-sale marketable securities (5,250,000) (7,810,000)
Business acquisitions, net of cash acquired (5,487,374) (2,536,766)
Investment in AetherWorks Corporation (5,296,525)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 10,903,011 (19,617,710) 3,804,687
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Purchase of treasury stock (7,048,437) (5,930,313) (11,152,498)
Stock option transactions 1,659,838 1,145,925 781,712
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,388,599) (4,784,388) (10,370,786)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,839,659 (8,745,286) (3,982,241)
Cash and cash equivalents, beginning of year 5,103,731 13,849,017 17,831,258
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 8,943,390 $ 5,103,731 $ 13,849,017
- ----------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosure: Income taxes paid $ 8,944,627 $ 10,815,846 $ 7,878,279
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
DIGI INTERNATIONAL INC. For the years ended September 30, 1996, 1995 and 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Unearned Total
-------------------- -------------------- Paid-in Retained Stock Stockholders'
Shares Par Value Shares Value Capital Earnings Compensation Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1993 14,178,336 $141,783 229 ($4,981) $35,190,341 $45,572,341 ($432,626) $80,466,858
Treasury stock, at cost 780,000 (11,152,498) (11,152,498)
Issuance of stock options
at below market prices 182,554 (182,554)
Stock compensation 153,076 153,076
Issuance of stock for MiLAN
purchase 186,100 1,861 (25,000) 456,250 3,705,823 4,138,934
Issuance of stock upon exercise
of stock options, net of
withholding 110,227 1,103 207,635 208,738
Tax benefit realized upon
exercise of stock options 571,975 571,975
Forfeiture of stock options (69,772) 69,772
Net income 16,701,092 16,701,092
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1994 14,474,663 144,747 755,229 (10,701,229) 39,788,556 62,273,433 (392,332) 91,113,175
Treasury stock, at cost 277,500 (5,930,313) (5,930,313)
Issuance of stock options
at below market prices 448,750 (448,750)
Stock compensation 166,667 166,667
Issuance of stock upon
exercise of
stock options, net of
withholding 88,295 883 683,315 684,198
Tax benefit realized upon
exercise of stock options 461,727 461,727
Forfeiture of stock options (76,028) 76,028
Net income 19,331,093 19,331,093
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995 14,562,958 145,630 1,032,729 (16,631,542) 41,306,320 81,604,526 (598,387) 105,826,547
Treasury stock, at cost 306,165 (7,048,437) (7,048,437)
Issuance of stock options
at below market prices 12,500 (12,500)
Stock compensation 204,973 204,973
Issuance of stock upon
exercise of stock options,
net of withholding 114,192 1,142 1,159,569 1,160,711
Tax benefit realized upon
exercise of stock
options 499,127 499,127
Forfeiture of stock options (110,758) 110,758
Net income 9,300,220 9,300,220
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 14,677,150 $146,772 1,338,894 ($23,679,979) $42,866,758 $90,904,746 ($295,156) $109,943,141
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi International Inc. (the Company) is a leading ISO 9001-compliant
provider of data communications hardware and software that delivers seamless
connectivity solutions for multiuser environments, Remote Access and LAN
Connect markets. The Company markets its products through an international
network of distributors and resellers, system integrators and original
equipment manufacturers (OEMs).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, while those
having original maturities in excess of three months are classified as
marketable securities and generally consist of U.S. Government or U.S.
Government-backed obligations. Marketable securities classified as
held-to-maturity are carried at amortized cost. Marketable securities
classified as available-for-sale are recorded at market value. (See Note 3)
REVENUE RECOGNITION
Sales are recognized at the date of shipment. Estimated warranty costs
and customer returns are recorded at the time of sale. Accounts receivable
are net of allowances for returns and doubtful accounts of $735,442 at
September 30, 1996 and $656,500 at September 30, 1995.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Market for raw materials is based on
replacement cost and for other inventory classifications on net realizable
value. Appropriate consideration is given to deterioration, obsolescence and
other factors in evaluating net realizable value.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
provided by charges to operations using the straight-line method based on
estimated useful lives.
Expenditures for maintenance and repairs are charged to operations as
incurred, while major renewals and betterments are capitalized. The assets
and related accumulated depreciation accounts are adjusted for asset
retirements and disposals with the resulting gain or loss included in
operations.
INTANGIBLE ASSETS
Purchased technology, license agreements, covenants not to compete and other
intangible assets are recorded at cost. Goodwill represents the excess of
cost over the fair value of assets acquired and is being amortized on a
straight-line basis over its estimated useful life of 10 to 15 years. All
other intangible assets are amortized on a straight-line basis over their
estimated useful lives of one to five years.
The Company periodically, at least quarterly, analyzes intangible assets for
potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating unit cash flows on a basis consistent with generally accepted
accounting principles.
24
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven
marketability of the product are established. Costs otherwise capitalized
after such point also are expensed because they are insignificant.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Tax credits are accounted for under the flow-through method, which recognizes
the benefit in the year in which the credit is utilized.
INCOME PER COMMON SHARE
Income per common share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period. Common stock equivalents result from dilutive
stock options.
USE OF ESTIMATES
The preparation of consolidated 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. The most significant areas which require the use of management's
estimates relate to the determination of the allowance for obsolete inventory
and uncollectable accounts receivable, along with accrued warranty costs and
sales returns.
2. ACQUISITIONS
On November 15, 1993, the Company acquired MiLAN Technology Corporation, a
provider of networking products, for stock and cash valued at approximately
$6.8 million. On September 29, 1995, the Company acquired LAN Access
Corporation, a provider of remote access products, for cash of approximately
$5.5 million, substantially all of which was allocated to goodwill. These
acquisitions have been accounted for as purchases. Results of operations
since the effective dates of the transactions are included in the
Consolidated Statement of Operations.
Pro forma data (unaudited) as though the acquisitions had been effective at
the beginning of 1994 is as follows:
FOR THE YEARS ENDED SEPTEMBER 30
1995 1994
- -------------------------------------------------------
Net sales $166,784 $132,829
- -------------------------------------------------------
Net income 18,284 16,060
- -------------------------------------------------------
Net income per share 1.30 1.11
- -------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115),
as of September 30, 1994. The adoption of SFAS 115 did not impact net income
or stockholders' equity for fiscal 1994. In accordance with SFAS 115,
prior-period financial statements have not been restated to reflect the
change in accounting principle.
25
<PAGE>
Held-to-maturity marketable securities, which consist of state and political
subdivision debt securities, will be held to their maturity of less than one
year. As of September 30, 1996, the Company had no held-to-maturity
marketable securities. At September 30, 1995, the amortized cost and
estimated fair value were $20,158,775 and $20,232,038, respectively.
Unrealized holding gains and losses were not significant.
Available-for-sale marketable securities, which consist of state and
political subdivision debt securities, will be sold within the next year. As
of September 30, 1996, the Company had no available-for-sale marketable
securities. At September 30, 1995, the estimated fair value approximated
amortized cost of $7,810,000. Unrealized and realized gains and losses were
not significant.
4. INVESTMENT IN AETHERWORKS CORPORATION
During 1996, under a financing arrangement, the Company purchased $5,296,525
of convertible notes from AetherWorks Corporation, a development stage
company engaged in the development of wireless and dial-up remote access
technology. At September 30, 1996, the Company is obligated to purchase up
to an additional $8.5 million of convertible notes from time to time at the
request of AetherWorks, based on certain conditions. The convertible notes
held by the Company at September 30, 1996 are convertible into 52% of
AetherWorks' common stock, and the purchase of $8.5 million additional
principal amount of convertible notes would increase the Company's ownership
interest upon conversion to 62.7%, based on AetherWorks' present
capitalization.
Subsequent to September 30, 1996, the Company purchased $1.5 million of
AetherWorks convertible notes. In connection with the financing arrangement,
the Company has also guaranteed $1.1 million of lease obligations incurred by
AetherWorks.
The Company has reported its investment in AetherWorks on the equity method
and has recorded a $3.6 million loss. Such loss represents 100% of the
AetherWorks net loss for the year ended September 30, 1996. 100% of
AetherWorks losses have been recorded due to the Company providing 100% of
the financial support for AetherWorks during the year.
Investment in AetherWorks Corporation consists of the following at September
30, 1996:
Convertible notes receivable $ 5,296,525
Net loss (3,623,776)
- -----------------------------------------------
$ 1,672,749
The following is condensed financial information related to AetherWorks
Corporation:
BALANCE SHEET DATA, AS OF SEPTEMBER 30, 1996:
- ---------------------------------------------
Current assets $ 72,974
Fixed assets, net 3,869,245
Total assets 4,264,200
Current liabilities 4,607,397
Notes payable 5,296,525
Shareholders' deficit (5,639,721)
OPERATING DATA FOR THE YEAR ENDED
SEPTEMBER 30, 1996:
- ---------------------------------------------
Operating expenses:
Research and development $ 2,531,046
General and administrative 922,570
Other 594,482
Eliminations (424,322)
- ---------------------------------------------
Net loss (3,623,776)
26
<PAGE>
5. SELECTED BALANCE SHEET DATA
1996 1995
- --------------------------------------------------------------------------------
Inventories:
Raw materials $ 19,145,019 $ 13,288,953
Work in process 10,469,315 7,645,002
Finished goods 4,925,930 6,897,130
- --------------------------------------------------------------------------------
Less reserve for obsolescence 1,168,100 812,000
- --------------------------------------------------------------------------------
$ 33,372,164 $ 27,019,085
- --------------------------------------------------------------------------------
Property, equipment and improvements:
Land $ 1,800,000 $2,103,174
Buildings 10,519,731 7,209,840
Improvements 631,362 274,811
Equipment 18,629,353 11,922,087
Purchased software 1,968,127 1,778,712
Furniture & fixtures 1,899,928 1,855,639
- --------------------------------------------------------------------------------
35,448,501 25,144,263
Less accumulated depreciation 11,218,400 7,427,444
- --------------------------------------------------------------------------------
$ 24,230,101 $ 17,716,819
Intangible assets:
Purchased technology $ 1,672,850 $ 1,621,858
License agreements 1,174,908 1,472,000
Covenants not to compete 520,250 1,670,000
Goodwill 11,185,506 11,418,393
Other 20,449 44,193
- --------------------------------------------------------------------------------
14,573,963 16,226,444
Less accumulated amortization 3,719,118 4,593,139
- --------------------------------------------------------------------------------
$ 10,854,845 $ 11,633,305
- --------------------------------------------------------------------------------
6. STOCK OPTIONS
The Company has a stock option plan (the "Plan") that provides for the
issuance of nonstatutory stock options and incentive stock options (ISOs) to
key employees and nonemployee board members holding less than 5% of the
outstanding shares of the Company's common stock.
The option price for ISOs and board member options is set at fair market
value of the Company's common stock on the date of grant. The option price
for nonstatutory options is set by the Compensation Committee of the Board of
Directors. The authority to grant options and set other terms and conditions
rests with the Compensation Committee. The Plan terminates in 2004.
During the years ended September 30, 1996, 1995, and 1994, 114,192, 88,295,
and 110,227 shares of the Company's Common Stock, respectively, were issued
upon the exercise of options for 123,959, 95,367, and 122,200 shares,
respectively. The difference between shares issued and options exercised
results from the Plan's provision allowing employees to elect to pay their
withholding obligation through share reduction. Withholding taxes paid by
the Company as a result of the share withholding provision amounted to
$186,927 in 1996, $413,000 in 1995, and $223,000 in 1994.
<PAGE>
During the years ended September 30, 1996, 1995, and 1994, the Board of
Directors authorized the issuance of nonstatutory stock options totaling
2,500, 50,000, and 17,338 shares respectively, at prices below the market
value of the stock. The difference between the option price and market value
at the date of grant has been recorded as additional paid in capital. The
compensation expense related to these shares is amortized over the five-year
period in which the employees perform services and amounted to $204,793 in
1996, $166,667 in 1995, and $153,076 in 1994.
STOCK OPTIONS AND COMMON SHARES RESERVED FOR
GRANT UNDER THE PLAN ARE AS FOLLOWS:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances,
September 30, 1993 283,400 739,300 $ .50 - 24.25
Granted (293,338) 293,338 11.50 - 23.75
Exercised (122,200) 11.50 - 24.25
Cancelled 17,100 (17,100) 11.83 - 23.75
---------- ---------
Balances,
September 30, 1994 7,162 893,338 $ .50 - 24.25
Additional shares
approved for grant 2,000,000
Granted (808,375) 808,375 15.25 - 29.25
Exercised (95,367) .50 - 21.25
Cancelled 119,251 (119,251) 3.33 - 23.13
---------- ---------
Balances,
September 30, 1995 1,318,038 1,487,095 $ .50 - 29.25
Granted (1,186,525) 1,186,525 14.25 - 28.50
Exercised (123,959) .50 - 21.25
Cancelled 223,001 (223,001) 9.40 - 28.50
---------- ---------
Balances,
September 30, 1996 354,514 2,326,660 $ .50 - 29.25
---------- ---------
- -----------------------------------------------------------------------------------------------
</TABLE>
Of options outstanding at September 30, 1996, options for 535,422 shares were
exercisable, at prices ranging from $.50 to $29.25 per share.
7. LINE OF CREDIT
During April of 1996, the Company negotiated a $5,000,000 uncollateralized
line of credit with its bank, to be used to fund general corporate cash
needs, effective until February of 1997. The interest rate varies depending
on the "base" or "prime" rate established by the bank. During fiscal 1996,
the Company did not use this line of credit.
8. COMMITMENTS
The Company has entered into various operating lease agreements, the last of
which expires in fiscal year 2003. Below is a schedule of future minimum
commitments under noncancelable operating leases:
FISCAL YEAR AMOUNT
- --------------------------------------------------
1997 $ 1,296,359
1998 1,148,472
1999 961,489
2000 892,203
2001 483,280
Thereafter 245,980
- --------------------------------------------------
Total rental expense for all operating leases for the years ended September
30, 1996, 1995, and 1994 was $965,710, $946,000, and $627,000, respectively.
9. INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 1996, 1995, and 1994 are as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Currently payable:
Federal $6,977,337 $ 9,505,650 $8,364,428
State 920,956 614,100 365,572
Deferred (393,153) (84,750) (80,000)
- --------------------------------------------------------------------------------
$7,505,140 $10,035,000 $8,650,000
<PAGE>
The net deferred tax asset at September 30, 1996 and 1995 consists of the
following:
1996 1995
- ------------------------------------------------------
Valuation reserves $ 615,631 $ 393,100
Inventory valuation 432,225 300,400
Vacation costs 311,250 178,700
Depreciation (164,850) (71,097)
- ------------------------------------------------------
Net deferred tax asset $ 1,194,256 $ 801,103
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for the years ended September 30, 1996, 1995, and
1994 is as follows:
1996 1995 1994
- -----------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
Utilization of research and
development tax credits (1.7) (1.7) (1.9)
State taxes, net of federal benefits 3.6 2.5 2.4
AetherWorks Corporation net loss 8.0
Foreign and other (.2) (1.6) (1.4)
- -----------------------------------------------------------------------
44.7% 34.2% 34.1%
10. FOREIGN SALES AND MAJOR CUSTOMERS
The Company maintains foreign sales offices, but does not otherwise have any
foreign operations.
Foreign export sales primarily in Europe, comprised approximately 20%, 20%,
and 21% of net sales for the years ended September 30, 1996, 1995, and 1994,
respectively.
During 1996, one customer (customer C) accounted for 13.9% of net sales while
another (customer A) accounted for 13.4%. During 1995, one customer (customer
A) accounted for 12.5% of net sales and another customer (customer B)
accounted for 11.7%. One customer (customer A) comprised 11.8% of net sales
in 1994.
11. EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section 401(k)
of the Internal Revenue Code ("the Code"), whereby eligible employees may
contribute up to 15% of their earnings, not to exceed amounts allowed under
the Code. In addition, the Company may make contributions at the discretion
of the Board of Directors. During 1995 and 1994, the Company provided for
matching contributions totaling $125,000, and $100,000 respectively. No
contribution was made in 1996.
12. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of," and
Statement No. 123, "Accounting for Stock-Based Compensation." The Company
plans to adopt these statements in fiscal 1997. With regards to Statement
No. 123, the Company intends to follow the option that permits entities to
continue to apply current accounting standards to stock-based employee
compensation arrangements. Effective with year-end 1997 reporting, the
Company will disclose pro forma net income and earnings per share amounts as
if Statement No. 123 accounting was applied. The Company does not expect the
adoption of Statement No. 121 to have a materially adverse effect on its
financial position or results of operations.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Digi International Inc.
We have audited the consolidated balance sheets of Digi International Inc.
and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and stockholders' equity
for each of the three years in the period ended September 30, 1996. 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. As discussed in Note 4, the Company has recorded its
investment in AetherWorks Corporation (AetherWorks) on the equity method; the
1996 consolidated statement of operations includes the AetherWorks net loss
for the year ended September 30, 1996 of $3,623,776. We did not audit the
financial statements of AetherWorks, which statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for AetherWorks, is based solely on the
report of other auditors.
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 and, for the
year ended September 30, 1996, the report of other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audits and, for the year ended September 30,
1996, the report of the other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Digi International Inc. and subsidiaries as of
September 30, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
December 20, 1996
<TABLE>
<CAPTION>
Quarterly Financial Data (UNAUDITED)
- ---------------------------------------------------------------------------------------
(in thousands except per share amounts) Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net sales $ 43,866 $ 48,498 $ 50,317 $ 53,152
Gross margin 23,879 25,916 25,125 27,804
AetherWorks Corporation net loss (279) (656) (1,204) (1,485)
Net income (loss) 4,522 (a) 4,620 (a) (51) (a) 209
Net income per share .33 (a) .34 (a) (0) (a) .02
1995
Net sales 37,879 40,076 41,179 45,844
Gross margin 19,745 21,169 22,131 23,000
Net income 4,491 4,597 4,847 5,396
Net income per share .32 .33 .35 .38
1994
Net sales 25,989 31,647 35,185 38,124
Gross margin 14,736 16,672 17,696 18,741
Net income 4,036 4,123 4,216 4,326
Net income per share .28 .28 .29 .31
- ---------------------------------------------------------------------------------------
</TABLE>
The summation of quarterly net income per share may not equate to the
year-end calculation as quarterly calculations are performed on a discrete
basis.
(a) Restated for inclusion of AetherWorks Corporation net loss.
30
<PAGE>
DIRECTORS AND OFFICERS
- -------------------------------------------------------------------------------
DIRECTORS
JOHN P. SCHINAS (3) Mr. Schinas is a founder of the Company and has been its
Chairman of the Board since July 1991. He has been a member of the Board of
Directors since the Company's inception in July 1985 and served as the
Company's CEO from July 1985 to January 1992.
WILLIS K. DRAKE (2) Mr. Drake has been a member of the Board of Directors
since 1987 and a private investor since 1983.
RICHARD E. EICHHORN (1) (2) Mr. Eichhorn has been a member of the Board of
Directors since 1987. Since April 1992, Mr. Eichorn has been a private
investor.
ERVIN F. KAMM, JR. Mr. Kamm has been a member of the Board of Directors
since December 1, 1994 and was named President and CEO November 30, 1994. Mr.
Kamm was President and Chief Operating Officer of Norstan, Inc., from 1988 to
1994. Prior to Norstan, Mr. Kamm held a variety of CEO/COO positions with
privately held companies.
ROBERT S. MOE Mr. Moe has been a member of the Board of Directors since
October 1996. From 1981 to his retirement in 1993, he was the Chief Financial
Officer of Polaris Industries, Minneapolis, a manufacturer of snowmobiles,
all-terrain vehicles and personal watercraft.
MYKOLA MOROZ Mr. Moroz has been a member of the Board of Directors since
July 1991. Mr. Moroz was a founder of the Company and CEO from January 1992
to September 1994. Mr. Moroz was Chief Operating Officer of the Company from
July 1991 to January 1992. From October 1985 to July 1991, he occupied
various management positions with the Company. He is now a private consultant.
DAVID STANLEY (1) (3) Mr. Stanley has been a member of the Board of
Directors of the Company since 1990. Mr. Stanley has been Chairman and CEO of
Payless Cashways, Inc., a building materials retailer, since 1984.
(1) AUDIT COMMITTEE
(2) COMPENSATION COMMITTEE
(3) CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
CORPORATE OFFICERS
ERVIN F. KAMM, JR.
President and Chief Executive Officer
DOUGLAS J. GLADER
Vice President
MICHAEL D. KELLEY
Vice President
JONATHON E. KILLMER
Vice President, Chief Financial Officer
and Treasurer
DAVID M. RZASA
Vice President
DANA R. NELSON
Vice President
RAY D. WYMER
Vice President
JAMES E. NICHOLSON
Partner, Faegre & Benson LLP
Secretary
CORPORATE GOVERNANCE
- - The majority of the board's membership is comprised of outside directors.
- - The compensation and audit committees are comprised of all outside
directors.
- - The positions of Chairman of the Board and Chief Executive Officer are
separate.
- - The corporate governance and nominating committee is comprised of the
Chairman and two outside directors.
31
<PAGE>
STOCKHOLDER AND INVESTOR INFORMATION
- -------------------------------------------------------------------------------
STOCK LISTING
The Company's common stock has been publicly traded since its initial public
offering on October 5, 1989. The Company's common stock trades on the Nasdaq
National Market tier of The Nasdaq Stock Market-SM- under the symbol "DGII." At
December 13, 1996, the number of holders of the Company's Common Stock was
approximately 11,709 consisting of 415 record holders and approximately 11,294
stockholders whose stock is held by a bank, broker or other nominee.
High and low sale prices for each quarter during the years ended September 30,
1996 and 1995, as reported on The Nasdaq Stock Market were as follows:
1996 First Second Third Fourth
- -----------------------------------------------------------------
High $ 28.75 $ 30.00 $ 30.75 $ 27.375
Low 17.125 17.75 23.875 11.875
1995 First Second Third Fourth
- -----------------------------------------------------------------
High $ 19.25 $ 24.25 $ 26.00 $ 30.25
Low 13.25 18.00 18.25 22.00
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
The Company does not have a Dividend Reinvestment Plan or a Direct Stock
Purchase Plan.
STOCKHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Norwest Shareowners Services
P.O. Box 64854
St. Paul, MN 55164-0854
(612) 450-4064
(800) 468-9716
LEGAL COUNSEL
Faegre & Benson LLP
2200 Norwest Center
Minneapolis, MN 55402-3901
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P.
650 Third Avenue South
Minneapolis, MN 55402-4333
ANNUAL MEETING The Company's Annual Meeting of Stockholders will be held on
Thursday, January 30, 1997, at 3:30 pm, at Radisson Plaza Hotel, 35 South
Seventh Street, Minneapolis, Minn.
INVESTOR RELATIONS: A COPY OF THE COMPANY'S FORM 10-K, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, IS AVAILABLE FREE UPON WRITTEN REQUEST. CONTACT:
MAUREEN MCGARRIGLE
DIRECTOR, INVESTOR RELATIONS
DIGI INTERNATIONAL INC.
11001 BREN ROAD EAST
MINNETONKA, MN 55343
(612) 912-3444
EMAIL: [email protected]
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Digi International Inc.
Our report on the consolidated financial statements of Digi International
Inc. has been incorporated by reference in this Form 10-K from page 30 of the
1996 Annual Report to Stockholders of Digi International Inc. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedule listed in Item 14(a)2 on page 15 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basis financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 20, 1996
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
AetherWorks Corporation
We have audited the accompanying balance sheets of AetherWorks Corporation (a
development stage company) as of September 30, 1996 and 1995, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
the year ended September 30, 1996, the eighteen month period ended September
30, 1995 and the period from February 24, 1993 (inception) to September 30,
1996. 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 AetherWorks Corporation (a
development stage company) at September 30, 1996 and 1995, and the results of
its operations and its cash flows for the year ended September 30, 1996, the
eighteen month period ended September 30, 1995 and the period from February
24, 1993 (inception) to September 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 16 to the financial
statements, the Company's deficit accumulated during the development stage
raises substantial doubt about its ability to continue as a going concern.
The Company intends to obtain additional financing to permit it to continue
its operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Ernst & Young LLP
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 8, 1996
<PAGE>
Digi International Inc.
Schedule II
Valuation and Qualifying Accounts
<TABLE>
Balance at Charged Deductions
Beginning Charged to to Other from Balance at
of Year Expense Accounts Allowance End of Year
---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deducted from Accounts Receivable-
Allowance for Doubtful Accounts:
Year ended September 30: 1994 $359,000 $ 608,001 $84,581(2) $ 410,082(1) $ 641,500
-------- ---------- ------- ---------- ----------
-------- ---------- ------- ---------- ----------
1995 $641,500 $ 243,895 $ 228,895(1) $ 656,500
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
1996 $656,500 $ 262,164 $ 183,222(1) $ 735,442
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Deducted from Inventory-Allowance for
Inventory Obsolesence:
Year ended September 30: 1994 $355,000 $1,071,741 $72,441(2) $ 817,182(3) $ 682,000
-------- ---------- ------- ---------- ----------
-------- ---------- ------- ---------- ----------
1995 $682,000 $ 716,300 $ 586,300(3) $ 812,000
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
1996 $812,000 $1,455,895 $1,099,735(3) $1,168,176
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
(1) Uncollectible accounts charged against allowance.
(2) Balance of Milan Technology Corporation at date of acquisition.
(3) Scrapped inventory charged against allowance.
Page 1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
DIGI INTERNATIONAL ASIA PTE., LTD.
DIGI INTERNATIONAL GMBH
DIGIBOARD INCORPORATED FSC
DIGI INTERNATIONAL ISRAEL INC.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 registration
statements (File No. 33-32956, File No. 33-38898, and File No. 333-99) of Digi
International Inc. for its Stock Option Plan; Form S-3 Registration Statement
(File No. 33-59223) of Digi International Inc. for the common shares issued as
part of the MiLAN Technologies acquisition; and, Form S-8 (File No. 333-1821) of
Digi International Inc. for its Employee Stock Purchase Plan of our report dated
November 8, 1996, with respect to the financial statements of AetherWorks
Corporation for the year ended September 30, 1996, the eighteen month period
ended September 30, 1995 and the period from February 24, 1993 (inception) to
September 30, 1996 included in the Annual Report (Form 10-K) of Digi
International Inc. for the year ended September 30, 1996 filed with the
Securities and Exchange Commission.
Ernst & Young LLP
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 27, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 registration
statements (File No. 33-32956, File No. 33-38898, and File No. 333-99) of Digi
International Inc. for its Stock Option Plan; Form S-3 Registration Statement
(File No. 33-59223) of Digi International Inc. for the common shares issued as
part of the MiLAN Technologies acquisition; and, Form S-8 (File No. 333-1821) of
Digi International Inc. for its Employee Stock Purchase Plan of our reports
dated December 20, 1996, on our audits of the consolidated financial statements
and financial statement schedule of Digi International Inc. as of September 30,
1996 and 1995, and for the years ended September 30, 1996, 1995 and 1994, which
reports are included in or incorporated by reference in this Annual Report on
Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 30, 1996
<PAGE>
EXHIBIT 24
POWERS OF ATTORNEY
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 16th day of December, 1996.
/s/ Jonathon E. Killmer
--------------------------------------
Jonathon E. Killmer
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 23rd day of December, 1996.
/s/ Ervin F. Kamm, Jr.
---------------------------------------
Ervin F. Kamm, Jr.
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 23rd day of December, 1996.
/s/ Mykola Moroz
--------------------------------------
Mykola Moroz
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 20th day of December, 1996.
/s/ Willis K. Drake
--------------------------------------
Willie K. Drake
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 23rd day of December, 1996.
/s/ John P. Schinas
--------------------------------------
John P. Schinas
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 12th day of December, 1996.
/s/ David Stanley
--------------------------------------
David Stanley
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 17th day of December, 1996.
/s/ Richard E. Eichhorn
---------------------------------------
Richard E. Eichhorn
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Ervin F. Kamm,
Jr. and Jonathon E. Killmer, and either of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said attorneys-
in-fact, and either of them, full power and authority to do and perform any and
all acts necessary or incidental to the performance and execution of the powers
herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand
this 23rd day of December, 1996.
/s/ Robert S. Moe
--------------------------------------
Robert S. Moe
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 8943390
<SECURITIES> 0
<RECEIVABLES> 42874898
<ALLOWANCES> 0
<INVENTORY> 33372164
<CURRENT-ASSETS> 89691906
<PP&E> 24230101
<DEPRECIATION> 0
<TOTAL-ASSETS> 129938829
<CURRENT-LIABILITIES> 19995688
<BONDS> 0
0
0
<COMMON> 146772
<OTHER-SE> 109796369
<TOTAL-LIABILITY-AND-EQUITY> 129938829
<SALES> 195832640
<TOTAL-REVENUES> 195832640
<CGS> 93108624
<TOTAL-COSTS> 82626669
<OTHER-EXPENSES> 3623776<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16805360
<INCOME-TAX> 7505140
<INCOME-CONTINUING> 9300220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9300220
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<FN>
<F1>Aetherworks Corporation Net Loss
</FN>
</TABLE>
