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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1995.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
____________________________
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
------------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
______________________________
(Address of principal executive offices) (Zip Code)
(612) 912-3444
______________________________
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
On January 31, 1996, there were 13,228,442 shares of the registrant's $.01 par
value Common Stock outstanding.
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<PAGE>
INDEX
PART I . FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Condensed Statements of Operations
for the three months ended December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheets as of
December 31, 1995 and September 30, 1995 . . . . . . . . . . 4
Consolidated Condensed Statements of Cash
Flows for the three months ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. . . . . . . . . 8
PART II . OTHER INFORMATION
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 11
ITEM 4. Submission of Matters to a Vote of
Securities Holders . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 12
2
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31
(UNAUDITED)
1995 1994
----------- ------------
Net sales $43,866,263 $37,878,928
Cost of sales 19,987,202 17,898,419
----------- ------------
Gross margin 23,879,061 19,980,509
----------- ------------
Operating expenses:
Sales & marketing 8,820,102 6,735,572
Research & development 4,144,836 2,643,255
General & administrative 3,898,356 3,961,352
Total operating expenses 16,863,294 13,340,179
----------- ------------
Operating income 7,015,767 6,640,330
Other income, principally interest 393,360 339,510
AetherWorks Corporation net loss (279,307)
----------- ------------
Income before income taxes 7,129,820 6,979,840
Provision for income taxes 2,607,899 2,488,515
----------- ------------
Net income $4,521,921 $4,491,325
----------- ------------
----------- ------------
Income per common and common
equivalent share $0.33 $0.32
----------- ------------
----------- ------------
Weighted average common and
common equivalent shares outstanding 13,902,733 13,961,227
----------- ------------
----------- ------------
See accompanying notes to unaudited consolidated condensed financial statements
3
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS December 31 September 30
1995 1995
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,049,727 $5,103,731
Marketable securities 14,711,797 27,968,775
Accounts receivable, net 33,499,504 31,960,936
Inventories, net 29,579,975 27,019,085
Other 4,532,589 2,225,058
------------ -------------
Total current assets 83,373,592 94,277,585
Property, equipment and improvements, net 18,724,922 17,716,819
Intangible assets, net 11,518,420 11,633,305
Investment in AetherWorks Corporation 3,083,928
Other 2,278,091 2,415,755
------------ ------------
Total assets $118,978,953 $126,043,464
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,749,080 $ 12,106,515
Income taxes payable 1,596,895
Accrued expenses:
Advertising 3,353,570 2,235,946
Compensation 1,095,714 4,932,987
Other 789,891 941,469
------------ ------------
Total current liabilities 15,585,150 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; 14,576,171 and 14,562,958
shares outstanding 145,762 145,630
Additional paid-in capital 41,522,421 41,306,320
Retained earnings 86,126,447 81,604,526
------------ ------------
127,794,630 123,056,476
Less unearned stock compensation (519,946) (598,387)
Treasury stock, at cost, 1,347,729 and
1,032,729 shares (23,880,881) (16,631,542)
------------ ------------
Total stockholders' equity 103,393,803 105,826,547
------------ ------------
Total liabilities and stockholders' equity $118,978,953 $126,043,464
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated condensed financial statements.
4
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Operating Activities:
Net income $4,521,921 $4,491,325
------------ ------------
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 1,251,733 842,297
AetherWorks Corporation net loss 279,307
Provision for losses on accounts receivable 39,280 68,670
Provision for inventory obsolescence 179,012 45,000
Stock compensation 78,441 37,620
Changes in operating assets and liabilities (11,119,384) (1,008,785)
------------ ------------
Total adjustments (9,291,611) (15,198)
------------ ------------
Net cash (used in) provided by operating
activities (4,769,690) 4,476,127
Investing activities:
Purchase of property, equipment and improvements
Sale/purchase of marketable securities, net (2,144,951) (717,559)
13,256,978 (715,835)
Investment in AetherWorks Corporation (3,363,235)
------------ ------------
Net cash provided by (used in) investing activities 7,748,792 (1,433,394)
------------ ------------
Financing activities:
Purchase of treasury stock (7,249,339)
Stock option transactions, net 216,233 13,433
------------ ------------
Net cash (used in) provided by financing activities (7,033,106) 13,433
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,054,004) 3,056,166
Cash and cash equivalents, beginning of period 5,103,731 13,849,017
------------ ------------
Cash and cash equivalents, end of period $1,049,727 $16,905,183
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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DIGI INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements included in this Form 10-Q/A
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed,
or omitted, pursuant to such rules and regulations. These consolidated condensed
financial statements should be read in conjunction with the financial statements
and related notes thereto included in the Company's 1995 Annual Report and Form
10-K.
The consolidated condensed financial statements presented herein, as of December
31, 1995 and for the three months then ended, reflect, in the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation of financial position and the results of
operations and cash flows for the periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. INVESTMENT IN AETHERWORKS CORPORATION
Through December 31, 1995, the Company purchased $3.4 million in a secured
convertible note 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 $1.4 million secured
convertible notes from time to time at the request of AetherWorks, based on
certain events. The Company has reported its investment in AetherWorks on the
equity method and has recorded a $279,307 loss for the quarter ended December
31, 1995, which represents 100% of AetherWorks' net loss for the quarter ended
December 31, 1995. The percentage of AetherWorks' net loss included in the
Company's financial statements is based upon the percentage of financial support
provided by the Company (versus other investors) to AetherWorks during the
quarter.
6
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NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONT.)
3. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out method. Inventories at December 31, 1995 and September
30, 1995 consisted of the following:
December 31 September 30
----------- -----------
Raw materials $16,779,571 $12,476,953
Work in process 7,861,301 7,645,002
Finished goods 4,939,103 6,897,130
----------- -----------
$29,579,975 $27,019,085
----------- -----------
----------- -----------
4. INCOME PER SHARE
Income per common share is computed by dividing net income by the weighted
average number of common shares and common equivalent shares outstanding during
the period. Common stock equivalents result from dilutive stock options.
5. COMMON STOCK
During the three months ended December 31, 1995, 13,213 shares of the Company's
common stock were issued upon the exercise of outstanding stock options for
13,900 shares. The difference between the shares issued and options exercised
results from the stock option plan's provision allowing the employees to elect
to pay their withholding obligations through share reduction. Withholding taxes
paid by the Company, as a result of the share reduction option, amounted to
$19,775.
On March 27, 1995, the Company's Board of Directors authorized a one million
share repurchase program, which will be funded by available cash balances over
an unspecified period of time. During the quarter ended December 31, 1995,
$7,249,339 were used for treasury stock purchases. On January 31, 1996, the
Company's Board of Directors authorized a separate 500,000 share repurchase
program for the purpose of purchasing Common Stock for the Company's Employee
Stock Purchase Plan.
6. RESTATEMENT
The consolidated condensed financial statements for the three months ended
December 31, 1995 have been restated to reflect the accounting for the Company's
investment in AetherWorks Corporation on the equity method. (See Note 2.)
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Sales for the quarter ended December 31, 1995 exceeded sales for the
corresponding quarter ended December 31, 1994 by $5,987,335, which represents a
percentage increase of 15.8%. Sales in all product markets increased over prior
year amounts as follows:
PRODUCT MARKET QUARTERLY INCREASE PERCENT OF REVENUE
- -------------- ------------------ ------------------
Multiuser 15.6% 66.2%
Remote Access 36.0% 16.6%
LAN Connect 1.9% 17.2%
Sales to original equipment manufacturers (OEM's) across product markets
decreased from 24.2% of net sales in the quarter ended December 31, 1994 to
14.1% in 1995. The decrease in OEM business was due primarily to component
allocation issues impacting the Company's OEM customers and the industry as a
whole. The Company's management expects the OEM portion of the Company's
business to increase in the second quarter based on current firm orders and
increased availability of components. Sales of the Company's products in
international markets increased by 31.4% for the quarter ended December 31, 1995
over the corresponding quarter ended December 31, 1994.
The Company believes that the revenues from its Remote Access and LAN Connect
markets will continue to grow, while the Multiuser market growth may decline.
GROSS MARGIN
Gross margin increased from $19,980,509 or 52.8% of net sales for the quarter
ended December 31, 1994 to $23,879,061 or 54.4% for the quarter ended December
31, 1995. The increase in gross margin for the quarter is primarily related to
the decreased volume in OEM sales and to the smaller contribution made by sales
of the Company's LAN Connect products to the Company's sales. Both OEM sales
and sales of LAN Connect products have traditionally resulted in lower margins
than have non-OEM sales of the Company's Multiuser and Remote Access products.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (CONT.)
OPERATING EXPENSES
Operating expenses increased from $13,340,179 for the quarter ended December 31,
1994 to $16,863,294 for the quarter ended December 31, 1995, an increase of
26.4%. As a percentage of sales, expenses were 38.4% for the quarter ended
December 31, 1995 compared to 35.2% for the quarter ended December 31, 1994. The
quarterly increase can be attributed primarily to increased research and
development and marketing expenditures for new products and markets, principally
in the Remote Access and LAN Connect markets, plus increased staffing levels
resulting from the Company's increased product development and marketing
efforts.
OTHER INCOME, PRINCIPALLY INTEREST
Interest income increased from $339,510 for the quarter ended December 31, 1994
to $393,360 the quarter ended December 31, 1995.
AETHERWORKS CORPORATION NET LOSS
In connection with the purchase of a secured convertible note from AetherWorks
Corporation, a development stage company engaged in the development of wireless
and dial-up remote access technology, the Company has the ability, under certain
conditions, to convert its investment into a majority of AetherWorks' common
stock. The Company has reported its investment in AetherWorks on the equity
method and has recorded a $279,307 loss which represents 100% of AetherWorks'
net loss for the quarter ended December 31, 1995. The percentage of
AetherWorks' net loss included in the Company's financial statements is based
upon the percentage of financial support provided by the Company (versus other
investors) to AetherWorks during the quarter.
INCOME TAXES
The Company's effective income tax rate was 36.6% in the current quarter
compared to 35.7% in the corresponding quarter of last year. This increase was
due to the non-deductibility of AetherWorks' losses, offset slightly by an
increase in the foreign sales corporation benefit.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds from public stock offerings.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
Cash flows from operations for the three months ended December 31, 1995 was
negatively impacted by changes in operating assets and liabilities, primarily
related to increases in accounts receivable and inventories and to reductions in
accounts payable and accrued expenses, as well as the AetherWorks' net loss.
Investing activities for the period ended December 31, 1995, primarily include
redemption of maturing investments offset by purchases of property, equipment
and improvements and an increase in notes receivable. The Company's investment
in AetherWorks Corporation arose from the Company's purchase of a secured
convertible note from AetherWorks Corporation, which is a company engaged in the
development of wireless and dial-up remote access technology. If AetherWorks
attains certain development and financial performance milestones, the Company
will be obligated to purchase an additional secured convertible note in the
principal amount of approximately $1.4 million in the second quarter. Secured
convertible notes held by the Company are presently convertible into 51% of
AetherWorks common stock. The Company has reported its investment in
AetherWorks on the equity method and has recorded a $279,307 loss which
represents 100% of the AetherWorks' net loss for the three months ended December
31, 1995. The percentage of AetherWorks net loss included in the Company's
financial statements is based upon the percentage of financial support provided
by the Company (versus other investors) to AetherWorks during such period. The
Company anticipates that AetherWorks' losses will continue for fiscal 1996 and
into fiscal 1997.
On March 27, 1995, the Company's Board of Directors authorized a one million
share repurchase program, which will be funded by available cash balances over
an unspecified period of time. During the quarter ended December 31, 1995,
$7,249,339 was used for treasury stock purchases. On January 31, 1996, the
Company's Board of Directors authorized a separate 500,000 share repurchase
program for the purpose of purchasing Common Stock for the Company's Employee
Stock Purchase Plan.
At December 31, 1995, the Company had working capital of $71.2 million, no debt
and no established lines of credit. Management believes current financial
resources, cash generated by operations and the Company's potential capacity for
debt and/or equity financing will be sufficient to fund current business
operations and any anticipated business expansion.
The Financial Accounting Standards Board (FASB) has issued Statement No. 123,
"Accounting for Stock-Based Compensation." The Company plans to adopt this
Statement in fiscal year 1997. Although it has not made a definite determination
of its impact, the Company does not expect the adoption of Statement No. 123 to
have a materially adverse effect on its financial position or results of
operations.
10
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on
January 31, 1996, the stockholders approved the
following:
(a) Proposal to elect three directors, each to a three year term. Mr. John
P. Schinas was elected on a vote of 10,024,028 in favor, with 74,367
shares withholding authority to vote. Mr. Richard E. Offerdahl was
elected on a vote of 9,960,828 in favor, with 137,967 shares
withholding authority to vote. Dr. Jagdish N. Sheth was elected on a
vote of 10,018,455 in favor, with 79,940 shares withholding authority
to vote.
(b) Proposal to amend provisions of the Digi International Inc. Stock
Option Plan that provide for the granting of stock options to non-
employee directors. The proposal passed on a vote of 7,511,152 in
favor, 2,227,119 against, 113,440 abstentions, and 246,684 broker non-
votes.
(c) Proposal to approve the Digi International Inc. Employee Stock
Purchase Plan, which provides eligible employees of the Company the
opportunity to purchase Common Stock. The proposal passed on a vote
of 9,405,966 in favor, 268,046 against, 121,032 abstentions, and
303,351 broker non-votes.
(d) Proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
independent public accountants of the Company for fiscal year 1996.
The proposal passed on a vote of 10,005,952 in favor, 43,945 against,
48,498 abstentions, and no broker non-votes.
ITEM 5. OTHER INFORMATION
None
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
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(c) AMENDED AND RESTATED EMPLOYMENT
AGREEMENT BETWEEN THE COMPANY AND JOHN
P. SCHINAS***
10(h) CONSULTING AGREEMENT BETWEEN THE
COMPANY AND MYKOLA MOROZ***
10(r) EMPLOYMENT ARRANGEMENT BETWEEN THE
COMPANY AND JAMES R. BAKER FOR FISCAL 1996
10(s) EMPLOYEE STOCK PURCHASE PLAN OF THE
REGISTRANT*****
27 FINANCIAL DATA SCHEDULE
* INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT NUMBER OF THE COMPANY'S
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1992 (FILE NO.0-17972).
** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT NUMBER OF THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO.33-42384).
12
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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 A TO THE REGISTRANT'S PROXY STATEMENT
FOR ITS ANNUAL MEETING OF STOCKHOLDERS HELD ON JANUARY 31, 1996 (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.
(b) Reports on Form 8-K:
There were no reports filed on form 8-K during the quarter ended
December 31, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: December 23, 1996 By: /s/Jonathon E. Killmer
------------------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,049,727
<SECURITIES> 14,711,797
<RECEIVABLES> 33,499,504
<ALLOWANCES> 0
<INVENTORY> 29,579,975
<CURRENT-ASSETS> 83,373,592
<PP&E> 18,724,922
<DEPRECIATION> 0
<TOTAL-ASSETS> 118,978,953
<CURRENT-LIABILITIES> 15,585,150
<BONDS> 0
0
0
<COMMON> 145,762
<OTHER-SE> 103,248,041
<TOTAL-LIABILITY-AND-EQUITY> 118,978,953
<SALES> 43,866,263
<TOTAL-REVENUES> 43,866,263
<CGS> 19,987,202
<TOTAL-COSTS> 16,863,294
<OTHER-EXPENSES> 279,307<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,129,820
<INCOME-TAX> 2,607,899
<INCOME-CONTINUING> 4,521,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,521,921
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<FN>
<F1>AETHERWORKS NET LOSS
</FN>
</TABLE>
