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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---- ----
Commission file number: 0-17972
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
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(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 April 30, 1997, there were 13,400,941 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 Page
----
Condensed Consolidated Statements of Operations
for the three and six month periods ended
March 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of
March 31, 1997 and September 30, 1996. . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the six month periods ended March 31, 1997 and 1996. . . . . . . 5
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Review Report of Independent Accountants . . . . . . . . . . . . . . 9
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. . . . . . . . . . . .10
Forward-looking Statements . . . . . . . . . . . . . . . . . . . . .14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .16
ITEM 4. Submission of Matters to a Vote of Securities Holders. . . . . . . .16
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31 Six months ended March 31
------------------------------- -----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 40,393,222 $ 47,973,275 $ 82,629,437 $ 91,689,538
Cost of sales 21,099,206 22,582,177 43,694,943 42,569,379
-------------- ------------- ------------- -------------
Gross margin 19,294,016 25,391,098 38,934,494 49,120,159
-------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 8,708,518 8,825,532 19,235,351 17,495,634
Research and development 4,552,040 4,428,193 9,991,497 8,573,029
General and administrative 5,343,188 4,206,294 10,757,054 8,104,650
Restructuring 10,471,482 - 10,471,482 -
-------------- ------------- ------------- -------------
Total operating expenses 29,075,228 17,460,019 50,455,384 34,173,313
-------------- ------------- ------------- -------------
Operating (loss) income (9,781,212) 7,931,079 (11,520,890) 14,946,846
Other income, net 127,203 151,275 226,234 544,635
AetherWorks Corporation net loss (1,589,681) (655,990) (3,109,470) (935,297)
-------------- ------------- ------------- -------------
(Loss) income before income taxes (11,243,690) 7,426,364 (14,404,126) 14,556,184
(Benefit) provision for income taxes (1,843,473) 2,806,750 (2,425,905) 5,414,649
-------------- ------------- ------------- -------------
Net (loss) income $ (9,400,217) $ 4,619,614 $(11,978,221) $ 9,141,535
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Net (loss) income per common and
common equivalent share $ (0.70) $ 0.34 $ (0.90) $ 0.66
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average common and
common equivalent shares outstanding 13,381,615 13,693,597 13,367,885 13,787,075
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part to the condensed consolidated
financial statements.
3
<PAGE>
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 September 30
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 9,676,932 $ 8,943,390
Accounts receivable, net 38,066,444 42,874,898
Inventories 30,009,443 33,372,164
Income tax refund receivable 4,374,640 1,675,626
Other 2,940,432 2,825,828
------------- -------------
Total current assets 85,067,891 89,691,906
Property, equipment and improvements, net 23,297,609 24,230,101
Intangible assets, net 7,024,724 10,854,845
Investment in AetherWorks Corporation 2,063,279 1,672,749
Other 1,564,945 3,489,228
------------- -------------
Total assets $ 119,018,448 $ 129,938,829
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,814,183 $ 12,549,738
Accrued expenses:
Advertising 3,790,797 3,761,619
Compensation 1,766,039 1,622,549
Restructuring 1,248,858 -
Other 1,993,635 2,061,782
------------- -------------
Total current liabilities 20,613,512 19,995,688
Commitments and contingency
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value; 60,000,000 shares
authorized; 14,688,967 and 14,677,150 shares issued 146,887 146,772
Additional paid-in capital 42,771,095 42,866,758
Retained earnings 78,926,524 90,904,746
------------- -------------
121,844,506 133,918,276
Unearned stock compensation (232,489) (295,156)
Treasury stock, at cost, 1,306,961 and 1,338,894
shares (23,207,081) (23,679,979)
------------- -------------
Total stockholders' equity 98,404,936 109,943,141
------------- -------------
Total liabilities and stockholders' equity $ 119,018,448 $ 129,938,829
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part to the condensed consolidated
financial statements.
4
<PAGE>
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net (loss) income $ (11,978,221) 9,141,535
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Restructuring 10,270,361 -
Depreciation and amortization 3,770,910 2,830,774
AetherWorks Corporation net loss 3,109,470 935,297
Loss on sale of fixed assets 67,033 -
Provision for doubtful accounts receivable 522,236 142,379
Provision for inventory obsolescence 1,481,285 453,100
Stock compensation 50,225 104,967
Changes in operating assets and liabilities (438,769) (25,719,511)
------------- -------------
Total adjustments 18,832,751 (21,252,994)
------------- -------------
Net cash provided by (used in)
operating activities 6,854,530 (12,111,459)
------------- -------------
Investing activities:
Purchase of property, equipment and improvements (3,010,780) (9,390,929)
Investment in AetherWorks Corporation (3,500,000) (3,363,235)
Sale of marketable securities, net - 27,732,781
------------- -------------
Net cash (used in) provided by
investing activities (6,510,780) 14,978,617
------------- -------------
Financing activities:
Stock benefit plan transactions, net 389,792 949,442
Purchase of treasury stock - (7,249,339)
------------- -------------
Net cash provided by (used in) financing activities 389,792 (6,299,897)
------------- -------------
Net decrease in cash and cash equivalents 733,542 (3,432,739)
Cash and cash equivalents, beginning of period 8,943,390 5,103,731
------------- -------------
Cash and cash equivalents, end of period $ 9,676,932 $ 1,670,992
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part to the condensed consolidated
financial statements.
5
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included in this Form
10-Q 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 condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in the
Company's 1996 Annual Report and Form 10-K.
The condensed consolidated financial statements presented herein as of
March 31, 1997 and for the three and six month periods ended March 31, 1997 and
1996, reflect, in the opinion of management, all adjustments (which, with the
exception of the restructuring charge, consist only of normal, recurring
adjustments) necessary for a fair presentation of the consolidated financial
position and the consolidated results of operations and cash flows for the
periods presented. The consolidated results of operations for any interim
period are not necessarily indicative of results for the full year.
2. INVESTMENT IN AETHERWORKS CORPORATION
Through March 31, 1997, under a financing arrangement, the Company purchased
$8,796,525 of convertible notes from AetherWorks Corporation, a development
stage company engaged in the development of wireless and dial-up remote access
technology. At March 31, 1997, the Company is obligated to purchase up to an
additional $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 March 31, 1997 are convertible into 56.2% of AetherWorks' common
stock, and upon the purchase of the additional $5 million of convertible notes,
the Company's ownership interest upon conversion would increase to 62.7%, based
on AetherWorks' present capitalization. In connection with the financing
arrangement, the Company has also guaranteed $2.8 million of lease obligations
of AetherWorks.
The Company has reported its investment in AetherWorks on the equity method
and has reported losses of $1,589,681 and $3,109,470 for the three month and
six month periods ended March 31, 1997, and recorded losses of $655,990 and
$935,297 for the corresponding three and six month periods ended March 31,
1996. Such losses represent 100% of the AetherWorks net losses for these
periods. The percentage of AetherWorks' net losses 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
periods.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN AETHERWORKS CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
Investment in AetherWorks Corporation consisted of the following:
March 31, 1997 September 30, 1996
-------------- ------------------
<S> <C> <C>
Convertible notes receivable $8,796,525 $5,296,525
Cumulative net losses (6,733,246) (3,623,776)
---------- ----------
$2,063,279 $1,672,749
---------- ----------
---------- ----------
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at March 31, 1997 and
September 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
March 31 September 30
-------- ------------
<S> <C> <C>
Raw materials $12,786,935 $19,145,019
Work in process 9,061,793 10,469,315
Finished goods 8,160,715 3,757,830
</TABLE>
4. (LOSS) INCOME PER SHARE
Net (loss) income per share is computed by dividing net (loss) income by the
weighted average number of common and common equivalent shares outstanding
during each period. Common stock equivalents result from dilutive stock
options. No common stock equivalents were included in determining the
weighted average common and common stock equivalents outstanding for the
three and six month periods ended March 31, 1997, because their effect would
be antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share." This Statement establishes standards for
computing and presenting basic and diluted earnings per share (EPS) for
financial statements issued for both interim and annual periods ending after
December 15, 1997. The adoption of this Statement will not have a material
effect on the Company's reported EPS.
5. RESTRUCTURING CHARGE
During the three month period ended March 31, 1997, the Company's Board of
Directors approved a restructuring plan which resulted in a restructuring
charge of $10,471,482 ($8,283,681, net of tax benefits or $0.62 per share).
The restructuring charge related to the closing of the Cleveland
manufacturing facility, the reduction of selected product lines and the
consolidation and closing of certain research and development facilities.
These costs included (i) write downs of the carrying values of fixed assets
related to the closed manufacturing and research and development facilities,
(ii) write downs of the carrying values of goodwill and identifiable
intangible assets (primarily licensing agreements related to the discontinued
product lines) and related inventories and (iii) the accrual of severance
costs associated with the elimination of 105 positions (total workforce
reduction was 150).
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING CHARGE (CONTINUED)
The restructuring charge consists of $1,449,979 in cash expenditures
(primarily severance), of which $201,121 had been paid as of March 31, 1997,
and $9,021,503 resulting from the write down of asset carrying values. As of
March 31, 1997, $9,222,624 had been charged to this restructuring reserve and
the remaining reserve of $1,248,858 is expected to be essentially utilized
during fiscal 1997.
6. RECLASSIFICATION OF REBATE EXPENSES
Rebates to customers of approximately $525,000 and $675,000 for the three and
six month periods ended March 31, 1996, now reflected as a reduction of
sales, were previously included in sales and marketing expenses. This
reclassification had no impact on previously reported operating income, net
income or stockholders' equity.
7. LEGAL PROCEEDINGS
Discussion of legal matters is incorporated by reference from Part II, Item I
of this Form 10-Q "Legal Proceedings" and should be considered an integral
part of these Consolidated Condensed Financial Statements and Accompanying
Notes.
8
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Digi International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Digi International Inc. and Subsidiaries as of March 31, 1997, and the
related condensed consolidated statements of operations for the three month
and six month periods ended March 31, 1997 and 1996 and cash flows for the
six month periods ended March 31, 1997 and 1996. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1996, and the
related consolidated statements of operations and cash flows for the year
then ended (not presented herein); and in our report dated December 20, 1996,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of September 30, 1996, is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
April 23, 1997
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from the
Company's interim condensed consolidated statements of operations expressed
as percentages of sales:
<TABLE>
<CAPTION>
Three months % Six months %
ended Increase ended Increase
March 31 (decrease) March 31 (decrease)
--------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% (15.8%) 100.0% 100.0% (9.9%)
Cost of sales 52.2 47.1 ( 6.6) 52.9 46.4 2.6
------ ------ ------ ------ ------ ------
Gross margin 47.8 52.9 (24.0) 47.1 53.6 (20.7)
------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing 21.6 18.4 (1.3) 23.3 19.1 9.9
Research and development 11.3 9.2 2.8 12.1 9.4 16.5
General and administrative 13.2 8.8 27.0 13.0 8.8 32.7
Restructuring 25.9 0.0 100.0 12.7 0.0 100.0
------ ------ ------ ------ ------ ------
Total operating expenses 72.0 36.4 66.5 61.1 37.3 47.6
------ ------ ------ ------ ------ ------
Operating (loss) income (24.2) 16.5 (223.3) (13.9) 16.3 (177.1)
Other income, net 0.3 0.3 (15.9) 0.3 0.6 (58.5)
AetherWorks Corporation net loss (3.9) (1.4) 142.3 (3.8) (1.0) 232.5
------ ------ ------ ------ ------ ------
(Loss) income before income taxes (27.8) 15.5 (251.4) (17.4) 15.9 (199.0)
(Benefit) provision for income taxes (4.6) 5.9 (165.7) (2.9) 5.9 (144.8)
------ ------ ------ ------ ------ ------
Net (loss) income (23.3) 9.6 (303.5) (14.5) 10.0 (231.0)
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
NET SALES
Sales for the three month and six month periods ended March 31, 1997 were
lower than sales for the corresponding periods ended March 31, 1996 by
$7,580,053 and $9,060,101 or 15.8% and 9.9%, respectively. The majority of
decline was primarily due to a conscious effort by the Company to reduce
inventory levels in the distribution channel in the three month period ended
March 31, 1997 and softness in demand for networking products during the
first quarter of fiscal 1997. In addition, sales for the three month and six
month periods ended March 31, 1997 were also reduced by customer rebates of
$700,750 and $2,000,750, respectively, an increase in such rebates of
$175,750 and $1,325,750, respectively, over the corresponding period ended
March 31, 1996. Such increases were due to providing incentives to the
distribution market in the first quarter of fiscal 1997 that carried over
into the second quarter.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
Net sales to Original Equipment Manufacturers (OEMs), as a percentage of
total net sales, rose to 25.0% and 22.4% for the three and six month periods
ended March 31, 1997, as compared to 20.7% and 17.6% for the comparable
periods in 1996. Sequentially, net sales from OEMs for the three month
period ended March 31, 1997 increased 5.1% as compared to the three month
period ended December 31, 1996. The increase for the three month period was
due primarily to seasonal replenishment by OEM customers. The Company expects
the OEM portion of the Company's business to remain relatively stable with
the current level in the third quarter.
Net sales from the distribution markets, as a percentage of total sales,
declined to 60.6% and 64.8% for the three month and six month periods ended
March 31, 1997, as compared to 65.1% and 67.6% for the comparable periods for
1996. Sequentially, sales from the distribution market for the three month
period ended March 31, 1997 declined 8.4%, as compared to the three month
period ended December 31, 1996. The decline was due primarily to a conscious
effort to reduce inventory levels in the distribution channel in the three
month period ended March 31, 1997.
The effort by the Company to reduce inventory levels in the distribution
channel is expected to continue in the third quarter.
GROSS MARGIN
Gross margin for the three and six month periods ended March 31, 1997
declined to 47.8% and 47.1%, respectively, as compared to 52.9% and 53.6% for
the comparable periods in 1996. Such decline was principally due to the
increase of OEM and LAN Connect net sales as a percentage of total net sales.
Net sales of OEM and LAN Connect products generally provide lower gross
margins, as compared to sales made through the distribution markets. In
addition, due to the lower sales levels for the three and six month periods
ended March 31, 1997, which are anticipated to continue into the third
quarter of 1997, the Company has increased its reserves for excess and
obsolete inventories by approximately $300,000 and $1,500,000 in the three
and six month periods ended March 31, 1997.
OPERATING EXPENSES
Operating expenses for the three month period ended March 31, 1997 increased
66.5% over operating expenses for the corresponding period ended March 31,
1996 and increased as a percentage of sales to 72% for the three month period
ended March 31, 1997 from 36.4% for the three month period ended March 31,
1996. Operating expenses for the six month period ended March 31, 1997
increased by 47.6% over the corresponding period ended March 31, 1996, and
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
increased as a percentage of sales to 61% for the six month period ended
March 31, 1997, from 37.3% for the corresponding period in 1996. These
increases were due principally to the restructuring charge of $10.5 million,
recorded in the three month period ended March 31, 1997. The restructuring
charge related to the closing of the Cleveland manufacturing facility, the
elimination of selected product lines and the consolidation and closing of
certain research and development facilities. These costs included (i) write
downs of the carrying values of fixed assets related to the closed
manufacturing and research and development facilities, (ii) write downs of
the carrying values of goodwill and identifiable intangible assets (primarily
licensing agreements related to the discontinued product lines) and related
inventories and (iii) the accrual of severance costs associated with the
elimination of 105 positions (total workforce reduction was 150).
The increases in operating expense also resulted partially from increased
general and administration expenses due to the opening of new research and
development facilities in Huntsville, Ala. and Redmond, Wash in the second
half of fiscal 1996. In addition, general and administrative expenses
increased due to severance expenses, not a part of the restructuring
previously discussed, and expansion and upgrades to the Company's
infrastructure.
Sales and marketing, research and development and general and administrative
costs declined from $23.3 million and $21.4 million in the three month
periods ended September 30, 1996 and December 31, 1996, respectively, to
$18.6 million in the three month period ended March 31, 1997. Such decline
was due to decreased marketing costs and a reduction of funding levels for
new product development. The Company expects to continue to reduce such
costs during the remainder of fiscal 1997.
OTHER INCOME
Other income for the three and six month periods ended March 31, 1997
decreased to $127,203 and $226,234, respectively, as compared to $151,275 and
$544,635 for the corresponding periods in 1996. The decline was due to lower
interest income resulting from a decrease in invested funds.
AETHERWORKS CORPORATION NET LOSS
In connection with the purchase of convertible notes 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 $1,589,681 and $3,109,470
of net losses for
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
AETHERWORKS CORPORATION NET LOSS (CONTINUED)
the three and six month periods ended March 31, 1997, respectively. The
Company recorded AetherWorks net losses of $655,990 and $935,297 for the
corresponding three and six month periods ended March 31, 1996. These net
losses represent 100% of AetherWork's net losses for such periods. The
percentage of AetherWorks' net losses 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 periods. The
Company anticipates that AetherWorks' net losses for the remainder of fiscal
1997 will be at levels similar to or higher than those incurred during the
three and six month periods ended March 31, 1997.
INCOME TAXES
Due to the net losses incurred in both the three and six month periods ended
March 31, 1997, the Company has recorded an income tax benefit of $1,843,473
and $2,425,905, respectively. Such benefits are not higher due to the
non-deductibility of certain intangible assets written off as part of the
restructuring charge and the AetherWorks net losses.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds from earlier public offerings. Investing activities
for the three and six month periods ended March 31, 1997 consisted of
purchases of equipment and capital improvements, including a new enterprise
wide computer system, and the purchase of additional convertible notes from
AetherWorks Corporation. Such notes purchases totaled $1.5 million and $3.5
million in the three and six month periods ended March 31,1997, respectively.
As of March 31, 1997, the Company is obligated to purchase up to an additional
$5 million in convertible notes from time to time at the request of
AetherWorks. See also Note 2 of the Notes to the Condensed Consolidated
Financial Statements.
At March 31, 1997, the Company had working capital of $64 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, including the
Company's obligation to purchase additional convertible notes from
AetherWorks Corporation.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial position.
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:
THE EXPECTATION THAT THE OEM PORTION OF THE COMPANY'S BUSINESS WILL REMAIN
RELATIVELY STABLE WITH THE CURRENT LEVEL IN THE THIRD QUARTER. This
expectation may be impacted by unanticipated revenue opportunities or changes
in ordering levels that may reduce current levels of net sales to OEMs.
THE EFFORT TO REDUCE INVENTORY LEVELS IN THE DISTRIBUTION CHANNEL WILL CONTINUE
IN THE NEXT QUARTER. General market conditions and competitive conditions
within these markets may impact sales levels either unfavorably or favorably.
THE EXPECTATION THAT LOWER SALES LEVELS ARE ANTICIPATED TO CONTINUE INTO THE
THIRD QUARTER OF 1997. General market conditions and competitive conditions
within these markets may impact sales levels either unfavorably or favorably.
THE EXPECTATION THAT THE REDUCTION IN SALES AND MARKETING, RESEARCH AND
DEVELOPMENT AND GENERAL AND ADMINISTRATIVE COSTS WILL CONTINUE DURING THE
REMAINDER OF FISCAL 1997. This expectation may be impacted by presently
unanticipated revenue opportunities or by unanticipated expenses.
THE EXPECTATION THAT THE AETHERWORKS CORPORATION NET LOSSES FOR THE REMAINDER
OF FISCAL 1997 WILL BE SIMILAR OR GREATER THAN THOSE INCURRED DURING THE
THREE AND SIX MONTH PERIODS ENDED MARCH 31, 1997. This expectation may be
impacted by presently unanticipated revenue opportunities or by unanticipated
expenses.
THE BELIEF THAT THE COMPANY'S 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. Changes in anticipated operating results, credit availability
and equity market conditions may further enhance or inhibit the Company's
ability to maintain or raise appropriate levels of cash.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 3, 1997, the Company and certain of its previous officers were
named as defendants in a putative securities class action lawsuit in the
United States District Court for the District of Minnesota on behalf of an
alleged class of purchasers of its common stock during the period January 25,
1996, through December 23, 1996, inclusive, which is captioned DENNIS
D'HONDT, INDIVIDUALLY AND ON BEHALF OF ALL PERSONS SIMILARLY SITUATED,
PLAINTIFF, VS. DIGI INTERNATIONAL INC., ERVIN F. KAMM, JR., GERALD A. WALL,
AND GARY L. DEANER, DEFENDANTS. The complaint in the action alleges the
Company and certain of its previous officers violated federal securities laws
by, among other things, misrepresenting and/or omitting material information
concerning the Company's operations and financial results. The complaint
seeks compensatory damages in an unspecified amount plus interest against all
defendants, jointly and severally, and an award of attorneys' fees, experts'
fees and costs.
On January 17, 1997, February 6, 1997 and February 14, 1997, three additional
putative securities class action lawsuits were filed in the United States
District Court for the District of Minnesota captioned RUTH LINEHAN,
INDIVIDUALLY AND ON BEHALF OF ALL PERSONS SIMILARLY SITUATED, PLAINTIFF AND
RUSSELL SIEGEL AND ANNE BUTLER, AS EXECUTRIX OF THE ESTATE OF MICHAEL BUTLER,
ON BEHALF OF THEMSELVES AND ALL OTHER SIMILARLY SITUATED, PAUL HOLM,
INDIVIDUALLY AND ON BEHALF OF ALL PERSONS SIMILARLY SITUATED, PLAINTIFFS, VS.
DIGI INTERNATIONAL INC., ERVIN F. KAMM, JR., GERALD A. WALL, AND GARY L.
DEANER, DEFENDANTS, which make the same allegations against the same
defendants as those asserted in the lawsuit described in the previous
paragraph.
On February 25, 1997, an additional securities lawsuit was filed in the
United States District Court for the District of Minnesota captioned
LOUISIANA STATE EMPLOYEES RETIREMENT SYSTEM IN BEHALF OF ITSELF AND IN BEHALF
OF ALL OTHER PARTIES SIMILARLY SITUATED AND CIRCUMSTANCED WHO DESIRE TO
PERSONALLY JOIN IN THIS ACTION AND TO CONTRIBUTE TO THE COSTS AND EXPENSES
THEREOF, PLAINTIFFS, VS. DIGI INTERNATIONAL INC., GARY L DEANER, ERVIN F.
KAMM, JR., GERALD A. WALL, AND "JOHN DOE AND "RICHARD ROE" BEING FICTITIOUS,
THE PARTIES INTENDED BEING THOSE PARTIES, PRESENTLY UNKNOWN TO THE PLAINTIFF,
WHO PARTICIPATED IN THE WRONGFUL ACTS SET FORTH HEREIN, DEFENDANTS, which
make the same allegations as those asserted in the lawsuit described in the
first paragraph above. This lawsuit, unlike the other lawsuits, is not a
class action.
On March 7, 1997, an additional securities class action lawsuit was filed in
the United States District Court for the District of Minnesota captioned
EDWARD HENRY CHAPMAN, III ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY
SITUATED, PLAINTIFF, VS. DIGI INTERNATIONAL INC.; ERVIN F. KAMM, JR.; GERALD
A. WALL; JONATHON E. KILLMER; AND GARY L. DEANER, DEFENDANTS, which make the
same allegations as those asserted in the lawsuit described in the first
paragraph above.
By Memorandum Order dated April 2, 1997, the District Court consolidated all
of the above lawsuits for pretrial purposes, and consolidated the five class
action lawsuits for all purposes including trial. The District Court
appointed 21 persons to serve as lead plaintiffs in the consolidated class
actions, and granted the lead plaintiffs 30 days from April 2, 1997 within
which to file and serve a consolidated class action complaint that will
supersede the five separate complaints. To date, plaintiffs have not filed
or served a consolidated class action complaint.
15
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
These lawsuits are in a preliminary stage and, accordingly, their ultimate
outcome or potential impact on the financial position, results of operations
or cash flows of the Company cannot be determined at this time.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
3(a) Amended and Restated Certificate of Incorporation of the Registrant*
3(b) Amended and Restated By-Laws of the Registrant**
10(m) Employment Agreement with Jerry A. Dusa, dated March 12, 1997
15 Letter Re: Unaudited Interim Financial Information
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. 0-017972)
**Incorporated by reference to the corresponding exhibit number of the Company's
Registration Statement on Form S-1 (File No. 33-42384)
16
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K:
Form 8-K dated February 18, 1997, regarding the announcement of the
Company recording a restructuring charge during the second quarter of
fiscal 1997.
17
<PAGE>
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: May 1, 1997 By: /s/ Jonathon E. Killmer
---------------------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
18
<PAGE>
EXHIBIT 10(m)
EMPLOYMENT AGREEMENT WITH JERRY A. DUSA
DATED MARCH 12, 1997
<PAGE>
EMPLOYMENT AGREEMENT
(Jerry A. Dusa)
This Agreement is made as of March 12, 1997 by and between DIGI
INTERNATIONAL INC., a Delaware corporation (the "Company"), and Jerry A. Dusa
(the "Executive").
WHEREAS the Company desires to employ Executive in accordance with the
terms and conditions stated in this Agreement; and
WHEREAS Executive desires to accept that employment pursuant to the terms
and conditions of this Agreement;
NOW THEREFORE, in consideration of the covenants and agreements contained
herein, the parties hereto agree as follows:
I. EMPLOYMENT
1.1 EMPLOYMENT AS SENIOR EXECUTIVE. The Company hereby agrees to employ
Executive, commencing the date hereof and continuing until the date his
employment terminates pursuant to Article III hereof, in a senior executive
capacity, initially as President and Chief Executive Officer of the Company.
Executive accepts such employment pursuant to the terms of this Agreement.
Executive shall perform such duties and responsibilities as may be determined
from time to time by the Board of Directors of the Company, which shall be
consistent with his position as an officer of the Company.
1.2 EXCLUSIVE SERVICES. Commencing on the date hereof, Executive agrees
to devote his full time, attention and energy to performing his duties and
responsibilities to the Company under this Agreement.
II. COMPENSATION, BENEFITS AND PERQUISITES
2.1 BASE SALARY. During the period this Agreement is in effect, the
Company shall pay Executive a base salary at the annual rate of $250,000,
payable semi-monthly. Beginning on or about October 1, 1997, the Board of
Directors of the Company (the "Board", which term shall include a duly
authorized committee of the Board of Directors) will review the base salary
annually, and may in its sole discretion increase it to reflect performance and
other factors. However, the Board is not obligated to provide for any
increases.
2.2 BONUSES. Executive shall be eligible to receive a cash performance
bonus of up to 100% base salary paid for each fiscal year during which this
Agreement is in effect, as follows:
<PAGE>
(a) Executive shall be entitled to the target bonus amount if the
objectives set by the Board of Directors in its sole discretion for the
fiscal year are met. Such objectives may include, in the sole discretion
of the Board, the achievement of financial objectives set forth in the
Board-approved Budget Plan for a particular fiscal year, or such other
objectives as the Board, in its sole discretion, shall determine.
(b) If some or all of the objectives are not met for a fiscal year,
then the Board will determine in its discretion what portion, if any, of
the target bonus amount will be paid to Executive for that year.
(c) The target bonus for each fiscal year shall be paid to Executive
on September 30 of each year or as soon thereafter as the Company
determines whether the objectives for such bonus have been met for that
year.
(d) In any fiscal year in which the objectives for the cash bonus
are based upon financial objectives in the Board-approved Budget Plan for
such fiscal year, the Board will consult with Executive before determining
the Budget Plan for each fiscal year. However, the Board will have
authority to establish the Budget Plan for each year in its sole
discretion.
(e) In any fiscal year in which the objectives for the cash bonus
are based upon financial objectives in the Board-approved Budget Plan for
such fiscal year, the objectives set by the Company's Board-approved Budget
Plan for such fiscal year shall not be adjusted for the acquisition, by any
means, of any businesses or business units (and expenses related thereto)
that may occur during a particular fiscal year. The objectives set by the
Company's Board-approved Budget Plan for any such fiscal year shall be
equitably adjusted by the Board for the divestiture, by any means, of any
businesses or business units (and expenses related thereto) that may occur
during a particular fiscal year and to eliminate any reorganization,
restructuring or other extraordinary charge that may be incurred during a
particular fiscal year.
2.3 OVERACHIEVEMENT BONUSES. If the objectives set by the Board of
Directors for a cash performance bonus are exceeded for a fiscal year, the Board
may in its discretion award Executive a bonus that is larger than the target
bonus.
2.4 STOCK OPTIONS. As of the date of this Agreement, Executive has been
awarded a non-statutory stock option under the Digi International Inc. Stock
Option Plan (the "Stock Option Plan") for 240,000 Common Shares of the Company
(as defined in the Stock Option Plan). On or about September 30 of each year
the Compensation Committee of the Board of the Company considers and awards
stock options to key employees of the Company and its subsidiaries. These
awards are made in the discretion of the Compensation Committee and are
principally intended to recognize performance over the preceding fiscal year.
Executive acknowledges that he has received the maximum stock option grant
permitted under the Stock Option Plan for calendar 1997 and consequently would
not be eligible for consideration for additional stock option grants until on or
after January 1, 1998.
<PAGE>
2.5 FORM OF STOCK OPTION AGREEMENT. Stock option awards to Executive
shall be pursuant to stock option agreements in substantially the form of
Schedule II, with such additions thereto and deletions therefrom as Executive
and the Chairman of the Board, the Chairman of the Compensation Committee or
another duly authorized officer of the Company shall agree, such agreement to be
conclusively evidenced by their execution and delivery thereof.
2.6 VACATIONS. Executive shall be entitled to vacation in accordance
with policies of the Company.
2.7 EMPLOYEE BENEFITS. Executive shall be entitled to the benefits and
perquisites which the Company generally provides to its other employees under
the applicable Company plans and policies, and to future benefits and
perquisites made generally available to employees of the Company. Executive's
participation in such benefit plans shall be on the same basis as applies to
other employees of the Company. Executive shall pay any contributions which are
generally required of employees to receive any such benefits.
2.8 EMPLOYMENT TAXES AND WITHHOLDING. Executive recognizes that the
compensation, benefits and other amounts provided by the Company under this
Agreement may be subject to federal, state or local income taxes. It is
expressly understood and agreed that all such taxes shall be the responsibility
of the Executive. To the extent that federal, state or local law requires
withholding of taxes on compensation, benefits or other amounts provided under
this Agreement, the Company shall withhold the necessary amounts from the
amounts payable to Executive under this Agreement.
2.9 COMPANY RESPONSIBILITY FOR INSURED BENEFITS. In this Article II, the
Company is agreeing to provide certain benefits which are provided in the form
of premiums of insurance coverage. The Company is not itself promising to pay
the benefit an insurance company is obligated to pay under the policy the
insurance company has issued. If an insurance company becomes insolvent and
cannot pay benefits it owes to Executive or his beneficiaries under the
insurance policy, neither Executive nor his personal representative or
beneficiary shall have any claim for benefits against the Company.
2.10 EXPENSES. During the term of his employment hereunder, Executive
shall be entitled to receive prompt reimbursement from the Company (in
accordance with the policies and procedures in effect for the Company's
employees) for all reasonable travel and other expenses incurred by him in
connection with his services hereunder.
2.11 RELOCATION. Executive shall relocate to the general vicinity of the
Minneapolis/St. Paul metropolitan area. The Company will pay for Executive's
direct relocation expenses, including the cost of moving Executive's household
goods.
2.12 COMPENSATION AS INTERIM ACTING CHIEF EXECUTIVE OFFICER. Executive
and the Company hereby confirm the terms of Executive's engagement and
compensation as interim
<PAGE>
acting Chief Executive Officer for the period January 3, 1997 to the date hereof
as set forth on Schedule III hereto. Executive and the Company agree that the
stock option agreement pertaining to the 10,000 share option referred to in
Schedule III hereto shall be amended to add the terms of Section 6(c)
(Termination Without Cause) and (d) (Change in Control) set forth in Schedule II
hereto.
III. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 TERMINATION OF EMPLOYMENT. Executive's employment under this
Agreement may be terminated by the Company at any time for any reason; provided,
however, that if Executive's employment is terminated by the Company during the
term of this Agreement for a reason other than for cause, he shall be entitled
to continue to receive his base salary under Section 2.1 for a period of 12
months from his date of termination. Executive's employment under this
Agreement may be terminated by Executive at any time for any reason. The
termination shall be effective as of the date specified by the party initiating
the termination in a written notice delivered to the other party, which date
shall not be earlier than the date such notice is delivered to the other party.
Except as expressly provided to the contrary in this section or applicable law,
Executive's rights to pay and benefits shall cease on the date his employment
under this Agreement terminates. This Agreement shall terminate in its entirety
immediately upon the death of Executive.
3.2 CAUSE. For purposes of this Article III, "cause" shall mean only the
following: (i) indictment or conviction of, or a plea of nolo contendere to,
(A) any felony (other than any felony arising out of negligence) or any
misdemeanor involving moral turpitude, or (B) any crime or offense involving
dishonesty with respect to 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 Executive's duties;
(iv) Executive's failure to devote substantially all of his working time and
efforts during normal business hours to the Company's business; (v) knowing
engagement in conduct which is materially injurious to the Company; (vi) knowing
failure, for Executive's own benefit, to comply with the covenants contained in
Sections 4.1 or 4.2 of this Agreement; (vii) knowingly providing materially
misleading information concerning the Company to the Company's Board of
Directors, any governmental body or regulatory agency or to any lender or other
financing source or proposed financing source of the Company; (viii) failure of
the Company to meet at least 70% of the Board-approved Budget Plan for either
net sales or after tax earnings in any fiscal year; or (ix) any other failure by
Executive to substantially perform his material duties under this Agreement
(excluding nonperformance resulting from Executive's disability) which failure
is not cured within thirty (30) days after written notice from the Chairman of
the Board or the Chairman of the Compensation Committee 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. For purposes of Section 3.2(viii), the net sales and after-tax
earnings targets set by the Company's Board-approved Budget Plan for any fiscal
year shall not be adjusted for the acquisition, by any means, of any businesses
or business units (and expenses related thereto) that may occur during a
particular fiscal year, but shall be equitably adjusted by the Board for the
<PAGE>
divestiture, by any means, of any businesses or business units (and expenses
related thereto) that may occur during a particular fiscal year and to eliminate
any reorganization, restructuring or other extraordinary charge that may be
incurred during a particular fiscal year.
3.3 DISABILITY. If Executive has become disabled from performing his
duties under this Agreement and the disability has continued for a period of
more than sixty (60) days, the Board may, in its discretion, determine that
Executive will not return to work and terminate his employment under this
Agreement. Upon any such termination for disability, Executive shall be
entitled to such disability, medical, life insurance, and other benefits as may
be provided generally for disabled employees of the Company during the period he
remains disabled.
3.4 RESIGNATION. Executive agrees that, upon termination of Executive's
employment hereunder for any reason, he shall be deemed to have resigned as a
director of the Company and as a director, officer and/or employee of any parent
company of the Company or any of their subsidiaries, unless prior to termination
of Executive's employment hereunder the provisions of this Section 3.4 shall
have been waived by vote of the Board (excluding Executive).
IV. NON-COMPETITION, CONFIDENTIALITY AND TRADE SECRETS
4.1 AGREEMENT NOT TO COMPETE. In consideration of the covenants and
agreements contained in this Agreement, Executive agrees that, on or before the
date which is one year after the date Executive's employment by the Company, any
parent company of the Company or any of their subsidiaries terminates, he will
not, unless he receives the prior approval of the Board of Directors of the
Company, directly or indirectly engage in any of the following actions:
(a) Own an interest in (except as provided below), manage, operate, join,
control, lend money or render financial or other assistance to, or
participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, any entity whose products or services
compete directly or indirectly with those of the Company, any parent
company of the Company, or any of their subsidiaries. However, nothing in
this subsection (a) shall preclude Executive from holding less than one
percent of the outstanding capital stock of any corporation required to
file periodic reports with the Securities and Exchange Commission under
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
securities of which are listed on any securities exchange, quoted on the
National Association of Securities Dealers Automated Quotation System or
traded in the over-the-counter market.
(b) Intentionally solicit, endeavor to entice away from the Company, any
parent company of the Company or any of their subsidiaries, or otherwise
interfere with the relationship of the Company, any parent company of the
Company or any of their subsidiaries with, any person who is employed by or
otherwise engaged to perform services for the Company, any parent company
of the Company or any of their
<PAGE>
subsidiaries (including, but not limited to, any independent sales
representatives or organizations), or any persons or entity who is, or was
within the then most recent 12-month period, a customer or client of the
Company, any parent company of the Company or any of their subsidiaries,
whether for Executive's own account or for the account of any other
individual, partnership, firm, corporation or other business organization.
If the scope of the restrictions in this section are determined by a court of
competent jurisdiction to be too broad to permit enforcement of such
restrictions to their full extent, then such restrictions shall be construed or
rewritten (blue-lined) so as to be enforceable to the maximum extent permitted
by law, and Executive hereby consents, to the extent he may lawfully do so, to
the judicial modification of the scope of such restrictions in any proceeding
brought to enforce them.
4.2 NON-DISCLOSURE OF INFORMATION. During the period of his employment
hereunder, and at all times thereafter, Executive shall not, without the written
consent of the Company disclose to any person, other than an employee of the
Company, any parent company of the Company or any of their subsidiaries or a
person to whom disclosure is reasonably necessary or appropriate in connection
with the performance by Executive of his duties as an executive of the Company,
except where such disclosure may be required by law, any material confidential
information obtained by him while in the employ of the Company, any parent
company of the Company or any of their subsidiaries with respect to any
products, technology, know-how or the like, services, customers, methods or
future plans of the Company, any parent company of the Company or any of their
subsidiaries, all of which Executive acknowledges are valuable, special and
unique assets, the disclosure of which Executive acknowledges may be materially
damaging.
4.3 REMEDIES. Executive acknowledges that the Company's remedy at law
for any breach or threatened breach by Executive of Section 4.1 or Section 4.2
will be inadequate. Therefore, the Company shall be entitled to injunctive and
other equitable relief restraining Executive from violating those requirements,
in addition to any other remedies that may be available to the Company under
this Agreement or applicable law.
V. MISCELLANEOUS
5.1 AMENDMENT. This Agreement may be amended only in writing, signed by
both parties and approved by the Board.
5.2 ENTIRE AGREEMENT. Before signing this Agreement the parties had
numerous conversations, including preliminary discussions, formal negotiations
and informal conversations, and generated correspondence and other writings, in
which the parties discussed the employment which is the subject of this
Agreement and their aspirations for its success. In such conversations and
writings, individuals representing the parties may have expressed their
judgments and beliefs concerning the intentions, capabilities and practices of
the parties, and may have forecasted future events. The parties recognize that
such
<PAGE>
conversations and writings often involve an effort by both sides to be positive
and optimistic about the prospects for the employment. It is also recognized,
however, that all business transactions contain an element of risk, and that it
is normal business practice to limit the legal obligations of contracting
parties to only those promises and representations which are essential to their
transaction so as to provide certainty as to their respective future rights and
remedies. Accordingly, this Agreement is intended to define the full extent of
the legally enforceable undertakings of the parties hereto, and no related
promise or representation, written or oral, which is not set forth explicitly in
this Agreement is intended by either party to be legally binding. Both parties
acknowledge that in deciding to enter into this transaction they have relied on
no representations, written or oral, other than those explicitly set forth in
this Agreement. Executive has relied entirely on his own judgment and that of
his advisers in entering into this Agreement.
5.3 ASSIGNMENT. The Company may in its sole discretion assign this
Agreement to any entity which succeeds to some or all of the business of the
Company through merger, consolidation, a sale of some or all of the assets of
the Company, or any similar transaction. Executive acknowledges that the
services to be rendered by him are unique and personal. Accordingly, Executive
may not assign any of his rights or obligations under this Agreement.
5.4 SUCCESSORS. Subject to Section 5.3, the provisions of this Agreement
shall be binding upon the parties hereto, upon any successor to or assign of the
Company, and upon Executive's heirs and the personal representative of Executive
or Executive's estate.
5.5 NOTICES. Any notice required to be given under this Agreement shall
be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested. Any notice by mail shall be
addressed as follows:
If to the Company, to:
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
Attention: Chairman of the Board
With a copy to:
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402-3601
Attention: James E. Nicholson
If to Executive, to:
<PAGE>
Jerry A. Dusa
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
or to such other addresses as either party may designate in writing to the other
party from time to time.
5.6 WAIVER OF BREACH. Any waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement. No waiver by the Company
shall be valid unless in writing and signed by the Chairman of the Board of
Directors or Chairman of the Compensation Committee.
5.7 SEVERABILITY. If any one or more of the provisions (or portions
thereof) of this Agreement shall for any reason be held by a final determination
of a court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions (or portions of the provisions) of this Agreement, and the
invalid, illegal or unenforceable provisions shall be deemed replaced by a
provision that is valid, legal and enforceable and that comes closest to
expressing the intention of the parties hereto.
5.8 GOVERNING LAW. THIS AGREEMENT SHALL BE INTERPRETED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA, APPLICABLE TO CONTRACTS
EXECUTED AND FULLY PERFORMED WITHIN THE STATE OF MINNESOTA WITHOUT GIVING EFFECT
TO CONFLICT OF LAW PRINCIPLES. EXECUTIVE HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY MINNESOTA STATE OR FEDERAL COURT IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND THE COMPANY AND EXECUTIVE
HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETERMINED ONLY IN SUCH MINNESOTA STATE COURT OR SUCH FEDERAL
COURT AND IN NO OTHER COURT. EXECUTIVE HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT HE MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. EACH OF THE COMPANY AND EXECUTIVE
HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF COPIES OF THE SUMMONS AND
COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR
PROCEEDING BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY DELIVERING OF A
COPY OF SUCH PROCESS TO OF THE COMPANY OR EXECUTIVE, AS THE CASE MAY BE, AT THE
RESPECTIVE ADDRESS SPECIFIED IN SECTION 5.5 OR BY ANY OTHER METHOD PROVIDED BY
LAW. EACH OF THE COMPANY AND EXECUTIVE AGREES THAT A FINAL JUDGMENT IN ANY SUCH
ACTION OR PROCEEDING SHALL BE CONCLUSIVE
<PAGE>
AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR BY ANY
OTHER MANNER PROVIDED BY LAW.
5.9 HEADINGS. The headings of articles and sections herein are included
solely for convenience and reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
5.10 COUNTERPARTS. This Agreement may be executed by either of the
parties hereto in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall constitute a single instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement in Minnetonka,
Minnesota, effective as of the date set forth above.
DIGI INTERNATIONAL INC.
By /s/ JOHN P. SCHINAS
--------------------
Its Chairman of the Board
EXECUTIVE
/s/ JERRY A. DUSA
------------------
Jerry A. Dusa
<PAGE>
EXHIBIT 15
LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
We are aware that our report dated April 23, 1997 on the reviews of interim
condensed consolidated financial information of Digi International Inc. and
Subsidiaries (the Company) for the three and six month periods ended March
31, 1997 and 1996, and included in the Company's Form 10-Q for the quarter
ended March 31, 1997, is incorporated by reference in the Company's
registration statements on Form S-8 (Registration Nos. 33-32956, 33-38898,
333-99 and 333-1821 and 333-23857) and Form S-3 (Registration No. 33-59223).
Pursuant to Rule 436(c), under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
April 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 9,676,932
<SECURITIES> 0
<RECEIVABLES> 38,066,444
<ALLOWANCES> 0
<INVENTORY> 30,009,443
<CURRENT-ASSETS> 85,067,891
<PP&E> 23,297,609
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,018,448
<CURRENT-LIABILITIES> 20,613,512
<BONDS> 0
0
0
<COMMON> 146,887
<OTHER-SE> 98,258,049
<TOTAL-LIABILITY-AND-EQUITY> 119,018,448
<SALES> 82,629,437
<TOTAL-REVENUES> 82,629,437
<CGS> 43,694,943
<TOTAL-COSTS> 39,983,902
<OTHER-EXPENSES> 13,580,952<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,404,126)
<INCOME-TAX> (2,425,905)
<INCOME-CONTINUING> (11,978,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,978,221)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> (.90)
<FN>
<F1>AetherWork loss 3,109,470; Restructuring charge 10,471,482
</FN>
</TABLE>
