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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: June 30, 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.
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(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
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(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 June 30, 1997, there were 13,406,963 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 nine month periods ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of
June 30, 1997 and September 30, 1996 . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended June 30, 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. . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . 18
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . 18
ITEM 4. Submission of Matters to a Vote of Securities Holders. . . . . . 18
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30 Nine months ended June 30
-------------------------------- ----------------------------------
1997 1996 1997 1996
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 40,843,298 $ 49,642,710 $ 123,472,736 $ 141,332,248
Cost of sales 20,724,950 25,191,439 64,419,895 67,760,818
------------ ------------- -------------- --------------
Gross margin 20,118,348 24,451,271 59,052,841 73,571,430
------------ ------------- -------------- --------------
Operating expenses:
Sales and marketing 9,112,452 12,510,890 29,310,308 31,023,175
Research and development 3,938,589 5,593,164 14,284,202 14,472,114
General and administrative 4,523,797 4,381,571 13,964,227 11,163,649
Restructuring - - 10,471,482 -
------------ ------------- -------------- --------------
Total operating expenses 17,574,838 22,485,625 68,030,219 56,658,938
------------ ------------- -------------- --------------
Operating income (loss) 2,543,510 1,965,646 (8,977,378) 16,912,492
Other income (expense), net 117,221 (149,794) 343,456 394,841
AetherWorks Corporation net loss (1,525,006) (1,203,625) (4,634,476) (2,138,922)
------------ ------------- -------------- --------------
Income (loss) before income taxes 1,135,725 612,227 (13,268,398) 15,168,411
Provision (benefit) for income taxes 1,068,455 663,457 (1,357,450) 6,078,106
------------ ------------- -------------- --------------
Net income (loss) $ 67,270 $ (51,230) $ (11,910,948) $ 9,090,305
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
Net income (loss) per common and
common equivalent share $ 0.01 $ - $ (0.89) $ 0.66
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
Weighted average common and
common equivalent shares outstanding 13,403,895 13,841,154 13,379,899 13,828,104
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1997 1996
-------------- --------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 14,793,019 $ 8,943,390
Accounts receivable, net 34,239,782 42,874,898
Inventories 27,989,600 33,372,164
Income tax refund receivable 1,746,720 1,675,626
Other 2,458,798 2,825,828
-------------- --------------
Total current assets 81,227,919 89,691,906
Property, equipment and improvements, net 22,940,693 24,230,101
Intangible assets, net 7,173,228 10,854,845
Investment in AetherWorks Corporation 2,038,273 1,672,749
Other 1,615,684 3,489,228
-------------- --------------
Total assets $ 114,995,797 $ 129,938,829
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,409,245 $ 12,549,738
Accrued expenses:
Advertising 3,016,874 3,761,619
Compensation 1,340,604 1,622,549
Restructuring 579,163 -
Other 1,982,476 2,061,782
-------------- --------------
Total current liabilities 16,328,362 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; 14,694,456 and 14,677,150 shares issued 146,945 146,772
Additional paid-in capital 44,495,675 42,866,758
Retained earnings 78,993,794 90,904,746
-------------- --------------
123,636,414 133,918,276
Unearned stock compensation (2,097,680) (295,156)
Treasury stock, at cost, 1,288,026 and 1,338,894
shares (22,871,299) (23,679,979)
-------------- --------------
Total stockholders' equity 98,667,435 109,943,141
-------------- --------------
Total liabilities and stockholders' equity $ 114,995,797 $ 129,938,829
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Operating activities:
Net (loss) income $ (11,910,948) 9,090,305
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Restructuring 9,600,666 -
Depreciation and amortization 5,256,247 3,654,134
AetherWorks Corporation net loss 4,634,476 2,138,922
Loss on sale of fixed assets 172,304 -
Provision for doubtful accounts receivable 1,062,936 323,838
Provision for inventory obsolescence 2,256,514 1,263,200
Stock compensation 105,177 158,031
Changes in operating assets and liabilities 3,622,585 (24,059,735)
-------------- --------------
Total adjustments 26,710,905 (16,521,610)
-------------- --------------
Net cash provided by (used in)
operating activities 14,799,957 (7,431,305)
-------------- --------------
Investing activities:
Purchase of property, equipment, intangibles,
and improvements (4,480,397) (11,417,259)
Investment in AetherWorks Corporation (5,000,000) (4,796,525)
Sale of marketable securities, net - 27,968,775
-------------- --------------
Net cash (used in) provided by
investing activities (9,480,397) 11,754,991
-------------- --------------
Financing activities:
Stock benefit plan transactions, net 530,069 1,453,790
Purchase of treasury stock - (7,249,339)
-------------- --------------
Net cash provided by (used in) financing activities 530,069 (5,795,549)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 5,849,629 (1,471,863)
Cash and cash equivalents, beginning of period 8,943,390 5,103,731
-------------- --------------
Cash and cash equivalents, end of period $ 14,793,019 $ 3,631,868
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
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 June 30,
1997 and for the three and nine month periods ended June 30, 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 June 30, 1997, under a financing arrangement, the Company purchased
$10,296,525 of convertible notes from AetherWorks Corporation, a development
stage company engaged in the development of wireless and dial-up remote access
technology. At June 30, 1997, the Company is obligated to purchase up to an
additional $3.5 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 June 30, 1997 are convertible into 58.2% of AetherWorks' common
stock, and upon the purchase of the additional $3.5 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 $1,525,006 and $4,634,476 for the three month and nine
month periods ended June 30, 1997, and recorded losses of $1,203,625 and
$2,138,922 for the corresponding three and nine month periods ended June 30,
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN AETHERWORKS CORPORATION (CONTINUED)
Investment in AetherWorks Corporation consisted of the following:
June 30, 1997 September 30, 1996
------------- ------------------
Convertible notes receivable $10,296,525 $5,296,525
Cumulative net losses (8,258,252) (3,623,776)
----------- -----------
$2,038,273 $1,672,749
----------- -----------
----------- -----------
3. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out method. Inventories at June 30, 1997 and September 30,
1996 consisted of the following:
June 30, 1997 September 30, 1996
------------- ------------------
Raw materials $13,787,559 $19,145,019
Work in process 7,695,630 10,469,315
Finished goods 6,506,411 3,757,830
4. INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during each period. Common stock equivalents result from dilutive stock
options. Common stock equivalents were excluded in determining the weighted
average common and common stock equivalents outstanding for the three and nine
month periods ended June 30, 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 previous quarter 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 $870,816 had been paid as of June 30, 1997, and $9,021,503
resulting from the write down of asset carrying values. As of June 30, 1997,
$9,892,319 had been charged to this restructuring reserve and the remaining
reserve of $579,163 is expected to be essentially utilized during fiscal 1997.
6. RECLASSIFICATION OF CERTAIN EXPENSES
Rebates to customers of approximately $673,862 and $1,348,862 for the three and
nine month periods ended June 30, 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 (loss), or net income
(loss).
In addition, certain costs relating to systems support and communication costs,
which previously were included in general and administrative expenses have been
reclassified into sales and marketing and research and development expenses for
all periods presented. Such amounts were $677,071 and $1,993,693 for the three
and nine month periods ended June 30, 1997 and $692,226 and $2,014,798 for the
three and nine month periods ended June 30, 1996, respectively. These
reclassifications had no impact on previously reported operating income (loss),
or net income (loss).
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. EMPLOYEE STOCK OPTIONS
During the fiscal quarter ended June 30, 1997, the Company cancelled and
reissued stock options to certain employees to purchase shares of the Company's
stock at an exercise price of $8.00 per share. In connection with this
transaction, the Company recorded approximately $1.9 million of unearned
compensation which will be amortized into operations over the vesting period of
four years commencing May 8, 1997.
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 June 30, 1997, and the related
condensed consolidated statements of operations for the three month and nine
month periods ended June 30, 1997 and 1996 and cash flows for the nine month
periods ended June 30, 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
July 23, 1997
9
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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 % Nine months %
ended Increase ended Increase
June 30 (decrease) June 30 (decrease)
---------------------------------- -----------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% (17.7%) 100.0% 100.0% (12.6%)
Cost of sales 50.7 50.7 (17.7) 52.2 47.9 4.9
---- ---- ----- ---- --- ----
Gross margin 49.3 49.3 (17.7) 47.8 52.1 (19.7)
---- ---- ----- ---- --- ----
Operating expenses:
Sales and marketing 22.3 25.2 (27.2) 23.7 22.0 (5.5)
Research and development 9.6 11.3 (29.6) 11.6 10.2 (1.3)
General and administrative 11.1 8.8 3.2 11.3 7.9 25.1
Restructuring 0.0 0.0 100.0 8.5 0.0 100.0
---- ---- ----- ---- --- -----
Total operating expenses 43.0 45.3 (21.8) 55.1 40.1 20.1
---- ---- ----- ---- --- ----
Operating income (loss) 6.2 4.0 29.4 (7.3) 12.0 (153.1)
Other income (expense), net 0.3 (0.3) (178.3) 0.3 0.3 (13.0)
AetherWorks Corporation net loss (3.7) (2.4) 26.7 (3.8) (1.5) 116.7
---- ---- ----- ---- --- -----
Income (loss) before income taxes 2.8 1.2 85.5 (10.7) 10.7 (187.5)
Provision (benefit) for income taxes 2.6 1.3 61.0 (1.1) 4.3 (122.3)
---- ---- ----- ---- --- -----
Net income (loss) 0.2 (0.1) (231.3) (9.6) 6.4 (231.0)
---- ---- ----- ---- --- -----
---- ---- ----- ---- --- -----
</TABLE>
NET SALES
Sales for the three month and nine month periods ended June 30, 1997 were lower
than sales for the corresponding periods ended June 30, 1996 by $8,799,412 and
$17,859,512 or 17.7% and 12.6%, 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 periods ended March 31, 1997 and
June 30, 1997 and softness in demand for networking products during the first
quarter of fiscal 1997. In addition, sales for the three month and nine month
periods ended June 30, 1997 were also reduced by customer rebates of $1,093,925
and $3,078,925, respectively, an increase in such rebates of $420,063 and
$1,730,063, respectively, over the corresponding periods ended June 30, 1996.
Such increases were due to providing incentives to the distribution market.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
Net sales to Original Equipment Manufacturers (OEMs), as a percentage of total
net sales, rose to 26.1% and 23.6% for the three and nine month periods ended
June 30, 1997, as compared to 22.5% and 19.4% for the comparable periods in
1996. Sequentially, net sales to OEMs for the three month period ended June 30,
1997 increased 5.1% as compared to the three month period ended March 31, 1997.
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
fourth quarter.
Net sales from the distribution markets, as a percentage of total sales,
declined to 61.5% and 63.7% for the three month and nine month periods ended
June 30, 1997, as compared to 63.9% and 66.1% for the comparable periods for
1996. Sequentially, sales from the distribution market for the three month
period ended June 30, 1997 increased 2.8%, as compared to 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 fourth quarter of fiscal 1997 and into the first
quarter of fiscal 1998.
GROSS MARGIN
Gross margin for the three month period ended June 30, 1997 remained flat at
49.3%, as compared to the three month period ended June 30, 1996. Gross margin
for the nine month period ended June 30, 1997 declined to 47.8%, as compared to
52.1% for the comparable period in 1996. Such decline was principally due to
the increase of OEM and physical layer product net sales as a percentage of
total net sales. OEM and physical layer products generally provide lower gross
margins, as compared to sales of multi-connect and remote access products. In
addition, the Company has increased its reserves for excess and obsolete
inventories by approximately $993,000 in the nine months ended June 30, 1997
versus 1996.
OPERATING EXPENSES
Operating expenses for the three month period ended June 30, 1997 declined 21.8%
over operating expenses for the corresponding period ended June 30, 1996 and
decreased as a percentage of sales to 43.0% for the three month period ended
June 30, 1997 from 45.3% for the three month period ended June 30, 1996.
Operating expenses for the nine month period ended June 30, 1997 increased by
20.1% over the corresponding period ended June 30, 1996, and increased as a
percentage of sales to 55.1% for the nine month period ended June 30, 1997,
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)
from 40.1% 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).
Sales and marketing, research and development and general and administrative
costs declined from $21.4 million and $18.6 million in the three month periods
ended December 31, 1996 and March 31, 1997, respectively, to $17.6 million in
the three month period ended June 30, 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 fourth quarter
of fiscal 1997.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the three and nine month periods ended June 30,
1997 amounted to $117,221 and $343,456, respectively, as compared to other
expense, net of $149,794 and other income, net of $394,841 for the corresponding
periods in 1996. The decline for the nine month period was due to lower
interest income resulting from a decrease in invested funds. The increase for
the three month period ended June 30, 1997 was a result of increased cash
balances and an ability to invest more 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 $1,525,006 and $4,634,476 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 nine month periods ended June 30, 1997, respectively. The Company
recorded AetherWorks net losses of $1,203,625 and $2,138,922 for the
corresponding three and nine month periods ended June 30, 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 nine month periods ended June 30, 1997.
INCOME TAXES
Due to the net losses incurred in the nine month period ended June 30, 1997, the
Company has recorded an income tax benefit of $1,357,450. Such benefit is not
higher due to the non-deductibility of certain intangible assets written off as
part of the restructuring charge and the AetherWorks net losses. During the
three month period ended June 30, 1997, the Company had taxable income (due to
the non-deductibility of the AetherWorks net losses) and, accordingly, has
recorded an income tax provision of $1,068,455.
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 nine month periods ended June 30, 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 $5.0 million in the
three and nine month periods ended June 30,1997, respectively. As of June 30,
1997, the Company is obligated to purchase up to an additional $3.5 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 June 30, 1997, the Company had working capital of $64,899,557 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.
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 FOURTH 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 IS EXPECTED
TO CONTINUE IN THE FOURTH 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
FOURTH QUARTER OF 1997 AND INTO THE FIRST QUARTER OF FISCAL 1998. 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 FOURTH
QUARTER 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
NINE MONTH PERIODS ENDED JUNE 30, 1997. This expectation may be impacted by
presently unanticipated revenue opportunities or by unanticipated expenses.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
FORWARD LOOKING STATEMENTS (CONTINUED)
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.
15
<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. Between January 17, 1997 and March 7, 1997, four similar
putative securities class actions also were commenced. By Memorandum and Order
dated April 2, 1997, the District Court consolidated all five of the putative
securities class actions for all purposes including trial, appointed 21 persons
to serve as lead plaintiffs in the consolidated class actions, and allowed the
lead plaintiffs to file and serve a consolidated class action complaint.
On May 12, 1997, a consolidated amended class action complaint (the
"Consolidated Amended Complaint") was filed in the combined actions, which are
captioned IN RE DIGI INTERNATIONAL INC. SECURITIES LITIGATION, Master File No.
97-5 (JRT/RLE) (U.S. District Court for the District of Minnesota). The
Consolidated Amended Complaint alleges that the Company and its previous
officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary L. Deaner violated the
federal securities laws by, among other things, misrepresenting and/or omitting
material information concerning the Company's operations and financial results.
The Consolidated Amended 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 July 3, 1997, defendants served a motion to dismiss the Consolidated Amended
Complaint on the ground, among others, that it fails to plead claims in
accordance with applicable law. The briefing with respect to this motion is
expected to be completed by August 1997, with a hearing before the District
Court to be scheduled thereafter.
On February 25, 1997, The Company and certain of its previous officers also were
named as defendants in a securities lawsuit filed in the United States District
Court for the District of Minnesota by the Louisiana State Employees Retirement
System and entitled 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", THE NAMES "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, Civil File No. 97-440, Master File No. 97-5
(JRT/RLE) (U.S. District Court for the District of Minnesota). On June 3, 1997,
the Louisiana State Employees Retirement System filed an Amended Complaint (the
"Louisiana Amended Complaint"). The Louisiana Amended Complaint alleges that
the Company and its previous officers Ervin F. Kamm, Jr., Gerald A. Wall and
Gary L. Deaner violated federal securities laws and state common law by, among
other things, misrepresenting and/or omitting material information concerning
the Company's operations and financial results.
16
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The Louisiana Amended Complaint seeks compensatory damages in the amount of
$718,404.70 plus interest against all defendants, jointly and severally, and an
award of attorneys' fees, disbursements and costs. This action has been
consolidated with the consolidated class actions for pretrial purposes.
On July 17, 1997, defendants served a motion to dismiss the Louisiana Amended
Complaint on the ground, among others, that it fails to plead claims in
accordance with applicable law. The briefing with respect to this motion is
expected to be completed by August 1997, with a hearing before the District
Court to be scheduled thereafter.
17
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
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**
15 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
- ------------------------------------------------
*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)
18
<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: August 11, 1997 By: /s/ Jonathon E. Killmer
-----------------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
19
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
We are aware that our report dated July 31, 1997 on our reviews of interim
condensed consolidated financial information of Digi International Inc. and
subsidiaries (the Company) for the three and nine month periods ended June 30,
1997 and 1996, and included in the Company's Form 10-Q for the quarter ended
June 30, 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 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.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
August 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 14,793,019
<SECURITIES> 0
<RECEIVABLES> 34,239,782
<ALLOWANCES> 0
<INVENTORY> 27,989,600
<CURRENT-ASSETS> 81,227,919
<PP&E> 22,940,693
<DEPRECIATION> 0
<TOTAL-ASSETS> 114,995,797
<CURRENT-LIABILITIES> 16,328,362
<BONDS> 0
0
0
<COMMON> 146,945
<OTHER-SE> 98,520,490
<TOTAL-LIABILITY-AND-EQUITY> 114,995,797
<SALES> 123,472,736
<TOTAL-REVENUES> 123,472,736
<CGS> 64,419,895
<TOTAL-COSTS> 68,030,219<F1>
<OTHER-EXPENSES> 4,634,476<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,268,398)
<INCOME-TAX> (1,357,450)
<INCOME-CONTINUING> (11,910,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,910,948)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
<FN>
<F1>Includes restructuring charge of $10,471,482
<F2>Aether Works Corp net loss
</FN>
</TABLE>
