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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, 1998.
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
---------------
(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 22, 1998, there were 13,517,354 shares of the registrant's $.01 par
value Common Stock outstanding.
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<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Statement of Operations
for the three month and six month periods ended
March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheet as of
March 31, 1998 and September 30, 1997. . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statement of Cash Flows
for the six month periods ended March 31, 1998 and 1997. . . . . . . . . .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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31 Six months ended March 31
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $45,058,973 $40,393,222 $87,649,032 $ 82,629,437
Cost of sales 21,993,344 21,099,206 43,214,657 43,694,943
----------- ----------- ----------- ------------
Gross margin 23,065,629 19,294,016 44,434,375 38,934,494
----------- ----------- ----------- ------------
Operating expenses:
Sales and marketing 9,007,379 9,185,606 17,266,872 20,197,857
Research and development 3,948,109 4,724,933 7,759,010 10,345,613
General and administrative 3,445,691 4,693,207 7,055,815 9,440,432
Restructuring - 10,471,482 - 10,471,482
----------- ----------- ----------- ------------
Total operating expenses 16,401,179 29,075,228 32,081,697 50,455,384
----------- ----------- ----------- ------------
Operating income (loss) 6,664,450 (9,781,212) 12,352,678 (11,520,890)
Other income, net 548,470 127,203 817,355 226,234
AetherWorks Corporation net loss - (1,589,681) - (3,109,470)
----------- ----------- ----------- ------------
Income (loss) before income taxes 7,212,920 (11,243,690) 13,170,033 (14,404,126)
Provision (benefit) for income taxes 2,547,584 (1,843,473) 4,662,359 (2,425,905)
----------- ----------- ----------- ------------
Net income (loss) $4,665,336 $(9,400,217) $ 8,507,674 $(11,978,221)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net income (loss) per common share,
basic $ 0.35 $ (0.70) $ 0.63 $ (0.90)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net income (loss) per common share,
assuming dilution $ 0.33 $ (0.70) $ 0.60 $ (0.90)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average common shares, basic 13,508,084 13,381,615 13,494,509 13,367,885
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average common shares,
assuming dilution 14,265,107 13,381,615 14,149,319 13,367,885
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 September 30
ASSETS 1998 1997
-------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,111,877 $ 31,329,666
Accounts receivable, net 26,502,752 25,658,522
Inventories, net 19,609,395 23,683,312
Other 4,102,343 4,147,942
-------------- ---------------
Total current assets 93,326,367 84,819,442
Property, equipment and improvements, net 23,123,070 23,617,696
Intangible assets, net 7,424,999 6,876,597
Other 2,679,592 2,997,601
-------------- ---------------
Total assets $ 126,554,028 $ 118,311,336
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,424,803 $ 10,118,921
Income taxes payable 4,780,885 1,771,986
Accrued expenses:
Advertising 2,468,653 2,847,672
Compensation 3,366,626 2,388,468
Accrued AetherWorks Corporation
obligations 1,350,000 3,350,000
Other 2,088,810 2,363,258
-------------- ---------------
Total current liabilities 21,479,777 22,840,305
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; 14,755,796 and 14,727,256 shares issued 147,558 147,273
Additional paid-in capital 44,375,563 44,403,102
Retained earnings 83,621,576 75,113,902
-------------- ---------------
128,144,697 119,664,277
Unearned stock compensation (1,081,740) (1,787,658)
Treasury stock, at cost, 1,245,965 and 1,338,894
common shares (21,988,706) (22,405,588)
-------------- ---------------
Total stockholders' equity 105,074,251 95,471,031
-------------- ---------------
Total liabilities and stockholders' equity $ 126,554,028 $ 118,311,336
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 8,507,674 (11,978,221)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Restructuring $ - 10,270,361
Depreciation and amortization 3,380,308 3,770,910
AetherWorks Corporation net loss - 3,109,470
Provision for losses on accounts receivable 707,992 522,236
Provision for inventory obsolescence 3,084,569 1,481,285
Loss on sale of fixed assets 135,134 67,033
Stock compensation 531,827 50,225
Changes in operating assets and liabilities 340,760 (438,769)
--------------- ----------------
Total adjustments 8,180,590 18,832,751
--------------- ----------------
Net cash provided by operating activities 16,688,264 6,854,530
--------------- ----------------
Investing activities:
Purchase of property, equipment and
improvements, and intangibles (3,469,771) (3,010,780)
Investment in AetherWorks Corporation (2,000,000) (3,500,000)
--------------- ----------------
Net cash used in investing activities (5,469,771) (6,510,780)
--------------- ----------------
Financing activities:
Stock benefit plan transactions, net 563,718 389,792
--------------- ----------------
Net cash provided by financing activities 563,718 389,792
--------------- ----------------
Net increase in cash and cash equivalents 11,782,211 733,542
Cash and cash equivalents, beginning of period 31,329,666 8,943,390
--------------- ----------------
Cash and cash equivalents, end of period $ 43,111,877 $ 9,676,932
--------------- ----------------
--------------- ----------------
</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 1997
Annual Report and Form 10-K.
The condensed consolidated financial statements presented herein as of March 31,
1998 and for the three month and six month periods ended March 31, 1998 and
1997, reflect, in the opinion of management, all adjustments (which, other than
the restructuring charge recorded in the three and six month periods ended March
31, 1997, 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, 1998, under a financing arrangement, the Company purchased
$13,796,525 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 no obligation to purchase additional notes. The
convertible notes held by the Company at March 31, 1998 are convertible into
62.7% of AetherWorks' common stock, based on AetherWorks' present
capitalization. In connection with the financing arrangement, the Company has
also guaranteed $3,060,000 of lease obligations of AetherWorks. In addition, in
the fourth quarter of fiscal 1997, the Company leased to AetherWorks $1,325,000
of computer equipment under a three-year direct financing lease.
As of September 30, 1997, because of significant uncertainty as to the future of
AetherWorks Corporation, the Company wrote off its remaining investment in
AetherWorks and accrued and expensed its then remaining future obligation to
purchase additional convertible notes. In addition, the Company has also
accrued $1,350,000 for its estimated probable obligation resulting from its
guarantees of certain AetherWorks lease obligations.
For the three month and six month periods ended March 31, 1997, the Company
reported its investment in AetherWorks on the equity method and reported net
losses of $1,589,681 and $3,109,470, respectively. Such losses represented 100%
of AetherWorks net losses for the periods. The percentage of AetherWorks' net
losses included in the Company's financial
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN AETHERWORKS CORPORATION (CONTINUED)
statements was based upon the percentage of financial support provided by the
Company (versus other investors) to AetherWorks during the periods. No such
losses were recorded in the three month or six month periods ended March 31,
1998, due to the aforementioned write off of the Company's AetherWorks
investment and the accrual of its remaining funding obligations to AetherWorks
in the fourth quarter of fiscal 1997.
3. INVENTORIES
Inventories, net are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at March 31, 1998 and September
30, 1997 consisted of the following:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
--------------- ------------------
<S> <C> <C>
Raw materials $6,966,551 $7,967,598
Work in process 6,910,102 8,704,357
Finished goods 5,732,742 7,011,357
</TABLE>
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share for all periods presented has been calculated
pursuant to the provisions of Statement of Financial Accounting Standards No.
128, which the Company adopted in the first quarter of fiscal 1998. Basic net
income (loss) per share is calculated based on only the weighted average of
common shares outstanding during the period. Net income (loss) per share,
assuming dilution, is computed by dividing net income (loss) by the weighted
average number of common and common equivalent shares outstanding during each
period. The Company's only common stock equivalents are those that result from
dilutive common stock options. Such common stock equivalents were excluded in
determining the weighted average common and common stock equivalents outstanding
for the three month and six month periods ended March 31, 1997, because their
effect was antidilutive.
5. RECLASSIFICATION OF CERTAIN EXPENSES
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
the three month and six month periods ended March 31, 1998 and 1997. Such
amounts were $853,158 and $1,706,316 for the three month and six month periods
ended March 31, 1998 and $649,981 and $1,316,622 for the three month and six
month periods ended March 31, 1997, respectively. These reclassifications had
no impact on previously reported operating income (loss) or net income (loss).
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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. The
ultimate outcomes of the lawsuits cannot be determined at this time, and no
potential assessment of the probable or possible effects of such litigation, if
any, on the Company's financial position, liquidity or future operations can be
made.
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, 1998, and the related
condensed consolidated statements of operations for the three month and six
month periods ended March 31, 1998 and 1997, and cash flows for the six month
periods ended March 31, 1998 and 1997. 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, 1997, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated December 15, 1997, 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, 1997, 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, 1998
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 statement of operations expressed as percentages
of sales:
<TABLE>
<CAPTION>
Three months % Six Months %
ended Increase ended Increase
March 31 (decrease) March 31 (Increase)
------------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 11.6% 100.0% 100.0% 6.1%
Cost of sales 48.8 52.2 4.2 49.3 52.9 (1.1)
---- ---- --- ---- ---- ---
Gross margin 51.2 47.8 19.5 50.7 47.1 14.1
---- ---- ---- ---- ---- ----
Operating expenses:
Sales and marketing 20.0 22.7 (1.9) 19.7 24.4 (14.5)
Research and development 8.8 11.7 (16.4) 8.9 12.5 (25.0)
General and administrative 7.6 11.6 (26.6) 8.1 11.4 (25.3)
Restructuring 0.0 25.9 (100.0) 0.0 12.7 100.0
--- ---- ----- --- ---- -----
Total operating expenses 36.4 72.0 (43.6) 36.6 61.1 (36.4)
---- ---- ---- ---- ---- ----
Operating income (loss) 14.8 (24.2) 168.1 14.1 (13.9) 207.2
Other income, net 1.2 0.3 331.2 0.9 0.3 261.3
AetherWorks Corporation net loss 0.0 (3.9) 100.0 0.0 (3.8) 100.0
--- --- ----- --- --- -----
Income (loss) before income taxes 16.0 (27.8) 164.2 15.0 (17.4) 191.4
Provision (benefit) for income taxes 5.7 (4.6) 238.2 5.3 (2.9) 292.2
--- --- ----- --- --- -----
Net income (loss) 10.4% (23.3%) 149.6% 9.7% (14.5%) 171.0
---- ---- ----- --- ---- -----
---- ---- ----- --- ---- -----
</TABLE>
NET SALES
Net sales for the three month and six month periods ended March 31,1998 were
higher than net sales for the corresponding periods ended March 31, 1997 by
approximately $4.7 million and $5.0 million or 11.6% and 6.1% respectively. The
majority of the increase was due to the Company completing its effort to reduce
inventory levels in the distribution channel through the first fiscal quarter of
1998, resulting in a net increase in sales into the distribution channel during
the second quarter of fiscal 1998.
Net sales to the distribution markets, as a percentage of total net sales,
increased to 72.4% and 68.0% for the three month and six month periods ended
March 31, 1998, as compared to 60.5% and 64.8% for the comparable periods of
1997. Sequentially, net sales to the distribution markets for the three month
period ended March 31, 1998 increased 20.8%, as compared to the three month
period ended December 31, 1997. The increase was directly related to the
Company completing its program of reducing inventory levels, as previously
discussed.
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 (OEM's), as a percentage of total
net sales, were 19.8% and 23.5% for the respective three and six month periods
ended March 31, 1998, as compared to 25.0% and 22.4% for the comparable periods
in 1997.
The decline in the second quarter of fiscal 1998 was due to a decline in demand
in print servers and a shift by certain OEM customers to a just in time shipment
method, thereby reducing the amount of orders for the quarter. Sequentially,
net sales to OEM's for the three month period ended March 31, 1998 declined
23.8% compared to the three month period ended December 31, 1997. The Company
expects the OEM portion of the Company's business in the third quarter of fiscal
1998 to approximate the overall six month 1998 percentage of total net sales.
GROSS MARGIN
Gross margin for the three and six month periods ended March 31, 1998 was 51.2%
and 50.7%, respectively, as compared to 47.8% and 47.1% for the comparable
periods in 1997. Such increases versus 1997 were due primarily to a decrease of
historically lower margin OEM and physical layer product net sales as a
percentage of total net sales for the three months ended March 31, 1998 and to a
$1 million reduction in rebates during the first fiscal quarter of 1998.
OPERATING EXPENSES
Operating expenses for the three month period ended March 31, 1998 decreased
11.8% versus operating expenses (excluding $10.5 million of restructuring
charges) for the corresponding period ended March 31, 1997 and decreased as a
percentage of net sales to 36.4% for the three month period ended March 31, 1998
from 46.1% (excluding restructuring charges) for the three month period ended
March 31, 1997. Operating expenses for the six month period ended March 31,
1998 decreased by 19.8% versus operating expenses (excluding restructuring
charges) for the six month period ended March 31, 1997. As a percentage of net
sales, operating expenses declined to 36.6% for the six month period ended March
31, 1998, from 48.4% (excluding restructuring charges) for the corresponding
period in 1997.
Such declines were due to reductions in the workforce, decreased marketing costs
and cost savings achieved through consolidation of research and development
functions.
The Company expects that operating expenses for subsequent quarters of fiscal
1998 will be similar to or slightly higher than the $16.4 million incurred in
the three months ended March 31, 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME
The increase in other income for the three month and six month periods ended
March 31, 1998 was a result of additional interest income earned on increased
cash and cash equivalent balances.
AETHERWORKS CORPORATION NET LOSS
In connection with the Company's purchase of $13.8 million of convertible
notes from AetherWorks Corporation, a development stage company engaged in
the development of wireless and dial-up remote access technology, the
Company's ownership interest upon conversion would be a majority of
AetherWorks' common stock. In fiscal 1997, the Company reported its
investment in AetherWorks on the equity method and recorded net losses of
$1,589,681 and $3,109,470 for the three and six month periods ended March 31,
1997, respectively. These net losses represent 100% of AetherWorks' net
losses for such periods. The percentage of AetherWorks' net losses included
in the Company's financial statements was based upon the percentage of
financial support provided by the Company (versus other investors) during
such periods. The Company wrote off its investment in Aetherworks and accrued
its then remaining obligations to purchase additional convertible notes and
also accrued an additional $1.4 million for its estimated probable obligation
resulting from its guarantees of certain Aetherworks lease obligations as of
September 30, 1997. As such, no losses were recorded in the three month or
six month periods ended March 31, 1998. The Company completed its remaining
obligations to purchase additional convertible notes during the second fiscal
quarter of 1998.
INCOME TAXES
Income taxes have been accrued at an overall effective rate of 35.3% and 35.4%
for the respective three and six month periods ended March 31, 1998. Due to the
net losses incurred in both the three and six month periods ended March 31,
1997, the Company had recorded an income tax benefit of $1,843,473 and
$2,425,905, respectively. Such benefits were lower than those which would have
been determined using the overall statutory income tax rate 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. Investing activities for the three month and six month periods
ended March 31, 1998 consisted of purchases of equipment and capital
improvements, including a new enterprise wide computer system and intangibles
and the final purchases of AetherWorks Corporation convertible notes. Equipment,
system and other purchases totaled $3,469,771 during the six month period ended
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
March 31, 1998. The final convertible note purchases from AetherWorks
amounted to $2 million for the six month period ended March 31, 1998. The
Company has no further financial obligations under its agreements with
AetherWorks Corporation other than approximately $1.4 million for its
estimated probable obligation resulting from its guarantees of certain
AetherWorks lease obligations.
At March 31, 1998, the Company had working capital of approximately $72 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 future business operations.
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.
NEW ACCOUNTING STANDARDS
As described in Note 4 to the Condensed Consolidated Financial Statements, the
Company, in the first fiscal quarter of 1998, adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
In addition, during the first fiscal quarter of 1998, the Emerging Issues Task
Force of the Financial Accounting Standards Board released Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation" (EITF 97-13). The Task Force reached a consensus
that the cost of business process reengineering activities, whether done
internally or by third parties, is to be expensed as incurred. This consensus
did not have a significant impact on the Company in its fiscal first and second
quarters of 1998. The Company, however, will incur future costs in connection
with the completion of its enterprise-wide information systems implementation
project that will be required to be expensed pursuant to EITF 97-13. Such
amounts are not expected to be material.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
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 as follows:
THE EXPECTATION THAT THE ORIGINAL EQUIPMENT MANUFACTURER (OEM) PORTION OF THE
COMPANY'S BUSINESS WILL RETURN TO THE OVERALL SIX MONTH PERCENTAGE OF TOTAL NET
SALES OF MARCH 31, 1998 IN THE THIRD FISCAL QUARTER - This expectation may be
impacted by unanticipated revenue opportunities or changes in ordering levels
that may reduce expected levels of net sales to OEMs.
THE EXPECTATION THAT OPERATING EXPENSES IN THE REMAINING QUARTERS OF FISCAL 1998
WILL BE AT LEVELS SIMILAR TO OR SLIGHTLY HIGHER THAN THOSE INCURRED IN THE
SECOND FISCAL QUARTER OF 1998 - 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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. 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 motion to dismiss was argued before the
District Court on October 31, 1997. A ruling has not yet been received.
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.
15
<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 motion to dismiss was argued before the
District Court on October 31, 1997. A ruling has not yet been received.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on January 28, 1998, the
stockholders approved the following:
(a) Proposal to elect three directors, Richard E. Eichhorn, Mykola Moroz
and Jerry A. Dusa for three-year terms. Mr. Eichhorn was elected on
a vote of 11,754,699 in favor, with 305,769 shares withholding
authority to vote. Mr. Moroz was elected on a vote of 11,831,626 in
favor, with 228,842 shares withholding authority to vote. Mr. Dusa
was elected on a vote of 11,824,694 in favor, with 235,774 shares
withholding authority to vote.
(b) Proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
independent public accountants for the Company for fiscal 1998. The
proposal passed on a vote of 11,862,794 in favor, 171,542 against,
26,132 abstentions and no broker non-votes.
ITEM 5. OTHER INFORMATION
None
16
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
3(a) Restated Certificate of Incorporation of the Registrant, As
Amended*
3(b) Amended and Restated By-Laws of the Registrant**
15 Letter Re: Unaudited Interim Financial Information
271 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. 0-17972)
**Incorporated by reference to the corresponding exhibit number of the Company's
Registration Statement on Form S-1 (File No. 33-42384)
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: April 30, 1998 By: /s/ Jonathon E. Killmer
--------------------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
18
<PAGE>
EXHIBIT 15
UNAUDITED INTERIM FINANCIAL INFORMATION LETTER
<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, 1998 on our reviews of interim
condensed consolidated financial information of Digi International Inc. and
Subsidiaries (the Company) for the three month periods ended March 31, 1998 and
1997, and included in the Company's Form 10-Q for the quarter ended March 31,
1998, 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
April 30, 1998
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