<PAGE>
As filed with the Securities and Exchange Commission on December 31, 1998.
Registration No. 333-61425
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- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------
AMENDMENT NO. 2
ON FORM S-1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
DIGI INTERNATIONAL INC.
(Exact name of the Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3576 41-1532464
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
11001 Bren Road East
Minnetonka, Minnesota 55343
(612) 912-3444
(Address and telephone number of the Registrant's
principal executive offices)
-----------------------------
Jerry A. Dusa
President and Chief Executive Officer
11001 Bren Road East
Minnetonka, Minnesota 55343
(612) 912-3444
(Name, address and telephone number of agent for service)
Copies to:
James E. Nicholson
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
Subject to Completion, dated December 31, 1998.
PROSPECTUS
DIGI INTERNATIONAL INC.
11001 Bren Road East
Minnetonka, Minnesota 55343
(612) 912-3444
585,927 SHARES
COMMON STOCK
This prospectus relates to the public offering, which is not being
underwritten, of 585,927 shares of our Common Stock which are held by some of
our current stockholders.
The prices at which such stockholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of shares by
the selling stockholders.
Our Common Stock is quoted on the Nasdaq Stock Market under the symbol
"DGII." On December 28, 1998, the last sale price for our Common Stock was
$11.25 per share.
-----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
This prospectus is dated ____________ , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY............................................... 2
FORWARD-LOOKING STATEMENTS....................................... 2
SELECTED FINANCIAL DATA.......................................... 3
SUPPLEMENTAL FINANCIAL DATA...................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 5
THE COMPANY...................................................... 13
MANAGEMENT....................................................... 17
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT...... 23
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY.................. 25
SELLING STOCKHOLDERS............................................. 26
DESCRIPTION OF CAPITAL STOCK..................................... 29
PLAN OF DISTRIBUTION............................................. 33
EXPERTS.......................................................... 33
WHERE YOU CAN FIND MORE INFORMATION.............................. 34
INDEX TO FINANCIAL STATEMENTS.................................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
Digi International Inc. is a worldwide provider of data communications
hardware and software for open systems, server-based remote access and LAN
(Local Area Network) applications.
Digi's two major product areas include: 1) serial port boards that
support server-based communications, which constituted approximately 80% of net
sales in fiscal 1998, and 2) physical layer and print server products that
enhance the data communications capabilities of a LAN and which constituted
approximately 20% of net sales in fiscal 1998.
In July 1998, Digi acquired Central Data Corporation and ITK
International, Inc., both of which were privately held. Central Data produces
high-performance serial port solutions for local and remote access connectivity,
and is developing a line of Universal Serial Bus products. ITK International is
a provider of open systems, remote access solutions for small and medium sized
businesses, Internet service providers and telephone companies. ITK
International has also developed a "proof of concept" Voice over Internet
Protocol gateway product which will allow Digi to enter the Internet telephony
market.
THE OFFERING
This offering consists of 585,927 shares of Digi's Common Stock which
are held by certain Digi stockholders. These shares were issued to the selling
stockholders in connection with Digi's acquisitions of Central Data and ITK
International in July 1998. Digi will not receive any proceeds from the sale of
the shares in this offering.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE SAFE HARBOR PROVISIONS OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF DIGI.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS ARE ONLY
PREDICTIONS OR STATEMENTS OF INTENTION SUBJECT TO RISKS AND UNCERTAINTIES.
ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED. BECAUSE
ACTUAL RESULTS MAY DIFFER, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS.
IN EVALUATING FORWARD-LOOKING STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE RISKS, UNCERTAINTIES AND OTHER MATTERS SET FORTH UNDER THE CAPTION
"FORWARD-LOOKING STATEMENTS" WITHIN THE SECTION ENTITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
2
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from Digi's
audited consolidated financial statements for the applicable fiscal years. This
data should be read in conjunction with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Digi's Consolidated Financial Statements for the fiscal year ended September 30,
1998 and the related notes thereto, included in this prospectus.
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30
------------------------------------------------------------------------
1998(1) 1997(2) 1996(3) 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales $182,932 $165,598 $193,151 $164,978 $130,945
Net (loss) income (22,659) (15,791) 9,300 19,331 16,701
Net (loss) income per share - basic (1.65) (1.18) 0.70 1.42 1.17
Net (loss) income per share - assuming (1.65) (1.18) 0.68 1.39 1.16
dilution
Total assets 160,735 118,311 129,939 126,043 102,758
Long-term debt 11,124
Stockholders' equity 94,821 95,471 109,943 105,827 91,113
</TABLE>
(1) Net (loss) income includes a charge of $39,200 for acquired in-process
research and development recorded in connection with Digi's acquisitions
of ITK International, Inc. and Central Data Corporation (see Note 2 to
the Digi financial statements included herein), a restructuring charge of
$1,020 (see Note 3 to the Digi financial statements included herein) and
a $1,350 gain related to Digi's investment in AetherWorks Corporation
(see Note 5 to the Digi financial statements included herein).
(2) Net (loss) income includes losses related to Digi's investment in
AetherWorks Corporation of $11,523 (see Note 5 to the Digi financial
statements included herein) and a restructuring charge of $10,471 (see
Note 3 to the Digi financial statements included herein).
(3) Net (loss) income includes losses related to Digi's investment in
AetherWorks Corporation of $3,624 (see Note 5 to the Digi financial
statements included herein).
3
<PAGE>
SUPPLEMENTAL FINANCIAL DATA
The supplemental financial data set forth below presents Digi's
unaudited financial information for the fiscal quarters indicated. In the
opinion of the Company's management, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments necessary to present fairly the information set forth therein.
The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
12/31/98 3/31/98 6/30/98 9/30/98
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales $42,590 $45,059 $46,449 $48,833
Gross margin 21,369 23,066 24,559(a) 25,399(a)
Acquired in-process research and development 39,200
Restructuring 1,020
AetherWorks Corporation gain 1,350
Net income (loss) 3,842 4,665 6,411 (37,577)
Net income (loss) per share - basic 0.28 0.35 0.47 (2.62)
Net income (loss) per share - assuming 0.27 0.33 0.45 (2.62)
dilution
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
12/31/97 3/31/97 6/30/97 9/30/97
<S> <C> <C> <C> <C>
Net sales $42,236 $40,393 $40,843 $42,125
Gross margin 19,640 19,294 20,118 21,063
Restructuring 10,471
AetherWorks Corporation net loss (1,520) (1,590) (1,525) (1,130)
AetherWorks Corporation (write-off) (5,759)
Net income (loss) (2,578) (9,400) 67 (2,431)
Net income (loss) per share - basic (0.19) (0.70) 0.01 (0.29)
Net income (loss) per share - assuming (0.19) (0.70) 0.01 (0.29)
dilution
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
12/31/96 3/31/96 6/30/96 9/30/96
<S> <C> <C> <C> <C>
Net sales $42,716 $47,973 $49,643 $51,819
Gross margin 23,729 25,391 24,451 26,471
AetherWorks Corporation net loss (279) (656) (1,204) (1,485)
Net income (loss) 4,522 4,620 (51) 209
Net income per share - basic 0.34 0.35 0.00 0.02
Net income per share - assuming dilution 0.33 0.34 0.00 0.02
</TABLE>
THE SUMMATION OF QUARTERLY NET INCOME PER SHARE MAY NOT EQUATE TO THE YEAR-END
CALCULATION AS QUARTERLY CALCULATIONS ARE PERFORMED ON A DISCRETE BASIS.
(a) A PROVISION FOR INVENTORY OBSOLESCENCE OF $1.9 MILLION WAS RECORDED DURING
THE THREE-MONTH PERIOD ENDED JUNE 30, 1998. THIS PROVISION WAS REVERSED
DURING THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected information from Digi's
Consolidated Statements of Operations, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Year Ended September 30, Percentage Increase/(Decrease)
1998 over 1997 over
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 10.5% (14.3)%
Cost of sales 48.4 51.6 48.2 3.6 (8.2)
-------- -------- -------- -------- --------
Gross margin 51.6 48.4 51.8 17.8 (19.9)
Operating expenses:
Sales and marketing 20.4 22.1 22.5 1.7 (15.6)
Research and development 9.3 10.9 11.0 (5.6) (15.5)
General and administrative 8.7 11.7 7.9 (17.2) 27.0
Acquired in-process research and development 21.4
Restructuring 0.6 6.3 (90.3)
-------- -------- -------- -------- --------
60.4 51.0 41.4 30.8 5.6
Operating (loss) income (8.8) (2.6) 10.4 (271.4) (121.5)
Other income, principally interest 1.0 0.1 0.2 1,082.2 (53.6)
AetherWorks Corporation net operating loss (3.5) (1.9) (100.0) 59.1
AetherWorks Corporation gain (write-off) 0.7 (3.5) (123.4)
(Loss) income before income taxes (7.1) (9.5) 8.7 17.7 (193.4)
Provision for income taxes 5.3 0.1 3.9 10,534.1 (98.8)
-------- -------- -------- -------- --------
Net (loss) income (12.4)% (9.5)% 4.8% (43.5)% (269.8)%
-------- -------- -------- -------- --------
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made herein, 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, but are not limited to, those identified as follows:
- - - THE EXPECTATION THAT ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT WILL REACH
TECHNOLOGICAL FEASIBILITY AND LEAD TO NEW USB PRODUCTS IN 1999 AND NEW
INTERNET PROTOCOL TELEPHONY PRODUCTS IN 2000 AND 2001 WHICH WILL BENEFIT DIGI
IN THE FUTURE AND DIGI'S ESTIMATION OF THE COSTS ASSOCIATED WITH SUCH
DEVELOPMENT -- This expectation may be impacted by unanticipated expenses or
obstacles to development, general market conditions or changes in competitive
conditions.
- - - DIGI'S ASSUMPTIONS REGARDING REVENUE GROWTH, COST OF SALES, COST SAVINGS AND
THE WEIGHTED AVERAGE COST OF CAPITAL USED TO VALUE IN-PROCESS RESEARCH AND
DEVELOPMENT ACQUIRED IN RECENT ACQUISITIONS -- These assumptions may be
impacted by general market conditions, unanticipated changes in expenses or
sales, delays in the development of new products, the useful lives of such
products once developed, component shortages, and technological advances and
other changes in competitive conditions that would affect the value of the
acquired in-process research and development.
- - - THE BELIEF THAT DIGI'S CURRENT FINANCIAL RESOURCES, CASH GENERATED FROM
OPERATIONS AND DIGI'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 Digi's ability to maintain
or raise appropriate levels of cash.
- - - DIGI'S BELIEF THAT EVALUATIONS AND MODIFICATIONS OF YEAR 2000 COMPLIANCE
MATTERS, INCLUDING YEAR 2000 COMPLIANCE OF THIRD PARTY SUPPLIERS, WILL NOT
HAVE A MATERIAL ADVERSE EFFECT ON DIGI'S OPERATIONS OR FINANCIAL POSITION --
This belief may be impacted by presently unanticipated delays in assessment
or remediation, unanticipated increases in costs or non-compliance by third
parties.
- - - DIGI'S EXPECTATION THAT VARIOUS RESTRUCTURING ACTIVITIES IN CONNECTION WITH
THE ACQUISITION OF ITK INTERNATIONAL, INC. AND CENTRAL DATA CORPORATION WILL
BE COMPLETED ACCORDING TO SCHEDULE -- This expectation may be impacted by
presently unanticipated delays or expenses.
5
<PAGE>
NET SALES
The $17.3 million increase in net sales from 1997 to 1998 and the $27.6
million decrease in net sales from 1996 to 1997 occurred within Digi's principal
product groups as follows:
<TABLE>
<CAPTION>
Annual Sales
Principal Market Percent of Annual Net Sales Increase (Decrease)
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Server Based 79.9% 75.7% 80.2% 16.6% (19.1%)
Physical Layer 20.1% 23.9% 18.9% (6.9%) 8.2%
Other 0% .4% .9% (100%) (56.5%)
</TABLE>
Net sales in fiscal 1998 increased from fiscal 1997 largely because Digi
reduced inventory levels in the North American distribution channel
throughout 1997 and into the first quarter of fiscal 1998. This resulted in
a net increase in sales within the distribution channel during the remainder
of 1998. In addition, during the third and fourth quarters of fiscal 1998,
Digi gave extended credit terms to North American distributors which provided
incentive for them to increase their purchases. Such incented increases in
sales to these customers could result in a decrease in sales to these
customers in fiscal year 1999. Digi's fiscal 1998 net sales also increased
due to the addition of $9.7 million in fourth-quarter sales made by newly
acquired ITK International, Inc. (ITK) and Central Data Corporation (CDC).
Net sales in 1997 declined from 1996 primarily due to Digi's inventory
reductions in the North American distribution channel.
Net sales to original equipment manufacturers (OEMs), as a percentage of
total net sales, declined to 22.2% versus 23.5% in 1997. The decrease was
principally a function of higher net sales to the distribution market. Net
sales to OEMs for 1996 were 20.3% of total sales.
Net sales to the distribution markets, as a percentage of total net
sales, increased to 69.3% in 1998, compared to 64.1% in 1997. This increase
was a result of Digi's 1997 inventory reductions in the North American
distribution channel, as previously discussed. Net sales to the distribution
market for 1996 represented 65.5% of total net sales.
During fiscal years 1998, 1997 and 1996, Digi's net sales to customers
outside the United States, primarily in Europe, were approximately $38.5
million, $39.6 million and $39.9 million, respectively, comprising
approximately 21.1%, 23.9% and 20.0% of total net sales.
GROSS MARGIN
Gross margin in 1998 rose to 51.6%, compared to 48.4% in 1997. The
increase was due to more stringent cost control and favorable product mix.
Gross margin also benefited as net sales of historically lower-margin
products -- largely OEM and certain physical layer products -- declined as a
percentage of total net sales. Offsetting the favorable sales mix were
increases in inventory valuation reserves, sales discounts granted, and a
higher proportion of lower margin products sold in the fourth quarter of
fiscal 1998 due to the acquisition of CDC and ITK. Gross margins on total ITK
and CDC sales in the fourth quarter of fiscal 1998 were 44.0%. Gross margin
in 1996 was 51.8%. The 1997 gross margin decline was principally due to the
increase of OEM and physical layer product net sales as a percentage of total
net sales as sales to the distribution markets were intentionally reduced in
1997. Digi increased its reserves for excess and obsolete inventories
approximately $2.6 million in 1998. In 1997, these reserves increased
approximately $1.5 million from the 1996 level.
OPERATING EXPENSES
Operating expenses in 1998 declined 5.0% from 1997, excluding acquired
in-process research and development charges of $39,200,000 recorded in 1998
and the restructuring charges recorded in 1998 and 1997 of $1,020,000 and
$10,471,482, respectively. The operating expense decline reflected reductions
in the workforce, decreased marketing costs and cost savings achieved through
the consolidation of U.S. research and development efforts, offset by CDC and
ITK operating expenses of $3.8 million. General and administrative expenses
declined in 1998 due to workforce reductions and cost-saving initiatives.
Operating expenses in 1997 declined 7.5% from 1996, excluding restructuring
charges. The decline resulted from cost-saving measures similar to those
executed in 1998. General and administrative expenses increased 27.0% in 1997
from 1996 due to an increase in the provision for losses on accounts
receivable, cost of management information systems and increased facilities
expenditures.
The $1,020,000 restructuring charge recorded in the fiscal 1998 fourth
quarter was associated with a board-approved plan to consolidate existing
offices in Germany with those acquired from ITK. The charge consists
principally of rent, contractual payments on office equipment, write-offs of
leasehold improvements and severance costs associated with the elimination of
six positions. These activities are expected to be completed in the second
quarter of fiscal 1999. No portion of this liability has been paid as of
September 30, 1998.
The $10,471,482 restructuring charge recorded in the fiscal 1997 second
quarter was related to a board-approved plan to consolidate operations and
reduce costs and expenses. The restructuring charge consisted of $1,259,769
in net cash
6
<PAGE>
expenditures (primarily severance), all of which had been paid as of
September 30, 1997, and $9,211,713 resulting from the write-down of asset
carrying values.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
ACQUISITION OF ITK INTERNATIONAL, INC.
In July 1998, Digi acquired all of the outstanding common stock of ITK.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed, including estimated restructuring
and integration costs of $3,484,000.
Components of the purchase consideration, including related transaction
costs, consist of $14,767,154 in cash, Digi's common stock with a market
value of $11,671,229 and $1,276,436 of replacement stock options issued by
Digi to ITK option holders. The cash and Digi's common stock were issued in
exchange for outstanding shares of ITK's common stock and Digi's stock
options were issued in exchange for the outstanding ITK common stock options.
The value of Digi's common stock issued was based on a per share value of
approximately $20.25, which was the market value of Digi's common stock on
the date Digi and ITK agreed to the terms of the purchase. The value of
Digi's common stock options is based on the excess of the market value of
Digi's common stock over the option exercise prices on the date that these
options were granted to ITK employees. The purchase price will increase by
$963,323 if the unvested portion of stock options granted to the ITK
employees vest. Such amount has been recorded as unearned stock compensation.
Valuation of the intangible assets acquired was determined by an
independent appraisal company and consists of purchased in-process research
and development (IPR&D), proven technology and an assembled workforce. The
purchase price exceeded the estimated fair value of tangible and intangible
assets acquired by $7,130,253, which was recorded as goodwill.
The table below is an analysis of the purchase price allocation.
<TABLE>
<S> <C>
Cash and fair value of Digi's common
stock and common stock options issued $ 26,276,436
Direct acquisition costs 1,438,383
ITK liabilities assumed, including estimated
restructuring and integration costs of $3,484,000 39,784,248
------------
Total purchase price 67,499,067
Estimated fair value of tangible assets
acquired 21,668,814
Estimated fair value of:
IPR&D 26,000,000
Identifiable intangible assets 12,700,000
Goodwill 7,130,253
------------
$ 67,499,067
------------
------------
</TABLE>
Management, based upon an independent appraisal, estimates that
$26,000,000 of the purchase price represents the fair value of purchased
IPR&D that had not yet reached technological feasibility and has no
alternative future use. The amount allocated to IPR&D was expensed as a
non-recurring, non-tax-deductible charge upon consummation of the acquisition.
Digi is using the acquired in-process research and development to create
new products in the area of Internet Protocol telephony, which will become
part of Digi's product line over the next several years. Digi anticipates
the initial Internet Protocol telephony products developed from acquired
in-process research and development will be released in 2000 and 2001. Digi
expects that the acquired in-process research and development will reach
technological feasibility, but there can be no assurance that the commercial
viability of these products will be achieved.
The nature of the efforts required to develop the acquired in-process
research and development into commercially viable products principally
relates to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including
functions, features and technical performance requirements. The estimated
costs to be incurred to develop the purchased in-process technology into
7
<PAGE>
commercially viable products are approximately $24,800,000 in the aggregate
through the year 2007, consisting of $300,000 in 1998; $2,000,000 in 1999;
$4,800,000 in 2000; $4,800,000 in 2001; $4,300,000 in 2002; $3,200,000 in
2003; $2,500,000 in 2004; $1,400,000 in 2005; $900,000 in 2006 and $600,000
in 2007.
The value assigned to purchased in-process research and development was
determined through independent appraisers, who projected cash flows related
to future products expected to be derived once technological feasibility is
achieved, including costs to complete the development of the technology and
the future revenues and costs which are expected to result from
commercialization of the products. These cash flows were discounted back to
their present values. The resulting net cash flows from such projects are
based on estimates made by Digi's management of revenues, cost of sales,
research and development costs, selling, general and administrative costs,
and income taxes resulting from such projects. These estimates are based on
the following assumptions:
- - - The estimated revenues are based upon projected average annual revenue growth
rates from future products expected to be derived once technological
feasibility is achieved of between 18% and 65% during the period from 2000
through 2005. Estimated total revenues expected from products to be developed
using purchased in-process research and development peak in the year 2005 and
decline rapidly in 2006 and 2007 as other new products are expected to enter
the market. These projections are based on estimates made by Digi's
management of market size and growth (which are supported by independent
market data), expected trends in technology and the nature and expected
timing of new product introductions by ITK and its competitors. These
estimates also include growth related to Digi utilizing certain ITK
technologies under development in conjunction with its products, Digi
marketing and distributing the resulting products through its resellers, and
Digi enhancing the market's response to ITK's products by providing
incremental financial support and stability.
- - - The estimated cost of sales as a percentage of revenues is expected to be
lower than ITK's cost of sales would have been on a stand-alone basis
primarily due to Digi's expected ability to achieve more favorable pricing
from key component vendors and production efficiencies due to economies of
scale achieved through combined operations.
- - - The estimated selling, general and administrative costs are expected to more
closely approximate Digi's cost structure (approximately 34% of revenues in
1997), which is lower than ITK's cost structure (approximately 81% of
revenues in fiscal 1997). Cost savings are expected to result primarily from:
(a) the changes related to certain restructuring actions including the
shut-down of certain existing ITK facilities and a reduction in certain
administrative ITK employees; (b) the distribution of ITK's products through
Digi's resellers (i.e., sales of higher volume products with lower direct
selling costs); and (c) efficiencies due to economies of scale through
combined operations (i.e., consolidated marketing and advertising programs).
These cost savings are expected to be realized primarily in 2000 and
thereafter.-
- - - Discounting the net cash flows back to their present values is based on the
weighted averages cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas
of that enterprise. The WACC assumed for Digi, as a corporate business
enterprise, is 14%. The discount rate used in discounting the net cash flows
from purchased in-process technology was 30%. This discount rate is higher
than the WACC due to the inherent uncertainties in the estimates described
above including the uncertainty surrounding the successful development of the
purchased in-process research and development, the useful life of such
completed research and development, the profitability levels of such
completed research and development and the uncertainty of technological
advances that are unknown at this time. If these products are not
successfully developed, the sales and profitability of the combined company
may be adversely affected in future periods. Additionally, the value of other
intangible assets acquired may become impaired. Digi expects to begin to
benefit from the purchased in-process research and development in 2000.
The identifiable intangible assets of $12,700,000 included in the
purchase price allocation set forth above are comprised of proven technology
with an appraised fair value of $11,300,000 and an assembled workforce with
an appraised fair value of $1,400,000, which have estimated useful lives of
five years and six years, respectively. The remaining unallocated purchase
price represents goodwill which is being amortized over seven years.
ACQUISITION OF CENTRAL DATA CORPORATION
In July 1998, Digi acquired all of the outstanding common stock of CDC.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed, including estimated restructuring
and integration costs of $750,000.
Components of the purchase consideration, including related transaction
costs, consist of $14,261,965 in cash, Digi's common stock with a market
value of $4,039,475 and $891,184 of replacement stock options issued by Digi
to CDC option
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holders. The cash and Digi's common stock were issued in exchange for
outstanding shares of CDC's common stock and Digi's stock options were issued
in exchange for the outstanding CDC common stock options. The value of Digi's
common stock issued was based on a per share value of approximately $20.25,
which was the market value of Digi's common stock on the date Digi and CDC
agreed to the terms of the purchase. The value of Digi's common stock options
is based on the excess of the market value of Digi's common stock over the
option exercise prices on the date that these options were granted to CDC
employees. The purchase price will increase by $1,230,683 if the unvested
portion of stock options granted to the CDC employees vest. Such amount has
been recorded as unearned stock compensation.
Valuation of the intangible assets acquired was determined by an
independent appraisal company and consists of purchased in-process research
and development (IPR&D), proven technology and an assembled workforce. The
purchase price exceeded the estimated fair value of tangible and intangible
assets acquired by $1,034,833, which was recorded as goodwill.
The table below is an analysis of the purchase price allocation.
<TABLE>
<S> <C>
Cash and fair value of Digi's common
stock and common stock options issued $ 18,891,184
Direct acquisition costs 301,440
CDC liabilities assumed, including estimated
restructuring and integration costs of $750,000 4,394,617
------------
Total purchase price 23,587,241
Estimated fair value of tangible assets acquired 5,252,408
Estimated fair value of:
IPR&D 13,200,000
Identifiable intangible assets 4,100,000
Goodwill 1,034,833
------------
$ 23,587,241
------------
------------
</TABLE>
Management, based upon an independent appraisal, estimates that
$13,200,000 of the purchase price represents the fair value of purchased
IPR&D that had not yet reached technological feasibility and has no
alternative future use. The amount allocated to IPR&D was expensed as a
non-recurring, non-tax-deductible charge upon consummation of the
acquisition. Digi is using the acquired in-process research and development
to create new products based on the Universal Serial Bus, which is emerging
as a new industry-standard serial communications bus architecture, and which
will become part of Digi's product line over the next several years. Digi
anticipates that Universal Serial Bus products developed from acquired
in-process research and development will be released in 1999. Digi expects
that the acquired in-process research and development will reach
technological feasibility, but there can be no assurance that the commercial
viability of these products will be achieved.
The nature of the efforts required to develop the acquired in-process
research and development into commercially viable products principally
relates to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including
functions, features and technical performance requirements. The estimated
costs to be incurred to develop the purchased in-process technology into
commercially viable products are approximately $5,000,000 in the aggregate
through the year 2004, consisting of $200,000 incurred during the period from
July 1998 through September 30, 1998, and $800,000 per year from 1999 to 2004.
The value assigned to purchased in-process research and development was
determined by independent appraisers, who projected cash flows related to
future products expected to be derived once technological feasibility is
achieved, including costs to complete the development of the technology and
the future revenues and costs which are expected to result from
commercialization of the products. These cash flows were discounted back to
their present values. The resulting net cash flows from such projects are
based on estimates made by Digi's management of revenues, cost of sales,
research and development costs, selling, general and administrative costs,
and income taxes resulting from such projects. These estimates are based on
the following assumptions:
- - - The estimated revenues are based upon projected average annual revenue growth
rates from future products expected to be derived once technological
feasibility is achieved of between 9% and 52% during the period from 2000
through 2002. Estimated total revenues expected from products to be developed
using purchased in-process research and development peak in the year 2002 and
decline rapidly in 2003 and 2004 as other new products are expected to enter
the market. These projections are based on estimates made by Digi's
management of market size and growth (which are supported by independent
market data), expected trends in technology and the nature and expected
timing of new product introductions by CDC and its competitors. These
estimates also include growth related to
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Digi utilizing certain CDC technologies under development in conjunction with
Digi's products, Digi marketing and distributing the resulting products
through its resellers, and Digi enhancing the market's response to CDC's
products by providing incremental financial support and stability.
- - - The estimated cost of sales as a percentage of revenues is expected to be
lower than CDC's cost of sales would have been on a stand-alone basis
primarily due to Digi's expected ability to achieve more favorable pricing
from key component vendors and production efficiencies due to economies of
scale achieved through combined operations.
- - - The estimated selling, general and administrative costs are expected to
remain at approximately the same levels for Digi and CDC (approximately 33%
of revenues for both Digi and CDC in 1997).
- - - Discounting the net cash flows back to their present values is based on the
weighted average cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas
of that enterprise. The WACC assumed for Digi, as a corporate business
enterprise, is 14%. The discount rate used in discounting the net cash flows
from purchased in-process technology was 30%. This discount rate is higher
than the WACC due to the inherent uncertainties in the estimates described
above including the uncertainty surrounding the successful development of the
purchased in-process research and development, the useful life of such
completed research and development, the profitability levels of such
completed research and development and the uncertainty of technological
advances that are unknown at this time.
If these products are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may
become impaired. Digi expects to begin to benefit from the purchased
in-process research and development in 1999.
The identifiable intangible assets of $4,100,000 included in the
purchase price allocation set forth above are comprised of proven technology
with an appraised fair value of $3,700,000, and an assembled workforce with
an appraised fair value of $400,000, which have estimated useful lives of
five years and six years, respectively. The remaining unallocated purchase
price represents goodwill, which is being amortized over seven years.
Digi has responded to questions provided by the staff of the Securities
and Exchange Commission about its write-offs of acquired in-process research
and development in connection with the ITK and CDC acquisitions. As of
December 11, 1998, Digi had not received any further comments from the
Securities and Exchange Commission.
OTHER INCOME
Other income for 1998 increased approximately $3.0 million, as Digi
earned higher interest income on its increased cash and cash equivalent
balances. Other income also included a fiscal 1998 third-quarter reversal of
a $1.4 million previously accrued obligation related to lease guarantees for
AetherWorks Corporation. As discussed in the next item below, the
obligation is no longer required because Digi is no longer the primary
guarantor for these leases.
AETHERWORKS CORPORATION NET LOSS AND WRITE-OFF
In connection with Digi's previously purchased $13.8 million of
convertible notes from AetherWorks Corporation, in May 1998 Digi exchanged
such notes for a non-interest bearing $8.0 million non-convertible note and
was released from all of its guarantees of certain lease obligations of
AetherWorks. Due to significant uncertainty as to its collectibility, the
$8.0 million note, which matures in 2001, has been recorded by Digi as having
no carrying value. In fiscal 1997 and 1996, Digi used the equity method to
account for its investment in AetherWorks and recorded net losses of $5.8
million and $3.6 million, respectively. These net losses represent 100% of
AetherWorks' losses for those years. The percentage of AetherWorks' net
losses included in Digi's financial statements was based upon the percentage
of financial support provided by Digi (versus other investors) during those
years. Digi wrote off its investment in AetherWorks as of September 30, 1997,
and recorded a $5.8 million charge, composed of its $2.4 million remaining
investment, its $2.0 million remaining obligation to purchase additional
notes and $1.4 million for the obligation to guarantee certain AetherWorks
leases. Digi no longer has any funding obligations or any potential equity
interest in or management control over AetherWorks. Consequently, Digi has
not included any of AetherWorks' net losses in its results of operations
during fiscal 1998.
INCOME TAXES
Digi recorded a $9.7 million tax provision for 1998, even though it has
reported a pre-tax loss for the year. This tax provision was required
primarily because the write-off of acquired in process research and
development and the amortization of certain intangible assets and goodwill
acquired in the purchase of ITK and CDC is not deductible for income tax
reporting purposes. In 1997, Digi recorded a $0.1 million tax provision,
while reporting a pre-tax loss for that year. That provision was necessary
due to the non-deductibility of certain intangible assets written off as part
of the restructuring charge, the
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AetherWorks net losses and the related investment write-off. In addition,
Digi had also provided additional provision in connection with an IRS
examination of certain tax returns filed in prior years. In 1996, Digi
recorded a $7.5 million income tax provision at a higher rate than the
federal statutory rate due primarily to the nondeductability of the
AetherWorks net losses.
INFLATION
Digi believes inflation has not had a material effect on its operations
or its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Digi has financed its operations principally with funds generated from
operations, and, in prior years, with proceeds from earlier public offerings.
Investing activities in 1998 consisted of the acquisitions of ITK and CDC for
a combined purchase price of $46.9 million, including the issuance of $15.7
million of common stock, $2.2 million of replacement stock options, and cash
payments of $29 million. In connection with the acquisitions, Digi also
assumed $22.1 million in line of credit obligations and long-term debt in the
fourth quarter of fiscal 1998, reflecting the outstanding debt of ITK and CDC.
Other investing activities in 1998 consisted primarily of purchases of
$5.8 million of equipment and capital improvements, including a new
enterprise-wide computer system. In addition, the final payments totaling $2
million for AetherWorks Corporation notes were made in 1998.
In September 1998, the Board of Directors authorized a program to
repurchase up to one million shares of Digi's common stock for use in Digi's
benefit plans. As of September 30, 1998, 15,000 shares had been repurchased
under this program.
Investing activities in 1997 consisted of purchases of $8.8 million of
equipment and capital improvements and the purchase of $6.5 million of
additional convertible notes from AetherWorks Corporation.
At September 30, 1998, Digi had working capital of $37.9 million and
debt totaling $22.1 million. Digi maintains lines of credit with various
financial institutions providing for borrowings of up to $25,707,000,
depending upon levels of eligible accounts receivable and inventories. As of
September 30, 1998, $10,707,000 had been borrowed under these lines of
credit. Digi's management believes that current financial resources, cash
generated from operations and Digi'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 Digi's foreign transactions are negotiated,
invoiced and paid in U.S. dollars -- except for approximately $5.8 million in
Deutschemark-denominated sales made through Digi's newly-acquired subsidiary,
ITK. In future periods, a significant portion of sales made through ITK will
be made in Deutschemarks until full integration of the "euro" is achieved.
Digi has not implemented a hedging strategy to reduce the risk of foreign
currency translation exposures, which management does not believe to be
significant based on the scope of Digi's foreign operations as of September
30, 1998.
Effective January 1, 1999, eleven states of the European Union will convert
to a common currency, called the "euro." This action will most likely cause the
majority of Digi's European transactions to be negotiated, invoiced and paid in
"euros." The conversion will most likely add currency exchange costs and risks,
although such costs and risks are not quantifiable at this time.
YEAR 2000 ISSUES
Digi began a comprehensive project in 1996 to prepare its products and
its internal computer systems for the year 2000. Most of Digi's products are
year 2000 compliant because there is very little or no date processing
involved. Certain products, including end-of-life versions, do require
customer action such as a patch or version upgrade to be compliant. These
products are being identified, and Digi is in the process of notifying
impacted customers.
Digi believes its implementation of a new enterprise-wide information
management system, principally installed to improve operating efficiency,
will address Digi's internal year 2000 compliance issues. Because of the
acquisitions of ITK and CDC, the world-wide rollout of this system will not
be completed until the late summer of calendar year 1999. If necessary
conversions are not completed on a timely basis, the year 2000 could have a
material adverse effect on Digi's operations. Overall, management believes
the year 2000 will not have a significant impact on operations.
Digi plans to continue with remediation and testing efforts with both
its products and internal systems to further mitigate any risks associated
with the year 2000. At this time, Digi believes it is unnecessary to adopt a
contingency plan covering the possibility that the year 2000 project will not
be completed in a timely manner, but, as part of the overall project, Digi
will
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<PAGE>
continue to assess the need for a contingency plan based on Digi's periodic
evaluation of target dates for the completion of the year 2000 project.
Digi faces risk to the extent that suppliers of products and services
purchased by Digi and others with whom Digi transacts business on a
world-wide basis do not have business products and services that comply with
year 2000 requirements. Digi has obtained assurances from most of its key
suppliers that their products and services are year 2000 compliant. In the
event any such third parties cannot, in a timely manner, provide Digi with
products and services that meet the year 2000 requirements, Digi's operating
results could be materially adversely affected.
The costs associated with the year 2000 project are minimal and are not
incremental to Digi, but include temporary reallocation of existing
resources. Although Digi believes that the remaining cost of year 2000
modifications for both internal-use systems and Digi's products are not
material, there can be no assurances that various factors relating to the
year 2000 compliance issues, including litigation, will not have a material
adverse effect on Digi's business, operating results, or financial position.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. This standard will require
that an enterprise display an amount representing total comprehensive income
for the period. Statement No. 130 will be initially effective for the first
quarter of Digi's fiscal year ending September 30, 1999. Adoption of
Statement of Financial Accounting Standards No. 130 will not impact Digi's
results of operations or its financial position.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes Statement No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that
those enterprises report selected segment information in interim financial
reports to stockholders. Operating segments are defined as revenue-producing
components of the enterprise which are generally used internally for
evaluating segment performance. Statement No. 131 will be effective for Digi
beginning with the first quarter of Digi's fiscal year ending September 30,
1999. Management has not yet completed its analysis of the effects of
Statement No. 131 on its financial reporting.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 will be effective for
Digi beginning with Digi's fiscal year ending September 30, 2000. As Digi
presently has no derivative instruments and is not involved in hedging
activity, Digi does not expect the adoption of Statement No. 133 to have an
impact on its results of operations or its financial position.
In October 1997, Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), was issued. SOP 97-2 provides guidance on when
revenue should be recognized and in what amounts for licensing, selling,
leasing or otherwise marketing computer software. SOP 97-2 will become
effective for Digi's fiscal year ending September 30, 1999. The adoption of
SOP 97-2 is not expected to have a significant impact on Digi's results of
operations or its financial position.
12
<PAGE>
THE COMPANY
BUSINESS
Digi was formed in l985 as a Minnesota corporation and reorganized as a
Delaware corporation in l989. Digi is a worldwide provider of data
communications products for open systems, server-based remote access and local
area network ("LAN") applications. Digi's communications products, which support
a broad range of server
platforms and network operating systems in the industry, enable people to
have access to information, no matter when they need it or what type of
computer they are using.
Digi's products enhance the development of open systems, server-based
communication by being compatible with all PC platforms - Compaq, IBM,
Hewlett-Packard, and Sun Microsystems - and popular operating systems, including
Microsoft Windows NT and Novell NetWare. Digi's solutions give customers the
flexibility to scale up easily as needs change and to choose from a variety of
industry-standard, cost effective alternatives. Digi's products also support
remote access connectivity through intranets and the Internet.
Digi's server-based communications serial port boards provide
asynchronous (transmitting single characters at a time) and synchronous
(transmitting characters in a group) data transmissions for analog modems, ISDN
(Integrated Services Digital Network), X.25, Frame Relay or T1/E1 connections.
Digi's serial port communications products constituted approximately
80%, 76% and 80% of net sales in fiscal 1998, 1997 and 1996, respectively. These
products provide connections for two primary markets:
1. The core serial port products provide PC-host-to-terminal serial
I/O (input/output) connections. These products facilitate data
transmission for point-of-sale ("POS") applications, on-line
transaction processing, factory automation, inventory control and
office automation, among others. The onboard firmware allows the
products to quickly, accurately and reliably transmit data,
thereby eliminating the information bottlenecks that can result
when multiple users or devices share one processing unit. These
solutions primarily use multiuser, multitasking operating systems
such as UNIX (and its variations), along with standard PC servers
and communications cards.
2. Open systems, server-based remote access products are data
communications boards that support remote access applications such
as Internet access, connectivity to corporate intranets and branch
office networks, and telecommuting.
Digi entered the LAN market with its acquisition of MiLAN Technology
Corporation in November 1993. Digi's LAN business, formerly the MiLAN Technology
Division, provides cost-effective and power-efficient Ethernet, Fast Ethernet
and Token Ring networking connectivity products that are installed on a LAN to
increase its productivity.
Digi's LAN connectivity products include these two groups:
1. The physical layer products allow users to easily build and expand
networks using a variety of technologies including Ethernet, Fast
Ethernet, Gigabit Ethernet and ATM. These products include single
and multiport transceivers, converters, microhubs and modular
repeaters.
2. The print server products, based on the FastPort line, make print
sharing convenient and affordable. The FastPort line includes the
industry's first multiprotocol network print server providing
access to any printer on an Ethernet or Token Ring network without
the inconvenience and expense of spooling through a workstation or
server.
Digi entered the Internet telephony market with the acquisition of ITK
International in July 1998 and its Voice over Internet Protocol ("VoIP")
products. ITK International provides the new VoIP technology with the NetBlazer
8500 gateway, a "proof of concept" product that converts voice signals to TCP/IP
packets and routes them over IP networks such as the Internet and company
intranets. This capability combines voice and data onto one cost-effective
network and is changing the whole concept of traditional voice communication.
Although the VoIP technology acquired from ITK International is still under
development, Digi believes that this technology will be successful once a
functioning, finished product is complete. Digi acquired ITK International for
approximately $27.7 million in cash, stock, replacement stock options and the
assumption of $39.8 million of liabilities and restructuring/integration costs.
Digi expanded its product lines with its acquisition of Central Data in
July 1998. Digi also acquired in-process research and development from Central
Data related to Universal Serial Bus ("USB") technology. This in-process
technology will give customers the ability to maintain existing non-USB
peripheral equipment and connect with new PCs which contain advanced USB
interfaces. Digi expects to introduce USB products in fiscal 1999. Digi acquired
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Central Data for approximately $19.2 million in cash, stock and replacement
stock options and the assumption of $4.4 million of liabilities and
restructuring/integration costs.
Digi works closely with customers, PC and server vendors, operating
system companies and other marketing partners to continuously optimize Digi's
wide area network ("WAN") and LAN products to interoperate in open systems,
industry-standard environments. This assures customers the ability to choose the
most flexible, cost-effective solution to meet their individual needs.
Digi markets its products to a broad range of customers, including
major domestic and international distributors, end users, system integrators,
VARs and OEMs. This network includes more than 185 distributors in the United
States, Canada and 65 countries worldwide, as well as OEM customers.
In July 1991, Digi opened a sales support office in Germany to increase
sales support to the European distribution network. Digi expanded its presence
in the German market in July 1998 with the acquisition of ITK International,
which maintains a sales and manufacturing office in Dortmund, Germany. In
October 1993, Digi opened a sales support office in Singapore to increase sales
support for its products to the Pacific Rim distribution network. In 1996, Digi
opened similar offices in Hong Kong, Sydney and Tokyo and in 1997, Digi opened
sales offices in Paris and London to better serve its non-U.S. markets.
To serve its worldwide markets, Digi (i) offers products that, in the
opinion of management, provide superior performance relative to current
standards and application requirements, (ii) provides products that are
compatible with a broad array of open systems operating systems and
industry-standard PC, server and workstation architectures, and (iii) provides,
in the opinion of management, superior technical support, including frequent and
timely product updates and ready access to Digi's support staff.
The computer industry is characterized by rapid technological advances
and evolving industry standards. The market can be significantly affected by new
product introductions and marketing activities of industry participants. Digi
competes for customers on the basis of product performance in relation to
compatibility, support, quality and reliability, product development
capabilities, price and availability. Many of Digi's competitors and potential
competitors have greater financial, technological, manufacturing, marketing and
personnel resources than Digi. Digi believes that it is the market leader in
serial port boards for server-based communications in the computer industry.
With respect to the LAN business, Digi believes it commands less than a 5%
market share. Digi is currently establishing its position in the remote access
market for Digi's RAS product lines. Digi will enter the Internet telephony
market upon full development of its VoIP technology.
Digi's manufacturing operations procure all parts and certain services
involved in the production of products. Digi subcontracts most of its product
manufacturing to outside firms that specialize in providing such services. Digi
believes that this approach to manufacturing is beneficial because it permits
Digi to reduce its fixed costs, maintain production flexibility and maximize its
profit margins.
Digi's products are manufactured to its designs with standard and
semi-custom components. Most of these components are available from
multiple vendors. Digi does have several single-sourced supplier
relationships, either because alternative sources are not available or
because the relationship is advantageous to Digi. If these suppliers are
unable to provide timely and reliable supply of components, Digi could
experience manufacturing delays adversely affecting results of operations.
During fiscal years 1996, 1997 and 1998, Digi's research and
development expenditures were $21.3, $18.0 and $17.0 million, respectively.
Due to rapidly changing technology in the computer industry, Digi
believes that its success depends primarily upon the engineering, marketing,
manufacturing and support skills of its personnel, rather than upon patent
protection. Although Digi may seek patents where appropriate and has certain
patent applications pending for proprietary technology, Digi's proprietary
technology or products are generally not patented. Digi relies primarily on
the copyright, trademark and trade secret laws to protect its proprietary
rights in its products. Digi has established common law and registered
trademark rights on a family of marks for a number of its products.
In May 1998, Digi exchanged its previously 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, for
a non-interest bearing $8,000,000 non-convertible note. As a part of the
exchange, Digi relinquished its
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<PAGE>
rights to any future technology or claims on any of AetherWorks' intellectual
properties. In exchange, Digi has been released from all of its guarantees of
certain lease obligations of AetherWorks. As a result, Digi reversed its
$1,350,000 accruals established in the fourth quarter of 1997, for the
estimated probable cost related to its guarantee of such lease obligations
and has included such amount as AetherWorks Corporation gain for the year
ended September 30, 1998.
Due to the significant uncertainty as to collectibility of the
$8,000,000 note, which matures in 2001, the note has been recorded with no
carrying value as of September 30, 1998. Digi continues to lease to AetherWorks
$1,325,000 of computer equipment under a three-year direct financing lease,
expiring in 2000.
During the year ended September 30, 1998, two customers comprised
more than 10% of net sales each: Ingram Micro at 15.5% and Tech Data at
13.7%. During the year ended September 30, 1997, two customers comprised more
than 10% of net sales each: Ingram Micro at 15.1%, and Tech Data at 10.5%.
During the year ended September 30, 1996, two customers accounted for more
than 10% of net sales each: Tech Data at 13.9% and Ingram Micro at 13.4%.
As of September 30, 1998, Digi had backlog orders which management
believed to be firm in the amount of $2.9 million. All of these orders are
expected to be filled in the current fiscal year. Backlog as of September 30,
1997 was $14.7 million.
Total employees at September 30, 1998 were 703.
PROPERTIES
Digi's headquarters and research facilities are located in a 130,000
square foot office building in Minnetonka, Minnesota which Digi acquired in
August 1995 and has occupied since March 1996. Digi's primary manufacturing
facility is currently located in a 58,000 square foot building in Eden Prairie,
Minnesota, which Digi purchased in May 1993 and has occupied since August 1993.
Additional office and research facilities include a 46,170 square foot facility
in Sunnyvale, California, the lease for which expires in April 2002. The
headquarters and research facilities owned by ITK International are located in a
63,000 square foot facility in Dortmund, Germany. The headquarters and research
facility owned by Central Data are located in a 20,000 square foot facility
located in Champaign, Illinois.
Digi's sales support office in Asia is located in a 1,560 square foot
office in Singapore, the lease for which expires in May 2000. Digi's sales
support office in Australia is located in a 886 square foot office in Sydney,
the lease for which expires in February 2001. Digi's sales support office in
Hong Kong is located in a 2,643 square foot office in Causeway Bay, the lease
for which expires in 2001. Digi's sales support office in London is located in a
2,000 square foot office, the lease for which expires in June 2002. Digi's sales
support office in Paris is located in a 625 square foot office, the lease for
which expires with a 30 day notice. Management believes that Digi's facilities
are suitable and adequate for current office, research and warehouse
requirements, and that its manufacturing facilities provide sufficient
production capacity to meet its currently anticipated needs.
LITIGATION
Between January 3, 1997 and March 7, 1997, Digi and certain of its
previous officers were named as defendants in five putative securities class
action lawsuits filed 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. The five putative class
actions were thereafter consolidated, and on May 12, 1997, a consolidated
amended class action complaint was filed in the actions, which are captioned IN
RE DIGI INTERNATIONAL INC. SECURITIES LITIGATION (Master File No. 97-5 DWF/RLE).
The Consolidated Amended Complaint alleges that Digi 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 Digi'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 February 25, 1997, Digi 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, which is captioned LOUISIANA STATE EMPLOYEES RETIREMENT
SYSTEM V. DIGI
15
<PAGE>
INTERNATIONAL INC., GARY L. DEANER, ERVIN F. KAMM, JR., GERALD A. WALL AND
"JOHN DOE" AND "RICHARD ROE", DEFENDANTS (Civil File No. 97-440, Master File
No. 97-5 DWF/RLE). On June 3, 1997, the Louisiana State Employees Retirement
System filed an Amended Complaint. The Louisiana Amended Complaint alleges
that Digi 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 Digi's operations and financial results. 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.
In a decision issued on May 22, 1998, the United States District Court
for the District of Minnesota granted in part and denied in part defendants'
motions to dismiss the Consolidated Amended Complaint and the Louisiana Amended
Complaint. The Court dismissed without leave to replead all claims asserted in
both cases, except for certain federal securities law claims based upon alleged
misrepresentations and/or omissions relating to the accounting treatment applied
to Digi's AetherWorks investment. The Court also limited the claims asserted in
the Louisiana Amended Complaint to the 11,000 shares of Digi's stock held
subsequent to November 14, 1996, for which the Louisiana Amended Complaint
claims damages of $184,276.40. The claims in the two actions remain pending
against Digi and its former officers Ervin F. Kamm, Jr. and Gerald A. Wall.
Discovery in the actions is proceeding.
Because the lawsuits are in preliminary stages, the ultimate outcomes
cannot be determined at this time, and no potential assessment of their effect,
if any, on Digi's financial position, liquidity or future operations can be
made.
16
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Digi's Directors and Executive Officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - -------------------------------- --------------- -------------------------------------------------------------
<S> <C> <C>
John P. Schinas 61 Chairman of the Board of Directors
Jerry A. Dusa 51 Director, President and Chief Executive Officer
Douglas J. Glader 54 Senior Vice President, Manufacturing Operations
Dino G. Kasdagly 44 Senior Vice President, Development
Willis K. Drake 75 Director
Richard E. Eichhorn 69 Director
Robert S. Moe 67 Director
Mykola Moroz 61 Director
David Stanley 63 Director
</TABLE>
Mr. Schinas, a founder of Digi, has been its Chairman of the Board
since July 1991. He has been a member of the Board of Directors since Digi's
inception in July 1985 and served as Digi's Chief Executive Officer from July
1985 to January 1992.
Mr. Dusa has been a member of the Board of Directors and President and
Chief Executive Officer of Digi since March 12, 1997 after serving Digi as
interim acting Chief Executive Officer from January 3, 1997 to March 12, 1997.
Prior to January 3, 1997, Mr. Dusa had been the owner and principal of Phase One
Partners, Inc., an investment and consulting business, since 1995 and had acted
as a consultant to Digi in this capacity since August 1996. From 1994 to 1995,
Mr. Dusa was Vice President of Fujitsu Microelectronics, Inc., a manufacturer of
integrated circuit products. From 1993 to 1994, Mr. Dusa was President of Eagle
Technology, a manufacturer of network connectivity products. From 1992 to 1993,
Mr. Dusa was President of Kalpana, Inc., a manufacturer of network connectivity
products. Prior to 1992, Mr. Dusa held executive management positions with a
number of high technology companies including IBM Corporation, 3Com Corporation
and Tandem Computers.
Mr. Glader was named Digi's Vice President of Operations in February
1995 and Senior Vice President, Manufacturing Operations, on July 8, 1997.
Before that, he was formerly Director of Manufacturing and Operations for MiLAN
Technology Corporation, which Digi acquired in November 1993. He began his
career with Memorex Corporation and also worked for Measurex Corporation, Altus
Corporation and Direct Incorporated. He founded and was Vice President of
Operations for Greyhawk Systems, Inc., a manufacturer of electronic imaging
hardware and software.
Mr. Kasdagly joined Digi in October 1997, as Senior Vice President,
Development. Prior to joining Digi, Mr. Kasdagly had been an executive with IBM
Corporation since November 1980, most recently as Director, Division Quality and
Business Reengineering for IBM's AS/400 Division.
Mr. Drake has been a member of Digi's Board of Directors since 1987.
Since 1983, Mr. Drake has been a private investor. Mr. Drake is also a director
of Analysts International Corporation, a software manufacturer; Innovex
17
<PAGE>
Inc., a manufacturer of specialty precision electromagnetic products and
Telident, Inc., a manufacturer of telephone system enhancement equipment; as
well as several privately held companies.
Mr. Eichhorn has been a member of Digi's Board of Directors since 1987.
Since April 1992, Mr. Eichhorn has been a private investor. He is also a
director of several privately held companies.
Mr. Moe has been a member of Digi's Board of Directors since October
1996. From 1981 to his retirement in 1993, he was the Chief Financial Officer of
Polaris Industries, Inc., a manufacturer of snowmobiles, all-terrain vehicles
and personal watercraft. He is also a director of Polaris Industries, Inc.
Mr. Moroz, a founder of Digi, has been a member of Digi's Board of
Directors since July 1991. He was a consultant to Digi on manufacturing
operations from December 1994 to November 1996. He was President of Digi from
July 1991 to November 1994 and Chief Executive Officer from January 1992 to
November 1994. Mr. Moroz was Chief Operating Officer of Digi from July 1991 to
January 1992. Mr. Moroz is also a director of Parts 1, Inc., a privately held
corporation that is a supplier to Digi.
Mr. Stanley has been a member of Digi's Board of Directors since 1990.
Mr. Stanley served as Chairman and Chief Executive Officer of Payless Cashways,
Inc., a building materials retailer, from 1984 to 1997. Payless Cashways, Inc.
filed a voluntary Chapter 11 bankruptcy petition on July 21, 1997. A plan of
reorganization was approved by the creditors and confirmed by the United States
Bankruptcy Court for the Western District of Missouri in November 1997. Payless
Cashways, Inc. emerged from bankruptcy in early December 1997. He is also a
director of Best Buy Co., Inc., a consumer electronics retailer.
COMMITTEES
Digi's Audit Committee consists of Messrs. Stanley (Chairman), Moe
and Moroz. Digi's Compensation Committee consists of Messrs. Eichhorn
(Chairman), Drake and Moe. Digi's Corporate Governance and Nominating
Committee consists of Messrs. Schinas (Chairman), Stanley and Eichhorn.
DIRECTOR COMPENSATION
Currently, each non-employee director of Digi who beneficially owns not
more than 5% of Digi's outstanding Common Stock who is newly elected to the
Board, whether elected at an annual meeting or during the year, and who has not
previously been a director of Digi, receives a one-time, non-elective grant of
an option to purchase 5,000 shares of Digi's Common Stock at the then-current
market price. Furthermore, each non-employee director of Digi who beneficially
owns not more than 5% of Digi's outstanding Common Stock, whether incumbent or
newly elected, who is elected at an annual meeting receives a non-elective grant
of an option to purchase 1,500 shares of Digi's Common Stock at the then-current
market price. If a newly elected non-employee director is first elected during
the year, then such non-elective option grant is prorated.
In addition, each non-employee director of Digi who beneficially owns
not more than 5% of Digi's outstanding Common Stock, whether incumbent or newly
elected, who is elected at an annual meeting has an election to receive one of
the following: (i) an option to purchase 6,000 shares of Common Stock of Digi at
the then-current market price or (ii) cash payments consisting of an annual
retainer of $8,000, payable quarterly in arrears, plus per meeting fees of $750
for each meeting of the Board of Directors attended and $350 for each committee
meeting attended that is not held on the same day as a meeting of the Board of
Directors. If a newly elected non-employee director of Digi who beneficially
owns not more than 5% of Digi's outstanding Common Stock is first elected during
the year, the option grant to purchase 6,000 shares of Common Stock or the
$8,000 annual retainer is prorated.
As additional compensation, each committee Chairman who is also a
non-employee director who beneficially owns not more than 5% of Digi's
outstanding Common Stock has an annual election to receive one of the following:
(i) an option to purchase 1,000 shares of Digi's Common Stock at the
then-current market price or (ii) a cash payment of $2,500. Directors who
beneficially own more than 5% of Digi's outstanding Common Stock serve without
receiving the compensation described above. Mr. Schinas serves as Chairman of
the Board pursuant to an employment
18
<PAGE>
agreement for an annual base salary of $100,000 and such bonus compensation
as the Compensation Committee may determine to award in its discretion.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table contains information concerning the annual and
long-term compensation for the fiscal years ended September 30, 1998, 1997 and
1996 provided to Digi's Chief Executive Officer and its other three most highly
compensated executive officers who received remuneration exceeding $100,000 for
the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
NAME AND FISCAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
------------------ ------ -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Jerry A. Dusa, President, 1998 $283,228 $200,000 250,000 $ (5)
Chief Executive Officer, Director(1) 1997 250,315 212,768 250,000 0
Douglas J. Glader, Senior Vice President, 1998 159,597 169,752 30,000 (5)
Manufacturing Operations(2) 1997 169,327 123,000 105,800 0
1996 134,712 0 10,800 0
Dino G. Kasdagly, Senior Vice President, 1998 171,106 143,938 80,000 (5)
Development(3)
Jonathon E. Killmer, Senior Vice 1998 182,480 156,910 30,000 (5)
President, Chief Financial Officer, 1997 144,231 100,000 105,000 0
Treasurer(4)
- - -----------
</TABLE>
(1) Mr. Dusa became President and Chief Executive Officer, and a Director,
on March 12, 1997. Prior to March 12, 1997, Mr. Dusa served as interim
acting Chief Executive Officer from January 3, 1997 and served as a
consultant to Digi prior to that time.
(2) Mr. Glader joined Digi in 1994, became Vice President in February 1995
and became Senior Vice President in April 1997.
(3) Mr. Kasdagly joined Digi as Senior Vice President in October 1997.
Pursuant to his employment agreement, Digi paid Mr. Kasdagly a one time
signing bonus of $42,407.74, which is included in his 1998 bonus
compensation in the above table. See "Employment Contracts; Severance,
Termination of Employment and Change-in-Control Arrangements" below.
(4) Mr. Killmer joined Digi as Vice President, Chief Financial Officer and
Treasurer in October 1997. Mr. Killmer became Senior Vice President,
Chief Financial Officer and Treasurer in July 1997 and held such
offices until his resignation effective October 30, 1998.
(5) No allocation of Digi's matching contribution to the 401-K Plan will be
made to individual plan accounts until after the end of the 1998
calendar year. If allocated, these amounts would be reflected here and
would be the only compensation reported in this column.
19
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- - ---------------------------------------------------------------
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION
OPTIONS EMPLOYEES OR BASE TERMS (1)
GRANTED IN FISCAL PRICE EXPIRATION -------------------------------------------
NAME (#) YEAR ($/SH) DATE 0%($) 5%($) 10%($)
- - ---------------------- ---------- --------- -------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerry A. Dusa......... 250,000(2) 20.83% $17.00 01/28/08 $968,750 $ 4,250,794 $ 9,286,093
Douglas J. Glader..... 30,000(3) 2.50 27.50 04/20/08 0 518,838 1,314,838
Dino G. Kasdagly...... 50,000(4) 4.16 14.75 10/28/07 0 463,810 1,175,385
Dino G. Kasdagly...... 30,000(3) 2.50 27.50 04/20/08 0 518,838 1,314,838
Jonathon E. Killmer... 30,000(3) 2.50 27.50 04/20/08 0 518,838 1,314,838
All Stockholders' Potential Realizable Value at
Assumed Growth Rates (5).................................................... $ 0 $462,649,245 $734,097,858
</TABLE>
(1) The dollar amounts under these columns are the results of calculations
at a 0% annual appreciation rate, and at the 5% and 10% annual
appreciation rates set by the Securities and Exchange Commission for
illustrative purposes, and, therefore, are not intended to forecast
future financial performance or possible future appreciation, if any,
in the price of Digi's stock. Stockholders are therefore cautioned
against drawing any conclusions from the appreciation data shown, aside
from the fact that optionees will only realize value from the option
grants shown when the price of the Company's stock appreciates (other
than in the case of Mr. Dusa), which benefits all stockholders
commensurately.
(2) These options become exercisable in 20% increments on the first,
second, third, fourth and fifth anniversaries of the date of grant with
the possibility of performance-based accelerated vesting of (i) up to
125,000 shares upon the attainment of fiscal 1998 goals previously
established for determination of Mr. Dusa's cash bonus and (ii) up to
an additional 125,000 shares based upon the attainment of fiscal 1999
goals to be established by the Committee for determination of Mr.
Dusa's cash bonus. If either the fiscal 1998 or 1999 goals are not
fully attained, the number of options to be accelerated will be
prorated based on the aggregate percentage achieved, in either case as
determined by the Committee. The options to be accelerated are those
that are the last scheduled to vest.
(3) These options become exercisable as to 7,500 shares on April 20, 1999,
and as to 625 shares on the twentieth day of each of the next 36 months
beginning on May 20, 1999.
(4) These options become exercisable in 20% increments on the first,
second, third, fourth and fifth anniversaries of the date of grant.
(5) These calculations are based upon 14,588,995 outstanding shares and
assume a base price of $19.40, the average price of the options granted
to the executive officers named in the Summary Compensation Table.
20
<PAGE>
AGGREGATED OPTION
EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
The purpose of the following table is to report exercises of stock
options during fiscal 1998 by the executive officers named in the Summary
Compensation Table and any value of their unexercised stock options as of
September 30, 1998. Only one of these executive officers exercised stock options
in fiscal 1998 pursuant to Digi's Stock Option Plan. Digi has not issued any
Stock Appreciation Rights to its executive officers.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END FY-END(1)
SHARES ACQUIRED ---------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerry A. Dusa............ 0 $ 0 250,000 250,000 $1,236,250 $ 0
Douglas J. Glader........ 23,400 371,850 28,700 113,700 99,475 333,225
Dino G. Kasdagly......... 0 0 0 80,000 0 0
Jonathon E. Killmer...... 0 0 22,500 112,500 74,375 265,625
- - -----------
</TABLE>
(1) Value is based on a share price of $12.25, which was the last reported
sale price for a share of Common Stock on the Nasdaq Stock Market on
September 30, 1998, minus the exercise price.
EMPLOYMENT CONTRACTS; SEVERANCE, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
JERRY A. DUSA. Digi and Mr. Dusa are currently parties to an employment
agreement entered into upon Mr. Dusa's election as President and Chief Executive
Officer of Digi on March 13, 1997. The agreement provides that Mr. Dusa will be
paid a base salary initially at the annual rate of $250,000. The Compensation
Committee will review Mr. Dusa's base salary annually and may, in its sole
discretion, increase it to reflect performance and other factors. The Committee
increased Mr. Dusa's base salary to $300,000 for fiscal 1998. The Committee has
not yet reviewed Mr. Dusa's base salary for fiscal 1999. The agreement also
provides that Mr. Dusa will be entitled to a cash bonus equal to 100% of his
base salary, provided that the objectives set by the Committee, acting in its
sole discretion, are met. If some or all of the objectives are not met for a
fiscal year then the Committee shall determine in its discretion what portion of
the target bonus amount, if any, will be paid to Mr. Dusa. Based upon his
achievement of 38.5% of his performance objectives and an additional
discretionary amount awarded in connection with his efforts in completing the
Company's acquisitions of Central Data and ITK International during fiscal 1998,
the Committee awarded Mr. Dusa a cash bonus of $200,000 for fiscal 1998 which
was equal to 67% of his aggregate base salary for fiscal 1998.
Mr. Dusa has a fully vested option to purchase 10,000 shares of Digi's
Common Stock at a per share exercise price of $10.125 which he received on
January 3, 1997 in connection with his service as interim acting Chief Executive
Officer of Digi. Pursuant to his employment agreement, the Company issued to Mr.
Dusa stock options to purchase an aggregate of 240,000 shares of Digi's Common
Stock in March 1997. These options were granted at the fair market value on the
date of grant, vesting in 25% increments on the first, second, sixth and seventh
anniversaries of the date of grant with the possibility of performance-based
accelerated vesting of the 25% increments allocated to the sixth and seventh
years if the closing price of Digi's Common Stock equals or exceeds $20.00 per
share for 90 consecutive calendar days at any time prior to the fifth
anniversary of the date of grant. The Committee, in its discretion, vested all
240,000 shares subject to this option in January 1998. In January 1998, Mr. Dusa
was granted an option to purchase 250,000 shares at $17.00 per share ($3.85 per
share below the fair market value on the date of grant), vesting in 20%
increments on the first, second, third, fourth and fifth anniversaries of the
date of grant with the possibility of performance-based accelerated vesting of
(i) up to 125,000 shares upon the attainment of fiscal 1998 goals previously
established for determination of Mr. Dusa's cash bonus and (ii) up to an
additional 125,000 shares based upon the attainment of fiscal 1999 goals to be
established by the Committee for determination of Mr. Dusa's cash bonus. If
either the fiscal 1998 or 1999 goals are not fully attained, the number of
options to be accelerated will be prorated based on the aggregate percentage
achieved, in either case as determined by the Committee. The options to be
accelerated are those that are the last scheduled to vest. Based upon Mr. Dusa's
achievement of 38.5% of his fiscal 1998 goals, vesting was accelerated with
respect to 48,125 shares covered by this option. The agreement also provides
21
<PAGE>
that Mr. Dusa is entitled to the benefits and perquisites which Digi
generally provides to its other employees under applicable plans and policies.
Under the terms of Mr. Dusa's employment agreement, if Digi terminates
his employment without cause, Mr. Dusa is entitled to receive his then current
base salary for a period of twelve months. In addition, any unvested stock
options will vest immediately prior to any termination of his employment by Digi
without cause. Any unvested stock options will also vest in the event of a
"change in control" of Digi, which is deemed to have occurred if any person or
group acquires more than 25% of the voting power of Digi, or if there is a
change in the membership of the Board of Directors, not approved by the
continuing directors, such that persons who were directors at the beginning of
any three-year period no longer constitute a majority of the Board.
DOUGLAS J. GLADER. Digi's agreement with Mr. Glader on February 6, 1995
provides that Mr. Glader will be paid a base salary at the annual rate of
$120,000, which the Committee increased to $170,000 for fiscal 1997 and 1998 and
which will increase to $190,000 for fiscal 1999. The Committee will review Mr.
Glader's base salary annually and may, in its sole discretion, increase it to
reflect performance, appropriate industry guideline data and other factors, but
is not obligated to provide for any increases in base salary. Under his
agreement, Mr. Glader also is entitled to a cash bonus opportunity based on his
percentage of achievement objectives set by the Committee, of up to 100% of his
base salary in any fiscal year. The Committee increased this percentage to 110%
for fiscal 1997 and 1998, but it will return to 100% for fiscal 1999. In
addition, Mr. Glader was granted an option to purchase 20,000 shares of Digi's
Common Stock with an exercise price at the fair market value on the date of
grant, vesting over five years. In August 1996, Mr. Glader was granted an option
to purchase 10,800 shares at the fair market value on the date of the grant,
vesting over five years with the possibility of accelerated vesting of the 20%
increments allocated to the fourth and fifth years if the closing price of
Digi's Common Stock equals or exceeds $26.00 per share for twenty consecutive
trading days. These options were repriced as part of a May 8, 1997 option
repricing and the substitute options now vest over four years. In May 1997, Mr.
Glader was granted an additional option to purchase 75,000 shares at the fair
market value on the date of the grant, vesting over five years. In April 1998,
Mr. Glader was granted an option to purchase 30,000 shares of Digi's Common
Stock at the fair market value on the date of grant, vesting over four years.
All of Mr. Glader's option grants will also vest in full in the event of his
termination without cause or a "change in control" of Digi which is deemed to
occur under the same conditions as for purposes of Mr. Dusa's option vesting. If
Mr. Glader's employment is terminated without cause, he would be entitled to
receive severance of $60,000. Mr. Glader also is entitled to the benefits and
perquisites which currently Digi generally provides to its other employees under
applicable plans and policies.
DINO G. KASDAGLY. Digi's agreement with Mr. Kasdagly dated October 1,
1997, provides that Mr. Kasdagly will be paid a base salary at an annual rate of
$175,000, which the Committee has increased to $185,000 for fiscal 1999. Mr.
Kasdagly's employment agreement also provides for a guaranteed payment of
$20,000, after taxes ($42,407.74 before taxes), paid in January 1998. Under his
agreement, Mr. Kasdagly is entitled to a cash bonus based on the percentage of
his achievement of objectives set by the Committee, of up to 60% of his base
salary in any fiscal year. The Committee increased his cash bonus opportunity to
100% of his base salary for fiscal 1999. Mr. Kasdagly's employment agreement
also provided for an option to purchase 50,000 shares of Digi's Common Stock at
the fair market value on the date of the grant, vesting over five years. In
April 1998, Mr. Kasdagly was granted an additional option to purchase 30,000
shares, vesting over four years. Mr. Kasdagly's options will vest in full in the
event of his termination without cause or a "change in control" of Digi which is
deemed to occur under the same conditions as for purposes of Mr. Dusa's option
vesting. Finally, Mr. Kasdagly's employment agreement entitles him to the
benefits and perquisites which Digi generally provides to its other employees
under applicable plans and policies.
JONATHON E. KILLMER. Prior to his resignation, effective October 30,
1998, Digi was party to an employment agreement with Mr. Killmer dated September
16, 1996, which provided that Mr. Killmer would be paid a base salary at an
annual rate of $150,000, which the Committee increased to $170,000 for fiscal
1998 and further increased, effective May 1, 1998, to $210,000. Under his
agreement, Mr. Killmer was also entitled to a cash bonus based on his percentage
of achievement of objectives set by the Committee of up to 100% of his base
salary in any fiscal year. For fiscal 1997, $100,000 of Mr. Killmer's bonus was
guaranteed. For fiscal 1998, the Committee determined to guarantee $80,000 of
Mr. Killmer's bonus. The Committee decreased the amount of Mr. Killmer's
guaranteed bonus to 40% on May 1, 1998, resulting in a guaranteed bonus of
$63,333.33 (7/12 times $80,000 plus 5/12 times $40,000) for fiscal 1998. Mr.
Killmer's employment agreement also provided for an option to purchase 30,000
shares of Digi's Common Stock at the fair market value on the date of grant,
vesting over five years. This option was repriced as part of the May 8,
22
<PAGE>
1997 repricing and the substitute option now vests over four years. In May
and July 1997, Mr. Killmer was granted additional options to purchase 25,000
and 50,000 shares, respectively, vesting over five years. The 25,000 share
option was granted at the fair market value on the date of grant and the
50,000 share option was granted at $1.13 below the fair market value on the
date of grant. In April 1998, Mr. Killmer was granted an option to purchase
30,000 shares of Digi's Common Stock at the fair market value on the date of
grant, vesting over four years. Mr. Killmer's options would have vested in
full in the event of his termination without cause or a "change in control"
of Digi had either event occurred prior to his resignation. As a result of
his resignation, all of the options granted to Mr. Killmer will expire on
January 28, 1999 unless previously exercised. Finally, Mr. Killmer's
employment agreement entitles him to the benefits and perquisites which Digi
generally provides to its other employees under applicable plans and policies.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of December 11, 1998, the beneficial
ownership of Digi's Common Stock by each director, by each executive officer
named in the Summary Compensation Table, by all directors and executive officers
as a group, and by each stockholder who is known by Digi to own beneficially
more than 5% of Digi's outstanding Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING SHARES
- - ------------------------------------------------------------- ------------------------ ------------------
<S> <C> <C>
Directors, nominees and executive officers:
Willis K. Drake 62,135(2) *
Jerry A. Dusa 351,125(3) 2.4%
Richard E. Eichhorn 102,750(4) *
Douglas J. Glader 33,812(5) *
Dino G. Kasdagly 10,000(6) *
Jonathon E. Killmer 23,850(7) *
Robert S. Moe 59,625(8) *
Mykola Moroz 115,786(9) *
John P. Schinas 1,407,260(10) 9.6%
David Stanley 85,250(11) *
All directors, nominees and executive officers as a group (10
persons, including those named above) 2,251,593(12) 14.7%
- - -----------
</TABLE>
* Less than one percent.
(1) Unless otherwise indicated in footnote below, the listed beneficial
owner has sole voting power and investment power with respect to such
shares.
(2) Includes 30,000 shares covered by options which are exercisable within
60 days of the record date.
(3) Includes 348,125 shares covered by options which are exercisable within
60 days of the record date.
(4) Includes 83,500 shares covered by options which are exercisable within
60 days of the record date.
(5) Includes 28,700 shares covered by options which are exercisable within
60 days of the record date.
(6) Includes 10,000 shares covered by options which are exercisable within
60 days of the record date.
(7) Includes 22,500 shares covered by options which are exercisable within
60 days of the record date. Includes 175 shares held by the IRA of Mr.
Killmer's spouse and 1,000 shares held directly by Mr. Killmer's
spouse. Mr. Killmer disclaims beneficial ownership for shares held by
his spouse. Mr. Killmer held the office of Senior Vice President of
Digi until his resignation effective October 30, 1998. Due to his
resignation, Mr. Killmer's 22,500 options will lapse on January 28,
1999, unless previously exercised.
23
<PAGE>
(8) Includes 18,125 shares covered by options which are exercisable within
60 days of the record date. Includes 1,500 shares held directly by Mr.
Moe's spouse. Mr. Moe disclaims beneficial ownership for the shares
held by his spouse.
(9) Includes 108,250 shares covered by options which are exercisable within
60 days of the record date.
(10) Mr. Schinas' address is 11001 Bren Road East, Minnetonka, Minnesota
55343.
(11) Includes 79,750 shares covered by options which are exercisable within
60 days of the record date.
(12) Includes 319,625 shares covered by options which are exercisable within
60 days of the record date held by five non-employee directors of Digi
and 409,325 shares covered by options which are exercisable within 60
days of the record date held by four executive officers of Digi.
24
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Digi's Common Stock has been traded in the over-the-counter market and
quoted on the Nasdaq Stock Market under the symbol DGII since Digi's initial
public offering on October 13, 1989. The following table sets forth, for the
fiscal quarters indicated, the high and low sale prices for Digi's Common Stock
as reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1997:
First Quarter............................................................ $18.75 $8.63
Second Quarter........................................................... 10.50 6.75
Third Quarter............................................................ 11.75 5.13
Fourth Quarter........................................................... 16.00 9.88
FISCAL YEAR ENDED SEPTEMBER 30, 1998:
First Quarter............................................................ $22.75 $13.75
Second Quarter........................................................... 28.63 17.00
Third Quarter............................................................ 29.50 19.50
Fourth Quarter........................................................... 25.25 9.63
FISCAL YEAR ENDED SEPTEMBER 30, 1999:
First Quarter (through December 28, 1998)................................ $16.38 $ 8.56
</TABLE>
On December 28, 1998, the last sale price for Digi's Common Stock as
reported by the Nasdaq Stock Market was $11.25 per share.
At December 11, 1998 the number of holders of Digi's Common Stock was
approximately 6,651, consisting of 333 record holders and approximately 6,318
stockholders whose stock is held by a banking broker or other nominee.
Digi has never declared or paid any cash dividends on its capital
stock. Digi currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future.
25
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Digi's Common Stock as of December 11, 1998 and as adjusted to
reflect the sale of shares offered by this prospectus by each selling
stockholder.
<TABLE>
<CAPTION>
SHARES
OWNED PRIOR SHARES OWNED
TO OFFERING SHARES OFFERED AFTER OFFERING
------------- --------------- -----------------------
NAME NUMBER NUMBER NUMBER PERCENT
---- ------ ------ ------ -------
<S> <C> <C> <C> <C>
VEW Energie AG 102,939 102,939 0 *
Attention: Dr. Jens Huffer
Abteilung HRE
Rheinlanddamm 24
Dortmund, Germany 44047
James D. Norrod 87,920 87,920 0 *
16 Mountain Laurels Road
Suite 301
Nashua, New Hampshire 03062
Prof. Dr. Klaus Rosenthal(1) 85,751(2) 60,751 25,000(2) *
c/o ITK Telekommunikation AG
Joseph-von-Fraunhofer Str. 23
Dortmund, Germany 44227
Dr. Wolfgang Schroder(1) 85,7512 60,751 25,000(2) *
c/o ITK Telekommunikation AG
Joseph-von-Fraunhofer Str. 23
Dortmund, Germany 44227
Prof. Dr. Firoz Kaderali 60,751 60,751 0 *
Auf der Emat 137
Iserlohn, Germany 58638
Prof. Dr. Reinhard Rock 60,751 60,751 0 *
Beethovenstr. 2
42781 Haan
Germany
Prof. Dr. Horst Strunz 60,751 60,751 0 *
Bergstr. 38
Rosrath, Germany 51503
Cisco Systems, Inc. 54,747 54,747 0 *
c/o Van Dang
255 West Tasmon Drive
Building J
San Jose, California 95134
</TABLE>
26
<PAGE>
<TABLE>
SHARES
OWNED PRIOR SHARES OWNED
TO OFFERING SHARES OFFERED AFTER OFFERING
------------- --------------- -----------------------
NAME NUMBER NUMBER NUMBER PERCENT
---- ------ ------ ------ -------
<S> <C> <C> <C> <C>
J.F. Shea Company, Inc. 12,701 12,701 0 *
655 Brea Canyon Road
Walnut, CA 91789-0489
GE Pension Trust 8,692 8,692 0 *
3003 Summer Street
Stamford, CT 06905
Metropolitan Life Insurance Company 2,542 2,542 0 *
334 Madison Avenue
Covent Station, NJ 07961-0633
Stephen B. Schwahn 2,173 2,173 0 *
1200 On the Mall, Apartment #207
Minneapolis, MN 55403
Robert G. Pagano 2,120 2,120 0 *
24 Swart Terrace
Nashua, New Hampshire 03060
Gregory P. Sweenie 1,802 1,802 0 *
15 Ox Bow Lane
Groton, Massachusetts 01450
Michael K. Ballard 1,590 1,590 0 *
93210 Fox Meadow Lane
Potomac, Maryland 20854
Jack K. Ahrens, II 1,010 1,010 0 *
c/o Pathfinder Venture Capital Fund
7300 Metro Blvd., Suite 585
Minneapolis, MN 55439
Threshold Ventures, Inc. 1,800 1,800 0 *
7580 E. Gray Road, Suite 203
Scottsdale, AZ 85260-3408
Uwe Sauerbrey(3) 994(4) 169 825(4) *
Oberste Kamp 5
Dortmund, Germany 44369
Russell Davies 636 636 0 *
1, New Cottages
Collingbourne Ducis
Nr Marlborough, Wiltshire
SN8 3DY
</TABLE>
27
<PAGE>
<TABLE>
SHARES
OWNED PRIOR SHARES OWNED
TO OFFERING SHARES OFFERED AFTER OFFERING
------------- --------------- -----------------------
NAME NUMBER NUMBER NUMBER PERCENT
---- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Norbert Szyperski 636 636 0 *
In den Auen 6
Forsbach, Germany 51503
James Edelmann and Barbara Edelmann, 437 437 0 *
JTWROS
45 Oldfield Drive
Sherborn, Massachusetts 01770
William J. Schnoor, Jr. 424 424 0 *
194 Eliot Street
Chestnust Hill, Massachusetts 02467
Penny Newman 318 318 0 *
Hill View, Star Lane, Knowl Hill
Maidenhead, Berkshires
RG10 9XY
United Kingdom
Matthias Markert(3) 608(5) 127 481(5) *
Albringhauser Str. 201
Wetter, Germany
58300
Mark Armitage 56 56 0 *
36 St. Margarets Mead
Marlborough, Wiltshire
SN8 4BA
United Kingdom
Jan Elliger(3) 111(6) 24 876 *
Ortsmuhle 3
Dortmund, Germany 44227
Frank te Heesen(3) 876 24 876 *
Mont-Cenis-Str. 109b
Herne, Germany 44627
Martin Twickler(7) 818 44 378 *
St. Wolfgans Platz 9f
Munchen, Germany 81669
Heike Isringhaus(3) 559 3 529 *
Wesselstr. 24
Castrop-Rauxel, Germany
</TABLE>
28
<PAGE>
<TABLE>
SHARES
OWNED PRIOR SHARES OWNED
TO OFFERING SHARES OFFERED AFTER OFFERING
------------- --------------- -----------------------
NAME NUMBER NUMBER NUMBER PERCENT
---- ------ ------ ------ -------
<S> <C> <C> <C> <C>
K.S. Kamal 47 47 0 *
11 Vandiemans Lane
Littlemore, Oxford
United Kingdom
OX4 3QA
Ralf Bonenkamp(3) 451(10) 9 361(10) *
In der Oeverscheidt 129
Dortmund, Germany 44149
Ulrich Findeisen(3) 451(10) 9 361(10) *
Ostenbergstr. 26
Dortmund, Germany 44225
Frank Langenbeck(3) 451(10) 9 361(10) *
Huestr. 151
Essen, Germany 45309
Klaus Peters(3) 451(10) 9 361(10) *
Sonnenplatz 6
Dortmund, Germany 44137
Petra Langjahr 3 3 0 *
Hellerstr. 38
Dortmund, Germany 44229
- - -----------------
</TABLE>
(1) Director and employee of ITK International, a wholly-owned subsidiary of
Digi, until December 31, 1998 at which time the selling stockholder will
become a consultant to ITK International.
(2) Includes options to purchase 25,000 shares of Digi's Common Stock.
(3) Employee of ITK International, a wholly-owned subsidiary of Digi.
(4) Includes options to purchase 825 shares of Digi's Common Stock.
(5) Includes options to purchase 481 shares of Digi's Common Stock.
(6) Includes options to purchase 87 shares of Digi's Common Stock.
(7) Advisor to ITK International, a wholly-owned subsidiary of Digi.
(8) Includes options to purchase 37 shares of Digi's Common Stock.
(9) Includes options to purchase 52 shares of Digi's Common Stock.
(10) Includes options to purchase 36 shares of Digi's Common Stock.
* Represents beneficial ownership of less than one percent of Digi's outstanding
Common Stock.
DESCRIPTION OF CAPITAL STOCK
At the date hereof, the authorized capital stock of Digi consists of
60,000,000 shares of Common Stock, par value $.01 per share, of which 14,588,995
shares were outstanding on December 11, 1998, and 2,000,000 shares of Preferred
Stock, par value $.01 per share, none of which is outstanding.
29
<PAGE>
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share on all
matters voted upon by Digi's stockholders. Common stockholders have no
preemptive or other rights to subscribe for additional shares or other
securities of Digi. There are no cumulative voting rights, and, accordingly,
holders of more than 50 percent of the outstanding shares of Common Stock will
be able to elect all of the members of the Board of Directors.
Common stockholders are entitled to dividends in such amounts as may
be declared by the Board of Directors from time to time from funds legally
available therefor, but Digi has no present intention of paying any dividends.
See "Price Range of Common Stock and Dividend Policy." In the event of
liquidation, the common stockholders are entitled to share ratably in any of
Digi's assets remaining after payment in full of creditors and preferred
stockholders to the extent of any liquidation preferences.
The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, pursuant to Digi's Restated
Certificate of Incorporation, to issue one or more series of Preferred Stock
with respect to which the Board, without stockholder approval, may determine
voting, conversion and other rights which could adversely affect the rights of
holders of Common Stock. The rights of the holders of the Common Stock would
generally be subject to the prior rights of the Preferred Stock with respect
to dividends, liquidation preferences and other matters. Among other things,
Preferred Stock could be issued by Digi to raise capital or to finance
acquisitions. The issuance of Preferred Stock under certain circumstances
could have the effect of delaying or preventing a change of control of Digi.
Digi has no present plans to issue any shares of Preferred Stock.
SHARE RIGHTS PLAN
Pursuant to the Share Rights Agreement, dated as of June 10, 1998,
between Digi and Norwest Bank Minnesota, National Association, Digi distributed,
as a dividend, one preferred share purchase right for each share of Common Stock
outstanding as of June 30, 1998. Each Right entitles the registered holder to
purchase from Digi one one-hundredth of a Digi Series A Junior Participating
Preferred Share, $.01 per share par value, at a price of $115 per one
one-hundredth of a Preferred Share, subject to adjustment.
Until the Distribution Date, as described below, (i) the Rights will be
evidenced by Common Stock certificates and will be transferred with and only
with the shares of Common Stock, (ii) new Common Stock certificates issued after
the Record Date upon transfer or new issuance of shares of Common Stock will
contain a notation incorporating the Rights Agreement by reference, and (iii)
the surrender for transfer of any Common Stock certificate, even without such
notation or a copy of the Summary of Rights attached thereto, will also
constitute the transfer of the Rights associated with the shares of Common Stock
represented by such certificate. As promptly as practicable following the
Distribution Date, separate certificates evidencing the Rights will be mailed to
holders of record of the shares of Common Stock as of the close of business on
the Distribution Date and such separate Rights Certificates alone will evidence
the Rights. The Rights will separate from the shares of Common Stock and a
Distribution Date for the Rights will occur upon the earlier of: (i) the close
of business on the fifteenth day following a public announcement that a person
or group of affiliated or associated persons has become an "Acquiring Person"
(i.e. has become, subject to certain exceptions, the beneficial owner of 20% or
more of the outstanding shares of Common Stock), or (ii) the close of business
on the fifteenth day following the commencement or public announcement of a
tender offer or exchange offer the consummation of which would result in a
person or group of affiliated or associated persons becoming, subject to certain
exceptions, the beneficial owner of 20% or more of the outstanding shares of
Common Stock (or such later date as may be determined by the Board of Directors
prior to a person or group of affiliated or associated persons becoming an
Acquiring Person). The Rights are not exercisable until the Distribution Date.
The Rights will expire on June 30, 2008, unless extended or earlier redeemed or
exchanged by Digi as described below.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person (unless such person first becomes an
Acquiring Person pursuant to a tender offer or an exchange offer for all
30
<PAGE>
outstanding shares of Common Stock at a price and on terms determined by the
Board of Directors (prior to any change in control of the Board of Directors) to
be fair to stockholders and otherwise in the best interests of Digi and its
stockholders and which the Board of Directors recommends to the stockholders),
proper provision shall be made so that each holder of a Right, other than Rights
that are or were beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
thereof at the then current exercise price of the Right that number of shares of
Common Stock having a market value of two times the exercise price of the Right,
subject to certain possible adjustments.
In the event that after the Distribution Date or within 15 days prior
thereto, Digi is acquired in certain mergers or other business combination
transactions (other than a transaction for at least the same per-share
consideration with a person who acquired shares of Common Stock through a
tender offer or exchange offer for all outstanding shares of Common Stock
approved by the Board of Directors in accordance with the preceding paragraph
or any wholly owned subsidiary of such person) or 50% or more of the assets or
earning power of Digi and its subsidiaries (taken as a whole) are sold after
the Distribution Date or within 15 days prior thereto, in one or a series of
related transactions, each holder of a Right (other than Rights which have
become void under the terms of the Rights Agreement) will thereafter have the
right to receive, upon exercise thereof at the then current exercise price of
the Right, that number of common shares of the acquiring company (or, in
certain cases, one of its affiliates) having a market value of two times the
exercise price of the Right.
In certain events specified in the Rights Agreement, Digi is permitted
to temporarily suspend the exercisability of the Rights.
At any time after a person or group of affiliated or associated persons
becomes an Acquiring Person (subject to certain exceptions) and prior to the
acquisition by a person or group of affiliated or associated persons of 50% or
more of the outstanding shares of Common Stock, the Board of Directors may (if
there has been no change in control of the Board of Directors) exchange all or
part of the Rights (other than Rights which have become void under the terms of
the Rights Agreement) for shares of Common Stock or equivalent securities at an
exchange ratio per Right equal to the result obtained by dividing the exercise
price of a Right by the current per share market price of the shares of Common
Stock, subject to adjustment.
At any time prior to the close of business on the twentieth day after
a public announcement that a person or group of affiliated or associated
persons has become an Acquiring Person, the Board of Directors may redeem the
Rights in whole, but not in part, at a price of $.001 per Right, subject to
adjustment, payable in cash; provided, however, that such redemption may occur
after any person becomes an Acquiring Person only if there has not been a
change in control of the Board of Directors. The period of time during which
the Rights may be redeemed may be extended by the Board of Directors, if no
such change of control has occurred or if no person has become an Acquiring
Person. The redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors, in its sole
discretion may establish.
The terms of the Rights may be amended by the Board of Directors,
subject to certain limitations after the Distribution Date, without the
consent of the holders of the Rights, including an amendment prior to the date
a person or group of affiliated or associated persons becomes an Acquiring
Person to lower the 20% threshold for exercisability of the Rights to not less
that the greater of (i) the sum of .001% and the largest percentage of the
outstanding shares of Common Stock then known by Digi to be beneficially owned
by any person or group of affiliated or associated persons (subject to certain
exceptions) or (ii) 10%.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Digi, including, without limitation, the right to
vote or to receive dividends.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Digi's Restated Certificate of Incorporation and Amended and Restated
By-Laws contain certain provisions, described below, that could delay, defer
or prevent a change in control of Digi if the Board determines that such a
change in control is not in the best interests of Digi and its stockholders,
and could have the effect of making it more difficult to acquire Digi or
remove incumbent management.
31
<PAGE>
CLASSIFIED BOARD. Pursuant to the Restated Certificate of
Incorporation, directors of Digi are divided into three classes and elected to
serve staggered three-year terms. Under Delaware law, directors serving
staggered terms can be removed from office only for cause.
ACTION BY WRITTEN CONSENT. Digi's Restated Certificate of
Incorporation provides that all stockholder action by written consent must be
unanimous.
SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of stockholders may
be called upon for any purpose by the Chairman of the Board of Directors or the
President of Digi, and must be called by either such officer upon the written
request of a majority of the Board or a duly authorized committee of the Board.
Stockholders do not have the power to call a special meeting.
NOMINATION PROCEDURES. The Amended and Restated By-Laws establish
procedures, including advance notice procedures, with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors. In general, notice must be received by Digi not less than
60 days prior to meetings of stockholders of Digi.
VACANCIES. A vacancy on the Board of Directors occurring for any
reason, including vacancies due to removal for cause, death, resignation or a
newly created directorship, may be filled for the remainder of the term by the
stockholders or by the Board by vote of a majority of the remaining directors,
though less than a quorum.
AMENDMENT OF BY-LAWS. Digi's Restated Certificate of Incorporation
gives the Board of Directors of Digi the power to adopt, amend and repeal Digi's
Amended and Restated By-Laws. This authority gives the Board of Directors
flexibility by enabling it to amend the Amended and Restated By-Laws in response
to changed circumstances without waiting for the next annual meeting of
stockholders or incurring the delay and expense associated with calling and
holding a special meeting of stockholders. Stockholders of Digi have the power
to adopt, amend or repeal the Amended and Restated By-Laws of Digi, but only
with the affirmative vote of at least 80% of the outstanding voting stock.
LIMITATIONS OF LIABILITY. Digi's Restated Certificate of Incorporation
limits the liability of directors, in their capacity as directors, to the full
extent permitted by Delaware law. It provides that directors shall not be liable
to Digi and its stockholders for monetary damages for a breach of their
fiduciary duty, except (i) for any breach to the director's duty of loyalty to
Digi or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) for
dividends, stock repurchases and other distributions made in violation of
Delaware law, and (iv) for any transaction from which the director derived an
improper personal benefit. These provisions do not affect the availability of
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty, although, as a practical matter, equitable
relief may not be available. The above provisions also may not limit director
liability for violations of, or relieve them from the necessity of complying
with, federal securities laws.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Generally, the
affirmative vote of the holders of a majority of the outstanding shares of
Digi's voting stock is necessary to authorize any agreement for consolidation,
merger or sale or other disposition of all or substantially all of Digi's
assets. However, Digi's Restated Certificate of Incorporation provides that if
such transactions involve a beneficial holder of 20% or more of Digi's
outstanding voting stock or a liquidation or dissolution of Digi proposed by
such a substantial stockholder, or in the case of certain other specified
transactions involving such a substantial stockholder, whether or not they
otherwise require a stockholder vote, the affirmative vote of the holders of
at least 80% of the outstanding shares of voting stock of Digi is required to
authorize such transactions. The special voting requirements do not apply if
the transaction is first approved by a majority of the directors (other than
such 20% stockholder or related parties) who were members of the Board of
Directors prior to the time that the substantial stockholder acquired such
stock holdings, or whose election or nomination for election to the Board was
approved by a majority of such directors, or if the consideration required to
be paid in such transaction meets certain fair price criteria and is either
cash or the same type of consideration used by such substantial stockholder in
acquiring beneficial ownership of its largest portion of Digi's capital stock.
A vote of at least 80% of the outstanding shares of Digi's voting stock is
required to amend this special voting provision. Other amendments to Digi's
Restated Certificate of Incorporation require an affirmative vote of the
holders of a majority of the outstanding shares entitled to vote thereon.
32
<PAGE>
The requirement of a supermajority vote to approve certain corporate
transactions and certain amendments to Digi's Restated Certificate of
Incorporation and Amended and Restated By-Laws could enable a minority of Digi's
stockholders to exercise veto powers over such transactions and amendments.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of Digi is
Norwest Bank Minnesota, N.A.
PLAN OF DISTRIBUTION
The distribution of the shares offered by the selling stockholders may
be effected from time to time in one or more transactions on:
the Nasdaq Stock Market or otherwise;
in the over-the-counter market;
in negotiated transactions;
through the writing of options on shares (whether the options
are listed on an options exchange or otherwise); or
by a combination of these methods of sale.
The sales may be at market prices prevailing at the time of sale, at
prices related to those prevailing market prices, or at negotiated prices. The
selling stockholders may effect these transactions by selling shares through
broker-dealers, and those broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling stockholders
and/or purchasers of shares from whom they may act as agent (which compensation
may be in excess of customary commissions). The selling stockholders and
broker-dealers that participate with the selling stockholders in the
distribution of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933, and any commission received by them
and any profit on the resale of shares may be deemed to be underwriting
compensation.
Digi will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
stockholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
EXPERTS
The consolidated balance sheets of Digi International Inc. and its
subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 1998 and the consolidated
balance sheets of ITK International, Inc. and its subsidiaries as of June 30,
1998 and 1997, and the related consolidated statements of operations, cash
flows and stockholders' equity for each of the three years in the period
ended June 30, 1998, included in this prospectus, have been included herein
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given upon their authority as experts in accounting and
auditing.
The financial statements of AetherWorks Corporation for the years
ended September 30, 1997 and 1996, and the period from February 24, 1993
(inception) to September 30, 1997, included in this prospectus, have been
audited by Ernst & Young LLP, as set forth in their report accompanying such
financial statements, and are included herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
33
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Digi files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document Digi files at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. You can also obtain copies of these documents by writing to
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference facilities. Digi's SEC filings are also available to the public
from the Digi web site at http://dgii.com or at the SEC's web site at
http://www.sec.gov.
This prospectus also forms part of a Registration Statement on Form S-1
which Digi has filed with the SEC. This prospectus does not contain all of the
information included in the Registration Statement. Certain information is
omitted and you should refer to the Registration Statement and its exhibits. You
may review a copy of the Registration Statement at the SEC's public reference
rooms or at the web sites discussed above.
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF DIGI
<S> <C>
Report of Independent Accountants............................................................. F-2
Consolidated Statement of Operations for the fiscal years ended
September 30, 1998, 1997 and 1996......................................................... F-3
Consolidated Balance Sheets as of September 30, 1998 and 1997................................. F-4
Consolidated Statement of Cash Flows for the fiscal years ended
September 30, 1998, 1997 and 1996......................................................... F-5
Consolidated Statement of Stockholders' Equity for the fiscal years ended
September 30, 1998, 1997 and 1996......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
Report of Ernst & Young LLP, Independent Auditors for AetherWorks Corporation................. F-16
FINANCIAL STATEMENTS OF ITK INTERNATIONAL
Report of Independent Accountants............................................................. F-17
Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996........ F-18
Consolidated Balance Sheets as of June 30, 1998 and 1997...................................... F-19
Consolidated Statements of Cash Flows for the Years Ended June 30,1998, 1997 and 1996......... F-20
Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended
June 30, 1998, 1997 and 1996.............................................................. F-21
Notes to Consolidated Financial Statements.................................................... F-22
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENT OF DIGI AND ITK
Unaudited Pro Forma Condensed Statement of Operations for the Year Ended September 30, 1998... F-34
Notes to Unaudited Pro Forma Condensed Statement of Operations................................ F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF DIGI INTERNATIONAL INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and stockholders'
equity present fairly, in all material respects, the financial position of Digi
International Inc. and subsidiaries (the Company), at September 30, 1998 and
1997 and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. As discussed in Note 5, the Company has recorded its investment in
AetherWorks Corporation (AetherWorks) on the equity method; the 1997 and 1996
consolidated statements of operations include AetherWorks' net operating losses
for the years ended September 30, 1997 and 1996 of $5,764,201 and $3,623,776,
respectively. We did not audit the financial statements of AetherWorks, which
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for AetherWorks'
net operating losses, is based solely on the report of other auditors.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 11, 1998
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 1997 1996
- - --------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 182,931,670 $ 165,597,937 $ 193,150,898
Cost of sales 88,539,156 85,482,536 93,108,624
------------- ------------- -------------
Gross margin 94,392,514 80,115,401 100,042,274
Operating expenses:
Sales and marketing 37,288,027 36,671,271 43,449,864
Research and development 16,963,410 17,978,135 21,279,551
General and administrative 16,003,146 19,324,777 15,215,512
Acquired in-process research and development 39,200,000
Restructuring 1,020,000 10,471,482
------------- ------------- -------------
Total operating expenses 110,474,583 84,445,665 79,944,927
------------- ------------- -------------
Operating (loss) income (16,082,069) (4,330,264) 20,097,347
Other income, net 1,818,286 153,809 331,789
AetherWorks Corporation net operating loss (5,764,201) (3,623,776)
AetherWorks Corporation gain (write-off)) 1,350,000 (5,758,548)
------------- ------------- -------------
(Loss) income before income taxes (12,913,783) (15,699,204) 16,805,360
Provision for income taxes 9,745,088 91,640 7,505,140
------------- ------------- -------------
Net (loss) income $ (22,658,871) $ (15,790,844) $ 9,300,220
------------- ------------- -------------
Net (loss) income per common share, basic $ (1.65) $ (1.18) $ 0.70
------------- ------------- -------------
------------- ------------- -------------
Net (loss) income per common share,
assuming dilution $ (1.65) $ (1.18) $ 0.68
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares, basic 13,729,765 13,393,408 13,323,564
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares,
assuming dilution 13,729,765 13,393,408 13,583,468
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 1997
- - --------------------------------------------------------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,355,368 $ 31,329,666
Accounts receivable, net 48,549,145 25,658,522
Inventories, net 27,365,924 23,683,312
Other 6,139,941 4,147,942
------------- -------------
Total current assets 92,410,378 84,819,442
Property, equipment and improvements, net 33,990,923 23,617,696
Intangible assets, net 31,354,483 6,876,597
Other 2,978,883 2,997,601
------------- -------------
Total assets $ 160,734,667 $ 118,311,336
------------- -------------
------------- -------------
LIABILITES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit agreements $ 10,707,000
Current portion of long-term debt 264,025
Accounts payable 15,255,175 $ 10,118,921
Income taxes payable 3,797,588 1,771,986
Accrued expenses:
Advertising 2,651,742 2,847,672
Compensation 6,776,292 2,388,468
AetherWorks Corporation funding obligation 3,350,000
Other 9,808,835 2,363,258
Restructuring reserves 5,254,000
------------- -------------
Total current liabilities 54,514,657 22,840,305
------------- -------------
Long-term debt 11,124,446
Other 275,000
------------- -------------
Total liabilities 65,914,103 22,840,305
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value: 2,000,000
shares authorized; none outstanding
Common stock, $0.01 par value; 60,000,000
shares authorized; 15,790,975 and 14,727,256
shares issued 157,910 147,273
Additional paid-in capital 68,695,448 44,403,102
Retained earnings 52,455,031 75,113,902
Cumulative foreign currency translation
adjustment (815,809)
------------- -------------
120,492,580 119,664,277
Unearned stock compensation (3,777,204) (1,787,658)
Treasury stock, at cost, 1,247,094 and
1,269,492 shares (21,894,812) (22,405,588)
------------- -------------
Total stockholders' equity 94,820,564 95,471,031
------------- -------------
Total liabilities and stockholders' equity $ 160,734,667 $ 118,311,336
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998 1997 1996
- - ----------------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net (loss ) income $ (22,658,871) $(15,790,844) $ 9,300,220
Adjustments to reconcile net (loss) income to
cash provided by (used in) operating activities:
Acquired in-process research and development 39,200,000
Restructuring 1,020,000 9,211,713
Depreciation of property and equipment 5,174,725 5,587,132 5,017,735
Amortization of intangibles 2,540,480 1,114,023 1,320,457
AetherWorks Corporation net loss 5,764,201 3,623,776
AetherWorks Corporation (gain) write-off (1,350,000) 5,758,548
Loss on sale of fixed assets 159,498 760,555 238,222
Provision for losses on accounts receivable 708,992 1,933,251 262,164
Provision for inventory obsolescence 3,414,270 2,910,988 1,455,895
Deferred income taxes (790,544) (1,787,933) (393,153)
Stock compensation 1,012,440 244,569 204,973
Changes in operating assets and liabilities:
Accounts receivable (17,687,833) 15,283,125 (11,176,126)
Inventories (569,839) 3,780,241 (7,808,974)
Income taxes payable (receivable) 883,900 3,447,612 (1,545,461)
Other assets (3,226,694) 713,772 (1,953,252)
Accounts payable 279,238 (2,430,817) 443,223
Accrued expenses 2,279,156 153,448 (664,452)
------------- ------------- -----------
Total adjustments 33,047,789 52,444,428 (10,974,973)
------------- ------------- -----------
Net cash provided by (used in) operating
activities 10,388,918 36,653,584 (1,674,753)
------------- ------------- -----------
Investing activities:
Purchase of property and equipment and certain
other intangible assets (5,816,163) (8,841,473) (12,902,436)
Proceeds from sale of fixed assets 1,133,197
Proceeds from held-to-maturity marketable securities 20,640,962
Proceeds from available-for-sale marketable securities 13,060,000
Purchase of held-to-maturity marketable securities (482,187)
Purchase of available-for-sale marketable securities (5,250,000)
Business acquisitions, net of cash acquired (27,356,560)
Investment in AetherWorks Corporation (2,000,000) (6,500,000) (5,296,525)
------------- ------------- -----------
Net cash (used in) provided by investing activities (35,172,723) (15,341,473) 10,903,011
------------- ------------- -----------
Financing activities:
Payments on long-term debt (73,000)
Proceeds from the issuance of long-term debt 2,064,865
Purchase of treasury stock (153,750) (7,249,325)
Stock option transactions, net 2,310,572 539,838 1,659,838
Employee stock purchase plan transactions, net 471,629 534,327 200,888
------------- ------------- -----------
Net cash provided by (used in) financing activities 4,620,316 1,074,165 (5,388,599)
------------- ------------- -----------
Effect of exchange rates changes on cash and
cash equivalents (810,809)
------------- ------------- -----------
Net (decrease) increase in cash and cash equivalents (20,974,298) 22,386,276 3,839,659
Cash and cash equivalents, beginning of period $ 31,329,666 $ 8,943,390 $ 5,103,731
------------- ------------- -----------
Cash and cash equivalents, end of period $ 10,355,368 $ 31,329,666 $ 8,943,390
------------- ------------- -----------
------------- ------------- -----------
Supplemental Cash Flows Information:
Interest paid $ 224,730 $ 208,000 $ 224,730
Income taxes paid $ 7,463,578 $ 238,439 $ 8,944,627
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
SHARES PAR VALUE SHARES VALUE PAID-IN-CAPITAL
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1995 14,562,958 $145,630 1,032,729 $(16,631,542) $41,306,320
Purchase of treasury stock, at cost 315,000 (7,249,325)
Employee stock purchase issuances (8,835) 200,888
Issuance of stock options at below
market prices 12,500
Stock compensation
Issuance of stock upon exercise
of stock options 114,192 1,142 1,159,569
Tax benefit realized upon exercise
of stock options 499,127
Forfeiture of stock options (110,758)
Net income
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 14,677,150 146,772 1,338,894 (23,679,979) 42,866,758
Employee Stock Purchase issuances (69,402) 1,274,391 (740,064)
Issuance of stock options at below
market prices 1,892,015
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 50,106 501 379,720
Tax benefit realized upon exercise
of stock options 159,617
Forfeiture of stock options (154,944)
Net loss
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 14,727,256 147,273 1,269,492 (22,405,588) 44,403,102
Issuance of stock for acquisitions 775,837 7,758 17,870,562
Purchase of treasury stock, at cost 15,000 (153,750)
Employee Stock Purchase issuances (37,398) 664,526 (192,897)
Issuance of stock options at below
market prices 3,171,305
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 287,882 2,879 2,307,694
Tax benefit realized upon exercise
of stock options 1,305,001
Forfeiture of stock options (169,319)
Foreign currency translation adjustment
Net loss
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1998 15,790,975 $157,910 1,247,094 $(21,894,812) $68,695,448
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
<CAPTION>
UNEARNED TOTAL
RETAINED STOCK CUMULATIVE STOCKHOLDERS'
EARNINGS COMPENSATION TRANSLATION EQUITY
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, September 30, 1995 $81,604,526 $(598,387) $105,826,547
Purchase of treasury stock, at cost (7,249,325)
Employee stock purchase issuances 200,888
Issuance of stock options at below
market prices (12,500)
Stock compensation 204,973 204,973
Issuance of stock upon exercise
of stock options 1,160,711
Tax benefit realized upon exercise
of stock options 499,127
Forfeiture of stock options 110,758
Net income 9,300,220 9,300,220
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 90,904,746 (295,156) 109,943,141
Employee Stock Purchase issuances 534,327
Issuance of stock options at below
market prices (1,892,015)
Stock compensation 244,569 244,569
Issuance of stock upon exercise of
stock options, net of withholding 380,221
Tax benefit realized upon exercise
of stock options 159,617
Forfeiture of stock options 154,944
Net loss (15,790,844) (15,790,844)
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 75,113,902 (1,787,658) 95,471,031
Issuance of stock for acquisitions 17,878,320
Purchase of treasury stock, at cost (153,750)
Employee Stock Purchase issuances 471,629
Issuance of stock options at below
market prices (3,171,305)
Stock compensation 1,012,440 1,012,440
Issuance of stock upon exercise of
stock options, net of withholding 2,310,573
Tax benefit realized upon exercise
of stock options 1,305,001
Forfeiture of stock options 169,319
Foreign currency translation adjustment $(815,809) (815,809)
Net loss (22,658,871) (22,658,871)
- - -----------------------------------------------------------------------------------------------------------------
Balances, September 30, 1998 $52,455,031 $(3,777,204) $(815,809) $94,820,564
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi International is a leading worldwide provider of data communications
products for open systems, server-based remote access, Internet telephony, and
local area network (LAN) applications. Digi's communications products support a
broad range of server platforms and network operating systems that enable people
to access information.
Digi's products are marketed through a global network of distributors,
system integrators, original equipment manufacturers (OEMs), as well as
thousands of value-added resellers (VARs).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, while those
having original maturities in excess of three months are classified as
marketable securities and generally consist of U.S. Government and U.S.
Government-backed obligations and high-grade commercial paper. Marketable
securities classified as held to maturity are carried at amortized cost.
Marketable securities classified as trading or available-for-sale are recorded
at market value. The Company had no marketable securities as of September 30,
1998 or 1997.
REVENUE RECOGNITION
Sales are recognized to distributors, VARs, and end-users at the date of
shipment. Estimated warranty costs and customer returns are recorded at the time
of sale.
The Company offers rebates to authorized domestic and international
distributors and authorized resellers. The rebates are incurred based on the
level of sales to the respective distributors and resellers, and are charged to
operations in the same period as the corresponding sales.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost
determined on the first-in, first-out method. Fair market value for raw
materials is based on replacement cost and for other inventory classifications
based on net realizable value. Appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
provided by charges to operations using the straight-line method based on
estimated useful lives, ranging from three to 39 years.
Expenditures for maintenance and repairs are charged to operations as
incurred, while major renewals and betterments are capitalized. The assets and
related accumulated depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.
The Company's cost of business process reengineering activities, whether
done internally or by third parties, is expensed as incurred.
INTANGIBLE ASSETS
Purchased technology, license agreements, covenants not to compete and
other intangible assets are recorded at cost. Goodwill represents the excess of
cost over the fair value of identifiable assets acquired and is being amortized
on a straight-line basis over periods ranging from five to 15 years. All other
intangible assets are amortized on a straight-line basis over their estimated
useful lives of one to seven years.
The Company periodically, at least quarterly, analyzes intangible assets
for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating cash flows on a basis consistent with generally accepted accounting
principles.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven marketability
of the product are established. Costs otherwise capitalized after such point
also are expensed because they are insignificant.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
Tax credits are accounted for under the flow-through method, which
recognizes the benefit in the year in which the credit is utilized.
INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share has been calculated for all periods 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
F-7
<PAGE>
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. The Company's only common stock equivalents are
those that result from dilutive common stock options. The calculation of diluted
earnings per common share for 1996 includes 259,904 of such common stock
equivalents. The calculation of diluted loss per common share for 1998 and 1997
excludes 835,670 and 236,165 equivalent shares, respectively, of the Company's
common stock attributable to common stock options because their effect would be
antidilutive.
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the Company's
international subsidiaries generally are measured using local currencies as
the functional currency. Assets and liabilities of these operations are
translated at the exchange rates in effect at each fiscal year-end.
Statements of operations accounts are translated at the average rates of
exchange prevailing during the year. Translation adjustments arising from the
use of differing exchange rates from period to period are included in the
cumulative translation account in stockholders' equity.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to the
determination of the estimated fair value and lives of acquired in-process
research and development and other acquired intangible assets, allowances for
obsolete inventories, uncollectable accounts receivable and sales returns and
accruals for warranty costs.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
statement establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. This standard will require that an enterprise display
an amount representing total comprehensive income for the period. Statement No.
130 will be initially effective for the first quarter of the Company's fiscal
year ending September 30, 1999. Adoption of Statement of Financial Accounting
Standards No. 130 will not impact the results of operations or the financial
position of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes Statement No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that those
enterprises report selected segment information in interim financial reports to
stockholders. Operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. Statement No. 131 will be effective for the Company beginning with
the first quarter of the Company's fiscal year ending September 30, 1999.
Management has not yet completed its analysis of the effects of this Statement
on its financial reporting.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement No. 133 will be effective for the Company
beginning with the Company's fiscal year ending September 30, 2000. As the
Company presently has no derivative instruments and is not involved in hedging
activity, the Company does not expect the adoption of Statement No. 133 to have
an impact on the results of operations or the financial position of the Company.
In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2), was issued. SOP 97-2 provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. SOP 97-2 will become effective for the Company's
fiscal year ending September 30, 1999. The adoption of SOP 97-2 is not expected
to have a significant impact on the results of operations or financial position
of the Company.
2 ACQUISITIONS
In July 1998, the Company acquired all of the outstanding common stock of
ITK International, Inc. (ITK). The transaction was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed.
Components of the purchase consideration, including related transaction
costs, consist of $14,767,154 in cash, the Company's common stock with a market
value of $11,671,229 and $1,276,436 of replacement stock options issued by the
Company to ITK option holders. The cash and the Company's common stock were
issued in exchange for outstanding shares of ITK's common stock and the
Company's stock options were issued in exchange for the outstanding ITK common
stock options. The value of the Company's common stock issued was based on a per
share value of approximately $20.25, which was the market value of the Company's
common
F-8
<PAGE>
stock on the date the Company and ITK agreed to the terms of the purchase. The
value of the Company's common stock options is based on the excess of the market
value of the Company's common stock over the option exercise prices on the date
that these options were granted to ITK employees. The purchase price will
increase by $963,323 if the unvested portion of stock options granted to the ITK
employees vest. Such amount has been recorded as unearned stock compensation.
Valuation of the intangible assets acquired was determined by an
independent appraisal company and consists of purchased in-process research and
development (IPR&D), proven technology and an assembled workforce. The purchase
price exceeded the estimated fair value of tangible and intangible assets
acquired by $7,130,253, which was recorded as goodwill.
The table below is an analysis of the purchase price allocation.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
<S> <C>
Cash and fair value of Company's common
stock and common stock options issued $ 26,276,436
Direct acquisition costs 1,438,383
ITK liabilities assumed, including estimated
restructuring and integration costs of $3,484,000 39,784,248
---------------
Total purchase price 67,499,067
Estimated fair value of tangible assets acquired 21,668,814
Estimated fair value of:
IPR&D 26,000,000
Identifiable intangible assets 12,700,000
Goodwill 7,130,253
---------------
$67,499,067
---------------
---------------
</TABLE>
Management, based upon an independent appraisal, estimates that $26,000,000
of the purchase price represents the fair value of purchased IPR&D that had not
yet reached technological feasibility and has no alternative future use. The
amount allocated to IPR&D was expensed as a non-recurring, non-tax-deductible
charge upon consummation of the acquisition. The Company is using the acquired
in-process research and development in the area of Internet protocol telephony,
which will become part of the Company's product line over the next several
years.
The identifiable intangible assets of $12,700,000 included in the purchase
price allocation set forth above are comprised of proven technology with an
appraised fair value of $11,300,000 and an assembled workforce with an appraised
fair value of $1,400,000, which have estimated useful lives of five years and
six years, respectively. The remaining unallocated purchase price represents
goodwill, which is being amortized over seven years.
In July 1998, the Company acquired all of the outstanding common stock of
Central Data Corporation (CDC). The transaction was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed, including
estimated restructuring and integration costs of $750,000.
Components of the purchase consideration, including related transaction
costs, consist of $14,261,965 in cash, the Company's common stock with a market
value of $4,039,475 and $891,184 of replacement stock options issued by the
Company to CDC option holders. The cash and the Company's common stock were
issued in exchange for outstanding shares of CDC's common stock and the
Company's stock options were issued in exchange for the outstanding CDC common
stock options. The value of the Company's common stock issued was based on a per
share value of approximately $20.25, which was the market value of the Company's
common stock on the date the Company and CDC agreed to the terms of the
purchase. The value of the Company's common stock options is based on the excess
of the market value of the Company's common stock over the option exercise
prices on the date that these options were granted to CDC employees. The
purchase price will increase by $1,230,683 if the unvested portion of stock
options granted to the CDC employees vest. Such amount has been recorded as
unearned stock compensation.
Valuation of the intangible assets acquired was determined by an
independent appraisal company and consists of purchased in-process research and
development (IPR&D), proven technology and an assembled workforce. The purchase
price exceeded the estimated fair value of tangible and intangible assets
acquired by $1,034,833, which was recorded as goodwill.
The table below is an analysis of the purchase price allocation.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
<S> <C>
Cash and fair value of Company's common
stock and common stock options issued $ 18,891,184
Direct acquisition costs 301,440
CDC liabilities assumed, including estimated
restructuring and integration costs of $750,000 4,394,617
---------------
Total purchase price 23,587,241
Estimated fair value of tangible assets acquired 5,252,408
Estimated fair value of:
IPR&D 13,200,000
Identifiable intangible assets 4,100,000
Goodwill 1,034,833
---------------
$ 23,587,241
---------------
---------------
</TABLE>
Management, based upon an independent appraisal, estimates that $13,200,000
of the purchase price represents the fair value of purchased IPR&D that had not
yet reached technological feasibility and has no alternative future use. The
amount allocated to IPR&D was expensed as a non-recurring, non-tax-deductible
charge upon consummation of the acquisition. The Company is using the acquired
in-process research and development to create new products based on the
Universal Serial Bus, which will become part of the Company's product line over
the next several years.
The identifiable intangible assets of $4,100,000 included in the purchase
price allocation set forth above are comprised of proven technology with an
appraised fair value of $3,700,000, and an assembled workforce with an appraised
fair value of $400,000,
F-9
<PAGE>
which have estimated useful lives of five years and six years, respectively. The
remaining unallocated purchase price represents goodwill, which is being
amortized over seven years.
The following unaudited pro forma condensed consolidated results of
operations have been prepared as if the acquisitions of ITK and CDC had occurred
as of the beginning of fiscal 1998 and 1997:
<TABLE>
<CAPTION>
YEARS 1998 1997
- - ----------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 220,271,670 $ 194,605,937
Net loss $ (42,794,201) $ (76,316,007)
Net loss per share $ (2.88) $ (5.39)
</TABLE>
The unaudited pro forma condensed consolidated results of operations are
not necessarily indicative of results that would have occurred had the
acquisitions been in effect for the years presented, nor are they necessarily
indicative of the results that will be obtained in the future.
3 RESTRUCTURING
In July 1998, the Company's Board of Directors approved a restructuring
plan related to the consolidation of its offices in Germany and the United
Kingdom. The restructuring plan relates to the elimination of existing
facilities rendered redundant by the acquisition of ITK. The charge of
$1,020,000 ($647,000 net of tax benefits or $0.04 per share), consisted
primarily of existing commitments for rent, contractual payments on office
equipment, write-offs of leasehold improvements and severance costs associated
with eliminating six positions. Management of the Company expects that these
restructuring activities will be completed by the end of the second quarter of
fiscal year 1999.
In connection with the Company's acquisition of ITK, the Company has
implemented a plan of reorganization and accordingly, has recognized a
$3,484,000 restructuring liability which the Company has included as a component
of total liabilities assumed in the acquisitions. The components of the
restructuring liability are as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------
<S> <C>
Personnel costs $ 1,844,000
Facilities closure costs 1,640,000
-------------
$ 3,484,000
-------------
-------------
</TABLE>
Management of the Company expects to complete these restructuring
activities by the end of the third quarter of fiscal year 1999. No amounts of
this liability have been paid as of September 30, 1998.
In connection with the Company's acquisition of CDC, the Company has
implemented a plan of reorganization and accordingly, the Company has recognized
a $750,000 restructuring liability which the Company has included as a component
of total liabilities assumed in the acquisition. The components of the
restructuring liability are as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------
<S> <C>
Personnel costs $ 675,000
Facilities closure costs 75,000
-------------
$ 750,000
-------------
-------------
</TABLE>
Management of the Company expects to complete these restructuring
activities by the end of the second quarter of fiscal year 1999. No amounts of
this liability have been paid as of September 30, 1998.
In February 1997, the Company's Board of Directors approved a restructuring
plan that resulted in a restructuring charge of $10,471,482 ($8,283,681, net of
tax benefits or $0.62 per share). The corporate restructuring plan resulted in
consolidation and reduced costs and expenses. It included the closing of the
Cleveland manufacturing facility, the reduction of selected product lines and
the consolidation and closing of the Torrance, California and Nashville,
Tennessee 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)
severance costs associated with the elimination of 105 positions. These
restructuring activities were completed in fiscal year 1997.
The restructuring charge consisted of $1,259,769 in net cash expenditures
(primarily severance), of which all had been paid as of September 30, 1997, and
$9,211,713 resulting from the write-down of asset carrying values.
4 RECLASSIFICATION OF CERTAIN EXPENSES
Certain costs relating to systems support and communications costs, which
previously were included in general and administrative expenses, have been
reclassified into sales and marketing and research and development expenses for
the years September 30, 1997 and 1996. Such amounts were $2,647,207 in 1997 and,
$2,707,024 in 1996. These reclassifications had no impact on previously reported
operating income, or net income.
5 INVESTMENT IN AETHERWORKS CORPORATION
In May 1998, the Company exchanged its previously 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, for
a non-interest bearing $8,000,000 non-convertible note. As a part of the
exchange, the Company relinquished its rights to any future technology or claims
on any of AetherWorks' intellectual properties. In exchange, the Company has
been released from all of its guarantees of certain lease obligations of
AetherWorks. As a result, the Company has
F-10
<PAGE>
reversed its $1,350,000 accrual established in the fourth quarter of 1997, for
the estimated cost related to its guarantee of such lease obligations and has
included such amount in AetherWorks Corporation gain for the year ended
September 30, 1998.
Due to the significant uncertainty as to its collectibility, the $8,000,000
note, which matures in 2001, has been recorded by the Company as having no
carrying value.
The Company continues to lease to AetherWorks $1,325,000 of computer
equipment under a three-year direct financing lease, expiring in 2000.
For the years 1997 and 1996, the Company has reported its investment in
AetherWorks on the equity method and reported net losses of $5,764,201 and
$3,623,776, respectively. These losses, which exclude $5,758,548 of additional
charges accrued as of September 30, 1997 as described below, represent 100% of
AetherWorks net losses for the two years. The percentage of AetherWorks net
losses included in the Company's Statement of Operations was based upon the
percentage of financial support provided by the Company (versus other investors)
to AetherWorks during such years.
Because of the significant uncertainty of the future of AetherWorks
Corporation, as demonstrated by its lack of ability to generate positive cash
flow, obtain other sources of equity financing and its continued uncertainty in
developing commercially marketable products, the Company decided, as of
September 30, 1997, to write off its remaining investment of $2,408,548 in
AetherWorks, and to accrue and expense its remaining obligation to purchase
$2,000,000 of additional notes. In addition, the Company also accrued $1,350,000
for its obligation resulting from its guarantees of certain AetherWorks' lease
obligations as of September 30, 1997.
The following represents condensed financial information from the audited
statements of AetherWorks for the years ended September 30, 1997 and 1996:
AETHERWORKS CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEET DATA, AS OF SEPTEMBER 30, 1997 1996
- - --------------------------------------------------------------- -----------
<S> <C> <C>
Current assets $ 955,695 $ 104,307
Fixed assets 4,813,266 3,993,731
Total assets 5,578,887 4,407,779
Current liabilities 1,467,836 3,942,032
Notes payable 16,016,747 6,105,467
Stockholders' deficit (11,905,696) (5,639,720)
OPERATING DATA FOR THE YEAR ENDED
SEPTEMBER 30,
Operating expenses:
Research and development $ 3,505,134 $ 2,567,844
General and administrative 2,069,304 999,247
Other 1,169,345 481,007
Eliminations (979,582) (424,322)
------------ ------------
Net loss $(5,764,201) $(3,623,776)
------------ ------------
------------ ------------
</TABLE>
The "eliminations line" item represents interest expense payable to the
Company for interest due on the notes issued by AetherWorks to the Company. This
amount is excluded from the AetherWorks loss as the Company has eliminated the
corresponding interest income from its Consolidated Statements of Operations.
6 SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
1998 1997
- - ---------------------------------------------------------------- ---------------
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable $ 53,618,657 $ 28,225,088
Less reserve for returns and
doubtful accounts 5,069,512 2,566,566
-------------- --------------
$ 48,549,145 $ 25,658,522
-------------- --------------
-------------- --------------
Inventories, net:
Raw materials $ 16,814,657 $ 10,160,377
Work in process 2,922,442 8,704,357
Finished goods 10,735,483 7,011,357
-------------- --------------
30,472,582 25,876,091
Less reserve for obsolescence 3,106,658 2,192,779
-------------- --------------
$ 27,365,924 $ 23,683,313
-------------- --------------
-------------- --------------
Property, equipment and improvements:
Land $ 2,774,300 $ 1,800,000
Buildings 19,912,614 10,522,285
Improvements 554,932 629,240
Equipment 20,859,857 18,377,899
Purchased software 6,968,127 5,186,787
Furniture and fixtures 929,889 927,859
-------------- --------------
51,999,720 37,444,070
Less accumulated depreciation 18,008,797 13,826,374
-------------- --------------
$ 33,990,923 $ 23,617,696
-------------- --------------
-------------- --------------
Intangible assets:
Purchased technology $ 15,910,858 $ 910,859
License agreements 3,476,400 1,133,900
Assembled workforce 1,800,000
Other 1,483,836 1,772,035
Goodwill 14,529,328 6,364,242
-------------- --------------
37,200,422 10,181,036
Less accumulated amortization 5,845,939 3,304,439
-------------- --------------
$ 31,354,483 $ 6,876,597
-------------- --------------
-------------- --------------
</TABLE>
7 BORROWING UNDER LINE OF CREDIT AGREEMENTS
The Company maintains lines of credit with various financial institutions
which provide for borrowings of up to $25,707,000. As of September 30, 1998,
$10,707,000 has been borrowed under these line of credit agreements. These line
of credit agreements are uncollateralized and provide for interest rates ranging
from 4.5% to 10.6% as of September 30, 1998.
F-11
<PAGE>
8 LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1998
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
<S> <C>
5.5% fixed rate long-term collateralized note $ 1,854,490
5.2% fixed rate long-term collateralized note 1,256,240
6.0% fixed rate long-term collateralized note 538,450
6.3% fixed rate long-term collateralized note 4,784,959
Variable rate long-term collateralized note 250,000
Long-term collateralized mortgage note 623,471
6.0% fixed rate long-term uncollateralized note 1,555,010
6.0% to 10.6% subsidized long-term notes 525,851
---------------
$ 11,388,471
Less current portion 264,025
---------------
$ 11,124,446
---------------
---------------
</TABLE>
The 5.5% fixed rate long-term note is payable in semi-annual
installments beginning September 2000. The 5.2% fixed rate long-term note is
payable in semi-annual installments beginning June 2001. The 6.0% fixed rate
long-term note is due in full on September 30, 2003. The 6.3% fixed rate
long-term note is payable in semi-annual installments beginning March 2000.
These notes are collateralized by land, buildings and equipment with a book
value of $10,576,458. Interest on the notes is payable on a quarterly basis.
The variable rate long-term collateralized note is payable in quarterly
principal payments and monthly interest payments. The interest rate is the
bank's lending rate plus 0.75%. This rate as of September 30, 1998 was 9.25%.
The note is collateralized by accounts receivable, inventory and property and
equipment with a book value of $4,713,573.
The Long-term mortgage note bears interest at a fixed rate of 8.85% through
February 2003 and then at prime plus 2.5%. The rate of interest is subject to
adjustment every five years with a maximum rate of 12.5% for years 10-15 and
14.5% for years 15-20. The note and interest is payable in monthly installments.
The note is collateralized by a building and certain equipment of the Company.
The 6.0% fixed rate long-term uncollateralized note is due in full in
November 2001. Interest is payable annually.
The subsidized long-term notes bear interest rates ranging from 6% to 10.6%
and are due at various dates through 2006. All borrowings under these notes are
uncollateralized.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- - ---------------------------------------------------
<S> <C>
1999 $ 264,025
2000 436,291
2001 462,562
2002 2,048,046
2003 1,131,762
Thereafter 7,045,785
--------------
$ 11,388,471
--------------
--------------
</TABLE>
9 INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Currently payable:
Federal $ 9,768,928 $ 1,737,116 $ 6,977,337
State 766,704 142,457 920,956
Deferred (790,544) (1,787,933) (393,153)
------------- ------------- -------------
$ 9,745,088 $ 91,640 $ 7,505,140
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The net deferred tax asset as of September 30, 1998 and 1997 consists of
the following:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------------------- -------------
<S> <C> <C>
Valuation reserves $ 2,673,443 $ 1,740,540
Inventory valuation 430,501 800,364
Compensation costs 1,007,367 248,470
Depreciation 102,133 193,525
------------- -------------
Net deferred tax asset $ 4,213,444 $ 2,982,899
------------- -------------
------------- -------------
</TABLE>
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for the years ended September 30, 1998, 1997, and 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------- ------ -----
<S> <C> <C> <C>
Statutory income tax rate (35.0)% (34.0)% 35.0%
Increase (reduction) resulting from:
Utilization of research and
development tax credits (0.9) (1.7)
Utilization of low income
housing credits 2.8 1.7
State taxes, net of federal benefits 3.9 3.6
AetherWorks Corporation net
operating loss 12.5 8.0
AetherWorks Corporation write-off 9.6
Acquired in-process research
and development 106.3
Restructuring charges 9.3
Tax contingencies 4.7
Foreign and other (2.5) (2.8) (0.2)
------ ------ ------
75.5% 0.1% 44.7%
------ ------ ------
------ ------ ------
</TABLE>
10 STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
The Company's stock option plan (the Stock Option Plan) provides for the
issuance of nonstatutory stock options and incentive stock options (ISOs) to key
employees and nonemployee board members holding less than 5% of the outstanding
shares of the Company's common stock. The Company's Non-Officer Stock Option
Plan (the Non-Officer Plan and, together with the Stock Option Plan, the Plans),
provides for the issuance of nonstatutory stock options to key employees who are
not officers or directors of the Company.
F-12
<PAGE>
The option price for ISOs and non-employee directors options granted under
the Stock Option Plan is set at the fair market value of the Company's common
stock on the date of grant. The option price for nonstatutory options granted
under the Plans is set by the Compensation Committee of the Board of Directors.
The authority to grant options under the Plans and set other terms and
conditions rests with the Compensation Committee. The Stock Option Plan
terminates in 2006. The Non-Officer Plan does not have a designated termination
date.
During the years ended September 30, 1998, 1997, and 1996, 287,882, 50,106,
and 114,192 shares of the Company's Common Stock, respectively, were issued upon
the exercise of options for 289,353, 50,167, and 123,959 shares, respectively.
The difference between shares issued and options exercised results from the
provision in the Plans allowing employees to elect to pay their withholding
obligation through share reduction. Withholding taxes paid by the Company as a
result of the share withholding provision amounted to $28,871 in 1998, $5,171 in
1997, and $186,927 in 1996.
During the year ended September 30, 1998 the Board of Directors authorized
the issuance of incentive stock options for the purchase of 486,631 shares. In
addition, the Board of Directors authorized the issuance of nonstatutory stock
options for the purchase of 543,461 shares, at prices below the market value of
the stock on the grant dates.
During the year ended September 30, 1997 the Board of Directors authorized
the cancellation and reissue of nonstatutory stock options to certain employees
for the purchase of 823,326 shares, at an exercise price below the market value
of the stock. Under this authorization, the original option issues were canceled
and new options were issued with a new four-year vesting schedule. During the
year ended September 30, 1996, the Board of Directors authorized the issuance of
nonstatutory stock options for the purchase of 2,500 shares at prices below the
market value of the stock on the grant date.
The difference between the option price and market value at the date of
grant for the above option arrangements has been recorded as additional paid-in
capital with an offsetting debit within stockholders' equity to unearned stock
compensation. The compensation expense related to these option grants is
amortized to operations over the contractual vesting period in which employees
perform services and amounted to $1,012,440 in 1998, $244,569 in 1997, and
$204,793 in 1996.
Stock options and common shares reserved for grant under the Plans are as
follows:
STOCK OPTIONS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
- - -------------------------------------------------- ------------- ----------
<S> <C> <C> <C>
BALANCES,
SEPTEMBER 30, 1995 1,318,038 1,497,095 $ 16.41
Granted (1,186,525) 1,186,525 20.67
Exercised (123,959) 11.38
Cancelled 223,001 (223,001) 22.18
----------- -------------
BALANCES,
SEPTEMBER 30, 1996 354,514 2,336,660 $ 18.14
Additional shares
approved for grant 500,000
Granted (1,509,701) 1,509,701 8.62
Exercised (50,617) 7.71
Cancelled 1,879,636 (1,879,636) 19.01
----------- -------------
BALANCES,
SEPTEMBER 30, 1997 1,224,449 1,916,108 $ 10.01
Additional shares
approved for grant 750,000
Granted (1,254,525) 1,254,525 $ 15.96
Exercised (289,353) 8.56
Cancelled 150,013 (150,013) 12.79
----------- -------------
BALANCES,
SEPTEMBER 30, 1998 869,937 2,731,267 $ 12.75
----------- -------------
----------- -------------
</TABLE>
Commencing April 1996, the Company has sponsored an Employee Stock Purchase
Plan (the Purchase Plan) which covers all domestic employees with at least 90
days of service. The Purchase Plan allows eligible participants the right to
purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. Employee
contributions to the plan were $658,118 in 1998, $534,327 in 1997, and $200,888
in 1996. Pursuant to the Purchase Plan, 37,398, 69,402, and 8,835 shares were
issued to employees during the fiscal years ended 1998, 1997 and 1996,
respectively. As of September 30, 1998, 384,365 shares are available for future
issuances under the Purchase Plan.
11 STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation costs for stock options granted to employees are measured as the
excess, if any, of the fair value of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. Such
compensation costs, if any, are amortized on a straight-line basis over the
option vesting schedule.
F-13
<PAGE>
Had the Company used the fair-value-based method of accounting for its stock
options granted in 1998, 1997 and 1996, and charged operations over the option
vesting periods based on the fair value of options at the date of grant, net
(loss) income and net (loss) income per common share would have been changed to
the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------- ------------- -----------
<S> <C> <C> <C>
Net (loss) income
As reported $(22,658,871) $ (15,790,844) $9,300,220
Pro forma (25,832,432) (17,449,611) 8,536,111
Net (loss) income per share -
basic
As reported $ (1.65) $ (1.18) $ 0.70
Pro forma (1.88) (1.30) 0.64
Net (loss) income per share -
assuming dilution
As reported $ (1.65) $ (1.18) $ 0.68
Per forma $ (1.88) $ (1.30) $ 0.63
</TABLE>
The weighted average fair value of options granted in fiscal years 1998,
1997 and 1996 was $12.29, $12.47 and $10.14, respectively. The weighted average
fair value was determined based upon the fair value of each option on the grant
date, utilizing the Black-Scholes option-pricing model and the following
assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS: 1998 1997 1996
- - --------------------------------------------------- ------------- -----------
<S> <C> <C> <C>
Risk free interest rate 5.49% 6.02% 5.99%
Expected option holding period 4 years 4 years 4 years
Expected volatility 60% 40% 50%
Expected dividend yield 0 0 0
</TABLE>
At September 30, 1998, the weighted average exercise price and remaining life of
the stock options are as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES $0.50 $2.36-3.19 $3.78-3.92 $5.91-8.88 $9.40-14.00 $14.50-21.50 $22.00-29.25 TOTAL
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total options outstanding 3,000 146,451 32,418 1,166,807 295,751 770,965 315,875 2,731,267
Weighted average remaining
contractual life (years) 0.67 7.70 1.91 8.00 7.78 8.75 8.20 8.11
Weighted average exercise price $ 0.50 $ 2.53 $ 3.83 $ 7.73 $11.57 $17.98 $25.44 $ 12.75
Options exercisable 3,000 112,498 27,127 513,849 115,784 108,338 82,625 963,221
Weighted average exercise price
of exercisable options $ 0.50 $ 2.58 $ 3.84 $ 7.58 $ 11.87 $ 18.04 $ 24.17 $ 9.98
</TABLE>
12 SHARE RIGHTS PLAN
The Company has adopted a share rights plan. Under the plan, the Company
will distribute as a dividend one right for each share of the Company's common
stock outstanding on June 30, 1998. Each right will entitle its holder to buy
one one-hundreth of a share of a new series of junior participating preferred
stock at an exercise price of $115, subject to adjustment. The rights will be
exercisable only if certain ownership considerations are met. The Company will
be entitled to redeem the rights prior to the rights becoming exercisable.
13 COMMITMENTS
The Company has entered into various operating lease agreements, the last
of which expires in fiscal 2013. Below is a schedule of future minimum
commitments under noncancellable operating leases:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- - --------------------------------------
<S> <C>
1999 $ 1,341,848
2000 1,143,148
2001 826,430
2002 385,510
2003 74,000
Thereafter 836,000
</TABLE>
Total rental expense for all operating leases for the years ended September 30,
1998, 1997 and 1996 was $1,786,715, $1,405,582 and $965,710, respectively.
14 EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section 401(k) of
the Internal Revenue Code ("the Code"), whereby eligible employees may
contribute up to 15% of their pre-tax earnings, not to exceed amounts allowed
under the Code. In addition, the Company may make contributions to the plan at
the discretion
F-14
<PAGE>
of the Board of Directors. The Company accrued $240,000 as a matching
contribution for 1998. No Company contribution was made in 1997 or 1996.
15 FOREIGN SALES AND MAJOR CUSTOMERS
Foreign export sales, primarily to Europe, comprised 21.1%, 23.9%, and
20.0% of net sales for the years ended September 30, 1998, 1997 and 1996,
respectively.
During 1998, one customer accounted for 15.5% of net sales and 26% of the
trade accounts receivable as of September 30, 1998, while another accounted for
13.7% of net sales and 10% of the trade accounts receivable as of September 30,
1998.
During 1997, one customer accounted for 15.1% of net sales while another
accounted for 10.5% of net sales. In addition, one customer accounted for 28% of
the trade accounts receivable outstanding as of September 30, 1997.
During 1996, one customer accounted for 13.9% of net sales and 11.8% of
accounts receivable as of September 30, 1996, while another accounted for 13.4%
of net sales and 14.3% of accounts receivable as of September 30, 1996.
16 GEOGRAPHIC SEGMENTS
Summary information regarding the Company's operations in the United States
and international markets is presented below. International consists primarily
of European operations.
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------- ------------ ------------
<S> <C> <C> <C>
NET SALES
United States $171,385,998 $160,181,397 $188,897,751
International 11,545,672 5,416,540 4,253,147
------------ ------------ ------------
Total $182,931,670 $165,597,937 $193,150,898
------------ ------------ ------------
------------ ------------ ------------
OPERATING INCOME (LOSS)
United States $ 24,519,769 $ 6,037,670 $ 19,682,936
International (381,838) 103,548 414,411
------------ ------------ ------------
Total (1) $ 24,137,931 $ 6,141,218 $ 20,097,347
------------ ------------ ------------
------------ ------------ ------------
IDENTIFIABLE ASSETS
United States $138,552,610 $116,100,151 $128,820,114
International 22,182,057 2,211,185 1,118,715
------------ ------------ ------------
Total $160,734,667 $118,311,336 $129,938,829
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) EXCLUDES ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $39,200,000
FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND ALSO EXCLUDES $1,020,000 AND
$10,471,482 OF RESTRUCTURING CHARGES FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997, RESPECTIVELY.
17 FOURTH QUARTER INFORMATION
A provision for inventory obsolescence of $1.9 million was recorded during
the three-month period ended June 30, 1998. This provision was reversed during
the three-month period ended September 30, 1998.
18 CONTINGENCIES
During fiscal 1997, the Company and certain of its previous officers were
named as defendants in a series of putative securities class action lawsuits 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 were consolidated, through
a Consolidated Amended Complaint filed in May 1997. Also in 1997, a similar but
separate action was filed by the Louisiana State Employees Retirement System.
The Consolidated Amended Complaint and the Louisiana Amended Complaint allege
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
Louisiana Amended Complaint also alleges misrepresentations in violation of
state common law.
In a decision issued on May 22, 1998, the District Court granted in part
and denied in part the motions of the Company and its three former officers to
dismiss the Consolidated Amended Complaint and the Louisiana Amended Complaint.
The Court dismissed without leave to replead all claims asserted in both cases,
except for certain federal securities law claims based upon alleged
misrepresentations and/or omissions relating to the accounting treatment applied
to the Company's AetherWorks investment. The Court also limited the claims
asserted in the Louisiana Amended Complaint to the 11,000 shares of the
Company's stock held subsequent to November 14, 1996. These claims remain
pending against the Company and two of its former officers, Ervin F. Kamm, Jr.
and Gerald A. Wall. Discovery in the actions is proceeding.
Because the lawsuits are in preliminary stages, the ultimate outcomes
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.
In the normal course of business, the Company is subject to various claims
and litigation. Management of the Company expects that these various litigation
items will not have a material adverse effect on the results of operations or
financial condition of the Company.
F-15
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
AetherWorks Corporation
We have audited the balance sheets of AetherWorks Corporation (a development
stage company) as of September 30, 1997 and 1996, and the related statements
of operations, shareholders' equity (deficit) and cash flows for the years
then ended and the period from February 24, 1993 (inception) to September 30,
1997. These financial statements, not separately presented herein, are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AetherWorks Corporation (a
development stage company) at September 30, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended and the period from
February 24, 1993 (inception) to September 30, 1997, in conformity with
generally accepted accounting principles.
The financial statements referred to above have been prepared assuming the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company's deficit accumulated during the
development stage raises substantial doubt about its ability to continue as a
going concern. The Company intends to obtain additional financing to permit
it to continue its operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Minneapolis, MN
October 28, 1997
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ITK International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of ITK International, Inc. and its subsidiaries (the "Company") at
June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Note 13, the Company was acquired on July 29, 1998.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1998
F-17
<PAGE>
ITK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 32,699 $ 22,188 $ 26,331
Cost of revenues 24,353 12,857 13,848
---------- ---------- ----------
Gross profit 8,346 9,331 12,483
---------- ---------- ----------
Operating expenses:
Selling, general and administrative 24,034 14,224 10,402
Research and development 6,784 4,916 2,148
---------- ---------- ----------
Total operating expenses 30,818 19,140 12,550
---------- ---------- ----------
Loss from operations (22,472) (9,809) (67)
Other income (expense):
Interest income 152 115 14
Interest expense (1,585) (973) (152)
Other income, net 607 519 231
---------- ---------- ----------
Income (loss) before income taxes $ (23,298) $ (10,148) 26
Income taxes 17 169 963
---------- ---------- ----------
Net loss $ (23,315) $ (10,317) $ (937)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share:
Basic and diluted $ (0.98) $ (0.58) $ (0.07)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common and
common equivalent shares outstanding:
Basic and diluted 23,746 17,830 14,325
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-18
<PAGE>
ITK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,373 $ 429
Accounts receivable, net of allowance for doubtful accounts
of $607 and $195 at June 30, 1998 and 1997, respectively 3,019 3,615
Inventories, net 5,267 7,271
Prepaid expenses and other currrent assets 678 556
-------- --------
Total current assets 11,337 11,871
Property and equipment, net 10,668 9,934
Intangible assets, net 4,405 535
Other assets 247 -
-------- --------
Total assets $ 26,657 $ 22,340
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Demand notes payable $ 14,168 $ 8,717
Accounts payable 4,756 4,278
Accrued expenses 5,573 910
Accrued compensation 1,847 888
Current portion of long-term debt 115 109
-------- --------
Total currrent liabilities 26,459 14,902
Long-term debt, less current portion 9,511 8,697
-------- --------
Total liabilities 35,970 23,599
-------- --------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Common stock, $.001 par value, 33,000,000 shares authorized,
27,392,904 and 19,179,680 shares issued and outstanding at
June 30, 1998 and 1997, respectively 27 19
Additional paid-in capital 36,948 18,503
Deferred compensation (3,307) -
Accumulated deficit (42,891) (19,576)
Cumulative translation adjustment (90) (205)
-------- --------
Total stockholders' deficit (9,313) (1,259)
-------- --------
Total liabilities and stockholders' deficit $ 26,657 $ 22,340
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-19
<PAGE>
ITK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(23,315) $(10,317) $ (937)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 2,327 811 403
Provision for doubtful accounts 412 145 -
Amortization of deferred
compensation 1,793
Loss on sale of property and
equipment 403 26 -
Changes in operating assets and
liabilities, excluding effects
of acquired business:
Accounts receivable 4,191 1,768 (1,716)
Inventories 5,630 1,077 (3,297)
Prepaid expenses and other current
assets 50 (203) (264)
Other assets 104 111 377
Accounts payable (1,444) (1,191) 28
Accrued expenses and compensation 2,421 (365) 508
--------- --------- --------
Net cash used by operating
activities (7,428) (8,138) (4,898)
--------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment (641) (8,496) (2,261)
Cash of acquired business 3,111 - -
Proceeds from sale of property and
equipment 73 167 7
--------- --------- --------
Net cash used in investing
activities 2,543 (8,329) (2,254)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 60 17,180 -
Dividends paid - (8,912) -
Proceeds from debt issuance 6,271 8,312 7,117
--------- --------- --------
Net cash provided by financing
activities 6,331 16,580 7,117
--------- --------- --------
Net increase in cash and cash
equivalents 1,446 113 (35)
Effect of exchange rate changes on
cash and cash equivalents 498 80 (370)
Cash at beginning of year 429 236 641
--------- --------- --------
Cash at end of period $ 2,373 $ 429 $ 236
--------- --------- --------
--------- --------- --------
Cash paid during the period for:
Interest $ 972 $ 631 $ 259
Income taxes 670 690 143
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued on Merger with
ITK AG $ 11,724 $ - $ -
Capital contribution, land received
from shareholder 1,569 - -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
<PAGE>
ITK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED DEFERRED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENT (DEFICIT)
---------- ------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 14,325,080 $ 14 $ 1,328 $ 590 $ - $ 53 $ 1,985
Net loss (937) (937)
Foreign currency translation (141) (141)
---------- ------- ---------- ----------- --------- ---------- ----------
Balance, June 30, 1996 14,325,080 14 1,328 (347) - (88) 907
Issuance of common stock 4,854,600 5 17,175 17,180
Dividends paid (8,912) (8,912)
Net loss (10,317) (10,317)
Foreign currency translation (117) (117)
---------- ------- ---------- ----------- --------- ---------- ----------
Balance, June 30, 1997 19,179,680 19 18,503 (19,576) - (205) (1,259)
Contributed capital 1,569 1,569
Issuance of common stock upon
Merger with ITK AG 7,609,860 7 11,717 11,724
Exercise of common stock options 603,364 1 59 60
Compensation related to the grant
of common stock options 5,100 (5,100) -
Amortization of deferred compensation 1,793 1,793
Net loss (23,315) (23,315)
Foreign currency translation 115 115
---------- ------- ---------- ----------- --------- ---------- ----------
Balance, June 30, 1998 27,392,904 $ 27 $ 36,948 $ (42,891) $ (3,307) $ (90) $ (9,313)
---------- ------- ---------- ----------- --------- ---------- ----------
---------- ------- ---------- ----------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-21
<PAGE>
ITK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
ITK International, Inc. and its subsidiaries (the "Company") design,
manufacture, sell, market and support a broad range of high
performance remote network access products. These products enable
customers to build: (i) dial-up local area network ("LAN")
inter-networks that provide remote offices, telecommuters and mobile
computer user access to corporate networks; (ii) remote LAN access
networks that provide access to the Internet; and (iii) mission
critical wide area network access facilities that provide LAN or
host access over the public switched telephone network. The Company
markets its products worldwide through distributors, value added
resellers and service providers. The Company also sells its modem
products to certain original equipment manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated.
On August 7, 1997, Telebit Incorporated ("TI") consummated a merger
(the "Merger") with ITK Telekommunikation AG ("ITK AG"), a German
corporation. The Company's common stock was recapitalized and ITK
AG's stockholders received an aggregate of 19,179,680 previously
unissued shares of common stock of the Company, representing 66.5%
of the common stock outstanding upon consummation of the Merger.
Due to the majority ownership received by ITK AG's stockholders,
the Merger was accounted for as a "reverse acquisition" such that
TI was designated as the acquired entity and ITK AG the acquirer.
Accordingly, the consolidated balance sheet as of June 30, 1997 and
the related consolidated statements of operations, of cash flows
and of changes in stockholders' equity (deficit) for each of the
two years in the period ended June 30, 1997 represent the historical
results of ITK AG and its subsidiaries. The results of operations
of TI are included in the consolidated financial statements from
August 7, 1997. In addition, the Company changed its name
concurrent with the Merger from "Telebit Incorporated" to "ITK
International, Inc." See Note 3.
All shares of common stock, options and per share amounts included
in the accompanying financial statements have been adjusted to
give retroactive effect to the recapitalization for all years
presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
F-22
<PAGE>
ITK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
REVENUE RECOGNITION
Revenue relating to products sold is recognized upon transfer of
legal title, which is generally upon shipment. The Company derives
a significant percentage of its revenue from sales to distributors.
Under the Company's standard distribution agreements, distributors
are granted certain "stock balancing" and "price protection"
rights. The Company provides reserves for such returns or price
adjustments at the time the related revenue is recorded, based on
historic rates of returns or price adjustments. The Company's
stock balancing and price protection obligations have historically
been within management's expectations.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable. The Company places its cash with financial
institutions which management believes are of high credit quality.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
include cash, accounts receivable, accounts payable, accrued
expenses, notes payable and long-term debt, approximates their
fair value at the balance sheet dates.
INVENTORIES
Inventories are stated at the lower of cost, determined on the
first-in, first-out (FIFO) basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
based on the following estimated useful lives of the assets
using the straight-line method:
<TABLE>
<S> <C>
Buildings 25 years
Office equipment 4-10 years
</TABLE>
Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for repairs and maintenance
are charged to expense as incurred. As assets are retired or sold,
the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the results
of operations.
INTANGIBLE ASSETS
Intangible assets, comprised primarily of acquired technology
(Note 3), are recorded at their fair value determined at time of
acquisition. Amortization is based on the estimated useful lives of
the assets of 4 years, using the straight-line method.
The Company periodically analyzes intangible assets for potential
impairment, assessing the appropriateness of lives and recoverability
of unamortized balances through measurement of undiscounted operating
cash flows on a basis consistent with generally accepted accounting
principles.
F-23
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
consolidated financial statements. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using currently
enacted tax rates for the year in which the differences are expected to
reverse. The Company records a valuation allowance against net deferred
tax assets if, based upon the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
NET LOSS PER COMMON SHARE
For each of the years presented, basic and diluted earnings per share are
the same due to the antidilutive effect of potential common shares
outstanding. Antidilutive potential common shares excluded from the
computation of diluted loss per share for the fiscal year 1998 include
4,617,848 common shares issuable upon the exercise of stock options.
FOREIGN CURRENCY
The accounts of foreign subsidiaries are translated using exchange rates in
effect at period-end for assets and liabilities and at average exchange
rates during the period for results of operations. The local currency for
all foreign subsidiaries is the functional currency. The related
transaction adjustments are reported as a separate component of
stockholders' equity (deficit). Gains or losses resulting from foreign
currency transactions are included in other income (expense) and were
immaterial for all periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". The statement establishes standards for the reporting and display
of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. This
standard will require that an enterprise display an amount representing
total comprehensive income for the period. SFAS No. 130 will be effective
for the Company's fiscal year ending June 30, 1999. Adoption of SFAS No.
130 is not expected to impact the Company's financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
operating segments, in annual financial statements and would require that
those enterprises report selected segment information in interim financial
reports to stockholders. Operating segments are defined as
revenue-producing components of the enterprise which are generally used
internally for evaluating segment performance. SFAS No. 131 will be
effective for the Company beginning with the Company's fiscal year ending
June 30, 1999. Adoption of SFAS No. 131 will not impact the Company's
financial position or results of operations.
F-24
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that all
derivative instruments be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The ineffective portion of all hedges will be recognized in current-period
earnings. SFAS No. 133 will be effective for the Company beginning with
the Company's fiscal year ending June 30, 2000. As the Company has no
derivative instruments and is not involved in hedging activity, the Company
does not expect the adoption of SFAS No. 133 to have an impact on the
Company's financial position or results of operations.
3. MERGER OF TELEBIT INCORPORATED AND ITK AG
As described in Note 1, on August 7, 1997, Telebit Incorporated ("TI")
consummated a merger (the "Merger") with ITK Telekommunikation AG ("ITK
AG"), a German corporation.
The Merger was accounted for using the purchase method. The purchase price
for financial accounting purposes was determined to be $11,724,000, based
upon an independent appraisal of the 7,609,860 shares of common stock and
the 2,051,000 options to purchase common stock of the Company received upon
the Merger by former stockholders and option holders of TI.
The following summarizes the allocation of the purchase price to the
estimated fair value of the assets acquired and liabilities assumed as of
August 7, 1997 (in thousands):
<TABLE>
<S> <C>
Assets acquired:
Cash $ 3,111
Accounts receivable 3,183
Inventories 4,126
Prepaid expenses and other current assets 172
Property, plant and equipment 1,054
Other assets 259
Identifiable intangible assets 4,650
Cost in excess of net assets acquired 262
Liabilities assumed:
Accounts payable (1,922)
Accrued expenses (3,171)
--------
Total purchase price $11,724
--------
--------
</TABLE>
The identifiable intangible assets consist primarily of acquired technology
valued at $3,900,000, as well as established customer base, workforce and
trademark. The identifiable intangible assets were fair valued by an
independent appraisal based on discounted cash flow analyses.
F-25
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
The following unaudited pro forma information is presented to illustrate
the results of operations had the Merger occurred on July 1, 1996 (in
thousands, except share data):
<TABLE>
<CAPTION>
Year ended
June 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Total revenues $ 35,202 $ 41,449
Loss from operations (22,769) (19,635)
Net loss (23,958) (20,758)
Loss per share - basic and diluted $ (0.88) $ (0.82)
</TABLE>
The above pro forma results of operations are not necessarily indicative of
the results of operations which actually would have been realized had the
Merger occurred as of July 1, 1996, nor of the future results of the
combined companies.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
1998 1997
<S> <C> <C>
Raw materials $ 1,270 $ -
Work in process 601 1,130
Finished goods 3,396 6,141
--------- ---------
$ 5,267 $ 7,271
--------- ---------
--------- ---------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
1998 1997
<S> <C> <C>
Land $ 749 $ 749
Buildings 8,845 7,081
Office equipment 4,516 4,150
Construction in progress - 157
--------- ---------
14,110 12,137
Less accumulated depreciation (3,442) (2,203)
--------- ---------
$ 10,668 $ 9,934
--------- ---------
--------- ---------
</TABLE>
Depreciation expense relating to property and equipment was $1,394,000,
$137,000 and
F-26
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
$276,000 for the fiscal years 1998, 1997 and 1996, respectively.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases facilities under various operating leases. Future
minimum lease payments under noncancelable operating leases with initial or
remaining terms of one or more years consisted of the following at June 30,
1998 (in thousands):
<TABLE>
<S> <C>
1999 $ 933
2000 404
2001 187
2002 122
2003 74
Thereafter 773
-------
Total future minimum lease payments $ 2,493
-------
-------
</TABLE>
Rental expense during the fiscal years 1998, 1997 and 1996 was $805,000,
$295,000 and $225,000, respectively.
7. DEMAND NOTES PAYABLE
On June 12, 1998, the Company entered into a $5,000,000 loan facility with
Digi International Inc. (see Note 13). Under this loan facility, Digi
International Inc. has advanced $5,000,000 to the Company as a demand note
payable. The outstanding balance of this demand note payable bears
interest at 8 percent. The Company has pledged as collateral for this
demand note payable 98,400 common shares of ITK AG.
At June 30, 1998, short-term liabilities exist with banks in the amount of
$9,168,000. These amounts are due daily. Interest is calculated quarterly
and is also due daily.
The weighted average interest rate on demand notes payable was 4.6% and
4.9% at June 30, 1998 and 1997, respectively.
F-27
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
5.2% fixed rate long-term collateralized note $2,882 $1,782
6.0% Fixed rate long-term collateralized note 1,498 1,546
6.3% fixed rate long-term collateralized note 4,433 4,597
6.0% fixed rate long-term uncollateralized note 574 591
6.0% subsidized long-term note 239 290
------ ------
Total long-term debt 9,626 8,806
Less: current maturities (115) (109)
------ ------
$9,511 $8,697
------ ------
------ ------
</TABLE>
The 5.2% fixed rate long-term note is payable in semi annual installments
beginning June 2001. Interest is payable on a quarterly basis. The 6.0%
fixed rate long-term note is payable in full in September 2003. Interest
is payable on a quarterly basis. The 6.3% fixed rate long term note is
payable in semi annual installments beginning March 2000. Interest is
payable on a semi-annual basis. These notes are collateralized by certain
land, building and equipment.
The 6.0% fixed rate long term note is due in full on November 5, 2001.
Borrowings under this note are uncollateralized.
The 6.0% subsidized long term note is payable in quarterly installments.
Interest is payable on a quarterly basis. Borrowings under this note are
uncollateralized.
Aggregate maturities of long-term debt over the next five fiscal years are
as follows: $115,000 in 1999, $213,000 in 2000, $407,000 in 2001,
$1,870,000 in 2002, $429,000 in 2003 and $6,592,000 thereafter.
9. STOCK PLANS
The Company maintains two stock plans. The 1996 Stock Option Plan (the
"1996 Plan") provided for the issuance of up to 5,000,000 shares of common
stock pursuant to the grant of incentive and non-qualified stock options.
The Company does not intend to issue any additional options under the 1996
Plan, but options that are forfeited will become available for grant under
the 1997 Stock Option Plan (the "1997 Plan").
F-28
<PAGE>
ITK INTERNATIONAL,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Under the terms of the 1997 Plan, employees, directors and certain
other individuals may be awarded incentive stock options, nonqualified
stock options or restricted stock. The 1997 Plan provides for the
issuance of a maximum of 3,000,000 shares of common stock, plus such
additional number of shares that become available due to the forfeiture
of options granted under the 1996 Plan. Non-qualified options may be
granted to any employee, officer, director or consultant at an exercise
price per share to be determined by the Board of Directors on the date
of grant. Options granted under the 1997 Plan are exercisable over
periods determined by the Board of Directors, not to exceed ten years
from the date of grant.
In fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires that companies either
recognize compensation expense for grants of stock, stock options and other
equity instruments based on fair value or provide pro forma disclosure of
net income and earnings per share in the notes to the financial statements
as if such method had been applied. The Company adopted the pro forma
disclosure provisions of SFAS No 123 in fiscal 1997 and has applied APB
Opinion No. 25 and related interpretations in accounting for all of its
stock option grants.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at June 30, 1997 -- $ --
Options of acquired company 2,707,167 0.10
Granted 4,595,000 0.10
Forfeited (2,085,494) 0.10
Exercised (598,825) 0.10
----------- -------
Outstanding at June 30, 1998 4,617,848 0.10
----------- -------
Options available for future grant 2,755,344
</TABLE>
Information related to the stock options outstanding at June 30,
1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
NUMBER AVERAGE NUMBER
RANGE OF OF REMAINING OF
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE OPTIONS
-------------- ------- ---------------- --------
<S> <C> <C> <C>
$ .10 4,617,848 9.36 years 2,213,468
</TABLE>
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance
with SFAS No. 123, the Company's net loss and net loss per common share
(both basic and diluted) for the fiscal year ended June 30, 1998 would not
have been materially different from the amount reported. Because options
vest over several years and additional option grants are expected to be
made in subsequent years, the pro forma impact above is not representative
of the pro forma effects for future years.
The fair value of each option granted during the fiscal year ended June 30,
1998 was estimated
F-29
<PAGE>
ITK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
on the date of grant using the minimum value method utilizing the
following weighted-average assumptions: (1) expected risk-free
interest rate of 5.4% to 5.7%; (2) expected option life of 7 years;
(3) expected stock volatility of 0%; and (4) expected dividend yield
of 0%. The weighted average fair value per option for options
granted in fiscal year 1998 was $1.11.
In accordance with APB No. 25, deferred compensation recorded under
the 1997 Plan during the year ended June 30, 1998 was $5,100,000
which is being amortized to expense over the vesting periods of the
related options. The related compensation expense recorded for the
year ended June 30, 1998 was $1,793,000.
As discussed in Note 13, on July 29, 1998, Digi International Inc.
acquired the Company. In connection with the acquisition, each
option holder of the Company received an option to purchase common
stock of Digi International Inc.
10. INCOME TAXES
The income tax provision consisted entirely of current foreign tax
expense of $17,000, $169,000 and $963,000 in fiscal years 1998, 1997
and 1996, respectively. Since the Merger, the Company has incurred
losses for tax purposes and, accordingly, has not provided for any
current or deferred federal and state income taxes.
Domestic and foreign income (loss) before income taxes for the
fiscal years 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic $(11,933) $ - $ -
Foreign (11,365) (10,148) 26
-------- -------- --------
$ 23,298 $(10,148) 26
-------- -------- --------
-------- -------- --------
</TABLE>
The following is a reconciliation between the provision for income
taxes based upon U.S. statutory income tax rates and the Company's
effective income tax expense (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income taxes (benefit) at
federal statutory rates $ (8,154) $ (3,552) $ 9
Foreign tax rate differential (4,419) (1,404) (337)
Amortization of intangible assets 669 - -
State taxes (net) (709) - -
Research and development credits (142) - -
Valuation allowance adjustments 12,650 5,125 710
Nondeductible expenses 122 - 217
Other - - 364
-------- -------- --------
$ 17 $ 169 $ 963
-------- -------- --------
-------- -------- --------
</TABLE>
F-30
<PAGE>
ITK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 18,991 $ 7,169
Research and development credits 143 -
Depreciation 652 7
Accrued expenses 168 7
Accounts receivable 38 202
Other 229 186
---------- ----------
Total gross deferred tax assets 20,221 7,571
Valuation allowance (20,221) (7,571)
---------- ----------
Total net deferred tax asset $ - $ -
---------- ----------
---------- ----------
</TABLE>
Under SFAS No. 109, the benefit associated with future deductible
temporary differences is recognized if it is more likely than not
that a benefit will be realized. Based on historical evidence of
net losses, the Company has recorded a valuation allowance that
offsets the full amount of its net deferred tax assets.
As of June 30, 1998, the Company had U.S. and state net operating
loss ("NOL") carryforwards of approximately $13,601,000 and
$11,481,000, respectively, available to offset future taxable income,
which expire at various dates through 2011.
A subsequent change in the Company's ownership as defined in Section
382 of the Internal Revenue Code may significantly limit the future
utilization of the federal NOL carryforwards incurred prior to an
ownership change. In fiscal year 1997 and in July 1998, substantial
changes in the ownership of the Company occurred.
At June 30, 1998, the Company's foreign subsidiaries had NOL
carryforwards of approximately $24,586,000.
F-31
<PAGE>
ITK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
11. GEOGRAPHIC DATA
The Company's operations are conducted in one business segment in
the United States and Europe. Geographic information about the
Company for fiscal years 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues
United States $ 12,100 $ 32 $ 934
Europe 20,599 22,156 25,397
-------- -------- --------
$ 32,699 $ 22,188 $ 26,331
-------- -------- --------
-------- -------- --------
Loss from operations:
United States $(10,854) $ (775) $ (455)
Europe $(11,618) (9,034) 388
-------- -------- --------
$(22,472) $ (9,809) $ (67)
-------- -------- --------
-------- -------- --------
Identifiable assets:
United States $ 6,393 $ 734 $ 757
Europe 20,264 21,606 17,103
-------- -------- --------
$ 26,657 $ 22,340 $ 17,860
-------- -------- --------
-------- -------- --------
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company sponsors a qualified 401(k) Plan which covers all
eligible employees of the Company. The Company made no matching
contributions to the plan during fiscal years 1998, 1997 and 1996.
13. SUBSEQUENT EVENT
On July 29, 1998, Digi International Inc. ("Digi") acquired 100% of
the outstanding common stock of the Company for $13.3 million in
cash, 576,357 shares of common stock of Digi and 125,174 options to
purchase Digi common stock issued to all existing option holders of
the Company. Accordingly, the Company became a wholly owned
subsidiary of Digi. The acquisition of the Company will be
accounted for by Digi using the purchase method. Certain
restructuring activities are expected as a result of the acquisition
by Digi.
F-32
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENT
The following unaudited pro forma condensed statement of operations for the
twelve month period ended September 30, 1998 gives effect to the
acquisition of ITK International, Inc. (ITK) by Digi International, Inc. (the
Company) using the purchase method of accounting. The unaudited pro forma
condensed statement of operations is presented for illustrative purposes only
and is not necessarily indicative of the combined results of operations for
future periods or the results that actually would have been realized had the
Company and ITK been a combined company during the specified period. The pro
forma condensed statement of operations, including the notes thereto, are
qualified in their entirety and should be read in conjunction with the
historical consolidated financial statements of the Company and ITK.
The unaudited pro forma condensed statement of operations is based on the
respective historical consolidated statement of operations and the notes thereto
of the Company and ITK. The purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed. The preliminary purchase
price allocation is based on the Company's estimates of fair value.
F-33
<PAGE>
DIGI INTERNATIONAL INC.
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
DIGI ITK POST
INTERNATIONAL INTERNATIONAL ACQUISITION ITK
INC. INC. OPERATIONS (a) ADJUSTMENTS PRO FORMA
-------------- --------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 182,931,670 $ 33,166,723 $ (5,867,321) $ 210,231,072
Cost Of sales 88,539,156 25,074,307 (3,732,998) 109,880,465
-------------- --------------- ----------------- --------------
Gross margin 94,392,514 8,092,416 (2,134,323) 100,350,607
-------------- --------------- ----------------- --------------
Operating expenses:
Sales and marketing 37,288,027 13,987,882 (1,161,989) 50,113,920
Research and development 16,963,410 5,899,665 (707,011) 22,156,064
General and administrative 16,003,146 8,500,781 (1,487,641) 3,511,941(b) 26,528,227
Acquired in-process research and
development 39,200,000 (39,200,000)(c)
Restructuring 1,020,000 1,020,000
-------------- --------------- ----------------- ------------ --------------
Total operating expenses 110,474,583 28,388,328 (3,356,641) (35,688,059) 99,818,211
-------------- --------------- ----------------- ------------ --------------
Operating (loss) income (16,082,069) (20,295,912) 1,222,318 35,688,059 532,396
Other income (expense), net 1,818,286 (2,053,732) 164,310 (721,702)(d) (792,838)
Aetherworks Corporation gain 1,350,000 1,350,000
-------------- --------------- ----------------- ------------ --------------
(Loss) income before income taxes (12,913,783) (22,349,644) 1,386,628 34,966,357 1,089,558
Income tax provision (benefit) 9,745,088 8,000 (252,596)(d) 5,283,114
(4,217,378)(e)
-------------- --------------- ----------------- ------------
Net loss $ (22,658,871) $ (22,357,644) $ 1,386,628 39,436,331 $ (4,193,556)
-------------- --------------- ----------------- ------------ --------------
-------------- --------------- ----------------- ------------ --------------
Net loss per common equivalent
share, basic and diluted $(1.65) $(0.30)
-------------- --------------
-------------- --------------
Weighted average common shares,
basic and diluted 13,729,765 (97,902) 576,357(f) 14,208,220
-------------- ----------------- ----------- --------------
-------------- ----------------- ----------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED
CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS.
F-34
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS
1. FINANCIAL STATEMENT:
Digi International Inc. (the Company) has a September 30 fiscal year-end.
The unaudited historical statement of operations information of the Company
for the year ended September 30, 1998 was derived from the consolidated
financial statements of the Company, which are included elsewhere in
this prospectus.
Prior to the acquisition by the Company, ITK International, Inc. (ITK) had
a June 30 fiscal year-end. Accordingly, the ITK statement of operations
information for the twelve-month period ended September 30, 1998 has been
derived by combining ITK's unaudited consolidated results of operations for
the applicable calendar quarters.
The pro forma condensed statement of operations assumes the business
combination took place on October 1, 1997. The pro forma condensed
statement of operations for the twelve-month period ended September 30,
1998 combines the Company's consolidated statement of operations and ITK's
consolidated statement of operations for the twelve-month period then
ended. There were no material transactions between the Company and
ITK during the 12-month period ended September 30, 1998.
The pro forma combined provision for income taxes may not necessarily be
indicative of amounts that would have resulted had the Company and ITK
filed a consolidated U.S. income tax return during the period presented.
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS:
The purchase price was allocated based upon the estimated fair value of
assets acquired and liabilities assumed. The preliminary purchase price
allocation is based on the Company's estimates of fair value.
(a) Adjustment reflects the statement of operations amounts related to ITK
for the period from the date of the Company's acquisition (July 29,
1998)through September 30, 1998. These adjustments are necessary
because these amounts are included in both the Company's and ITK's
statements of operations for the year ended September 30, 1998.
(b) Adjustment reflects amortization of acquired identifiable
intangible assets and goodwill. Identifiable intangible assets of
$12,700,000 are comprised of proven technology with an appraised
value of $11,300,000, and an assembled workforce with an appraised
value of $1,400,000 which have estimated useful lives of five years
and six years, respectively. The estimated annual
non-tax-deductible amortization charge related to the proven
technology and workforce is $2,493,333. The estimated annual
non-tax-deductible amortization charge related to the $7,130,253
allocated to goodwill, which has an estimated useful life of seven
years, is approximately $1,018,608.
F-35
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS, CONTINUED
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS,
CONTINUED:
(c) Adjustment reflects elimination of non-recurring charges of
$26,000,000 and $13,200,000 related to acquired in-process research
and development recorded by the Company in connection with its
acquisitions of ITK International, Inc. and Central Data
Corporation, respectively during the year ended September 30, 1998.
(d) Adjustment reflects the decrease in interest income and related tax
effect resulting from the use of cash and cash equivalents to complete
the acquisition. The assumed rate of return on the cash balance was
5%.
(e) Adjustment reflects the portion of the Company's income tax provision
which would not have been recognized due to ITK's U.S. net operating
losses for the twelve-month period ended September 30, 1998. The
adjustment reflects no income tax benefit for losses generated in
international tax jurisdictions due to continuing losses generated by
ITK in these jurisdictions.
(f) Adjustment reflects net increase (decrease) in weighted average common
shares and common equivalent shares outstanding for common stock and
common stock options issued in connection with the acquisition. Pro
forma earnings per common share for the periods presented were
calculated assuming that the 576,357 shares of the Company's common
stock issued in connection with the acquisition were issued at the
beginning of the period presented.
F-36
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the shares
of Common Stock being registered hereunder other than underwriting commissions
and expenses, are estimated below.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 3,720
Nasdaq Stock Market listing fee............................... 2,350
Legal fees and expenses....................................... 30,000
Accounting fees and expenses.................................. 20,000
Printing expenses............................................. 500
Transfer agent fees and expenses.............................. 1,000
Miscellaneous................................................. 430
-------
Total $58,000
-------
-------
</TABLE>
Except for the SEC registration fee, all of the foregoing expenses have
been estimated. The selling stockholders will bear fees and disbursements of
their own legal counsel and transfer taxes. The Registrant will bear all other
expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware law, a corporation may indemnify any person who was or
is a party or is threatened to be made a party to an action (other than an
action by or in the right of the corporation) by reason of his services as a
director or officer of the corporation, or his service, at the corporation's
request, as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees) that are actually
and reasonably incurred by him ("Expenses'), and judgments, fines and amounts
paid in settlement that are actually and reasonably incurred by him, in
connection with the defense or settlement of such action, provided that he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Although Delaware law permits a corporation to indemnify any person referred to
above against expenses defense or settlement of an action by or in the right of
the corporation, provided that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests,
if such person has been judged liable to the corporation, indemnification is
only permitted to the extent that the Court of Chancery (or the court in which
the action was brought) determines that, despite the adjudication of liability,
such person is entitled to indemnify for such Expenses as the court deems
proper. The General Corporation Law of the State of Delaware also provides for
mandatory indemnification of any director, officer, employee or agent against
Expenses to the extent such person has been successful in any proceeding covered
by the statute. In addition, the General Corporation Law of the State of
Delaware provides the general authorization of advancement of a director's of
officer's litigation expenses in lieu of requiring the authorization of such
advancement by the board of directors in specific cases, and that
indemnification and advancement of expenses provided by the statute shall not be
deemed exclusive of any other rights to which those seeking indemnification of
expenses may be entitled under any bylaw, agreement or otherwise.
Article V of the By-Laws of the Registrant provide for the broad
indemnification of the directors and officers of the Registrant and for
advancement of litigation expenses to the fullest extent required or permitted
by current Delaware law.
The Registrant maintains a policy of directors and officers liability
insurance that reimburses the Registrant for expenses that it may incur in
conjunction with the foregoing indemnity provisions and that may provide direct
indemnification to officers and directors where Registrant is unable to do so.
The Certificate of Incorporation of the Registrant eliminates the
personal liability of a director to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except under
certain
II-1
<PAGE>
circumstances involving certain wrongful acts such as breach of a director's
duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for any unlawful acts
under Section 174 of the General Corporation Law of the State of Delaware, or
for any transaction from which a director derives an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 8, 1998, as part of the consideration for the acquisition of
Central Data Corporation, the Registrant issued a total of 199,480 shares of its
Common Stock to stockholders of Central Data. All of these shares were issued
pursuant to the exemption from registration provided by Regulation D under the
Securities Act of 1933, as amended. The shares were only issued to persons who
certified that they were "accredited investors" as defined in Rule 501(a) of
Regulation D. All shares of Common Stock issued in connection with the
acquisition of Central Data were subsequently registered on this Registration
Statement.
On July 29, 1998, as part of the consideration for the acquisition of
ITK International, Inc., the Registrant issued a total of 576,357 shares of its
Common Stock to stockholders of ITK International. Of these shares of Common
Stock, 408,817 shares were issued pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933. The
shares of Common Stock issued pursuant to Regulation S were issued only to
persons who certified to the Registrant that they were not a "U.S. person" as
defined in Rule 901(k) of Regulation S. The remaining 167,540 shares were issued
pursuant to Regulation D only to those persons who certified that they were
"accredited investors." All shares of Common Stock issued in connection with the
acquisition of ITK International were subsequently registered on this
Registration Statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of July 1, 1998 among the
Registrant, Iroquois Acquisition Inc. and ITK International, Inc.
(incorporated by reference to Exhibit 2 to the Registrant's Form 8-K
filed August 12, 1998 (File no. 0-17972)).
2.2 Agreement and Plan of Merger dated as of July 1, 1998 among the
Registrant, CD Acquisition Inc. and Central Data Corporation
(incorporated by reference to Exhibit 2 to the Registrant's Form 8-K
filed July 23, 1998 (File no. 0-17972)).
3.1 Restated Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3(a) to the Registrant's Form
10-K for the year ended September 30, 1993 (File no. 0-17972)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3(b) to the Registrant's Registration Statement
on Form S-1 (File no. 33-42384)).
4 Form of Rights Agreement dated as of June 10, 1998 between the
Registrant and Norwest Bank Minnesota, National Association, as
Rights Agent (incorporated by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A, dated June 24,
1998).
5 Opinion and Consent of Faegre & Benson LLP.
10.1 Stock Option Plan of the Registrant (incorporated by reference to
Exhibit 10(a) to the Registrant's Form 10-K for the year ended
September 30, 1998 (File no. 0-17972).
10.2 Form of indemnification agreement with directors and officers of the
Registrant (incorporated by reference to Exhibit 10(b) to the
Registrant's Registration Statement on Form S-1 (File no. 33-30725)).
10.3 Amended and Restated Employment Agreement between the Registrant and
John P. Schinas (incorporated by reference to Exhibit 10(c) to the
Registrant's Form 10-K for the year ended September 30, 1994 (File
no. 0-17972)).
10.4 Restated and Amended Note Purchase Agreement between the Registrant
and AetherWorks Corporation, dated October 14, 1997 (incorporated by
reference to Exhibit 10(d) to the Registrant's Form 10-K for the year
ended September 30, 1997 (File no. 0-17972)).
10.5 401(k) Savings and Profit Sharing Plan of Digi International Inc.
(incorporated by reference to Exhibit 10(f) to the Registrant's Form
10-K for the year ended September 30, 1991 (File no. 0-17972)).
10.6 Employment Arrangement between the Registrant and Jonathon E.
Killmer, dated September 16, 1996 (incorporated by reference to
Exhibit 10(k) to the Registrant's Form 10-K/A for the year ended
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
September 30, 1996 (File no. 0-17972)).
10.7 Employment Agreement between the Registrant and Jerry A. Dusa, dated
March 12, 1997 (incorporated by reference to Exhibit 10(m) to the
Registrant's Form 10-Q for the quarter ended March 31, 1997 (File no.
0-17972)).
10.8 Employment Arrangement between the Registrant and Douglas Glader
(incorporated by reference to Exhibit 10(q) to the Registrant's Form
10-K for the year ended September 30, 1995 (File no. 0-17972)).
10.9 Amendment to Employment Agreement between Registrant and Douglas
Glader (incorporated by reference to Exhibit 10(p) to the
Registrant's Form 10-Q for the quarter ended December 31, 1996 (File
no. 0-17972)).
10.10 Employment Agreement between the Registrant and Dino G. Kasdagly,
dated October 1, 1997 (incorporated by reference to Exhibit 10(r) to
the Registrant's Form 10-K for the year ended September 30, 1997
(File no. 0-17972)).
10.11 Employee Stock Purchase Plan of the Registrant (incorporated by
reference to Exhibit B to the Registrant's Proxy Statement for its
Annual Meeting of Stockholders held on January 31, 1996).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Faegre & Benson LLP (included in Exhibit No. 5 to this
Registration Statement).
24 Powers of Attorney (previously filed).
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or are not
required.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering;
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions summarized in Item 15 above, or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such
II-3
<PAGE>
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minnetonka, State of Minnesota, on December 31, 1998.
DIGI INTERNATIONAL INC.
By /s/ Jerry A. Dusa
---------------------------------------
Jerry A. Dusa
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities indicated on December 31, 1998.
<TABLE>
<CAPTION>
Signature Title
- - --------- -----
<S> <C>
/s/ Jerry A. Dusa President, Chief Executive Officer and Director
- - ----------------------------- (Principal Executive Officer)
Jerry A. Dusa
/s/ William C. Nolte Director of Finance and Controller
- - ----------------------------- (Acting Principal Financial and Accounting Officer)
William C. Nolte
John P. Schinas* Director
Willis K. Drake* Director
Jerry A. Dusa* Director
Richard E. Eichhorn* Director
Robert Moe* Director
Mykola Moroz* Director
David Stanley* Director
</TABLE>
*Jerry A. Dusa, by signing his name hereto, does hereby sign this document on
behalf of himself and each of the other above named directors of the Registrant
pursuant to powers of attorney duly executed by such persons.
By /s/ Jerry A. Dusa
---------------------------------
Jerry A. Dusa, Attorney in Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of July 1, 1998 among the Incorporated by
Registrant, Iroquois Acquisition Inc. and ITK International, Inc. Reference
2.2 Agreement and Plan of Merger dated as of July 1, 1998 among the Incorporated by
Registrant, CD Acquisition Inc. and Central Data Corporation. Reference
3.1 Restated Certificate of Incorporation of the Registrant, as amended. Incorporated by
Reference
3.2 Amended and Restated By-Laws of the Registrant. Incorporated by
Reference
4 Form of Rights Agreement dated as of June 10, 1998 between the Registrant Incorporated by
and Norwest Bank Minnesota, National Association, as Rights Agent. Reference
5 Opinion and Consent of Faegre & Benson LLP. Filed Electronically
10.1 Stock Option Plan of the Registrant. Incorporated by
Reference
10.2 Form of indemnification agreement with directors and officers of the Incorporated by
Registrant. Reference
10.3 Amended and Restated Employment Agreement between the Registrant and Incorporated by
John P. Schinas. Reference
10.4 Restated and Amended Note Purchase Agreement between the Registrant and Incorporated by
Aether Works Corporation, dated October 14, 1997. Reference
10.5 401(k) Savings and Profit Sharing Plan of Digi International Inc. Incorporated by
Reference
10.6 Employment Arrangement between the Registrant and Jonathon E. Killmer, Incorporated by
dated September 16, 1996. Reference
10.7 Employment Agreement between the Registrant and Jerry A. Dusa, dated Incorporated by
March 12, 1997. Reference
10.8 Employment Arrangement between the Registrant and Douglas Glader. Incorporated by
Reference
10.9 Amendment to Employment Agreement between the Registrant and Douglas Incorporated by
Glader. Reference
10.10 Employment Agreement between the Registrant and Dino G. Kasdagly, dated Incorporated by
October 1, 1997. Reference
10.11 Employee Stock Purchase Plan of the Registrant. Incorporated by
Reference
23.1 Consent of PricewaterhouseCoopers LLP. Filed Electronically
23.2 Consent of Ernst & Young LLP. Filed Electronically
23.3 Consent of Faegre & Benson LLP (included in Exhibit No. 5 to the
Registration Statement). Filed Electronically
24 Powers of Attorney. Previously Filed
</TABLE>
<PAGE>
EXHIBIT 5
FAEGRE & BENSON LLP
2200 NORWEST CENTER
90 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402-3901
612/335-3000
FACSIMILE 612/336-3026
December 29, 1998
Digi International Inc.
11001 Bren Road East
Minnetonka, Minnesota 55343
Gentlemen:
In connection with the proposed registration under the Securities Act
of 1933, as amended, of 585,927 shares of Common Stock, par value $.01 per
share, of Digi International Inc., a Delaware corporation (the "Company"),
proposed to be sold by selling stockholders of the Registrant, we have examined
such corporate records and other documents, including the Amendment No. 2 on
Form S-1 to Registration Statement on Form S-3, dated the date hereof, relating
to such shares (the "Registration Statement"), and have reviewed such matters of
law as we have deemed necessary for this opinion, and we advise you that in our
opinion:
1. The Company is a corporation duly organized and existing under the
laws of the State of Delaware.
2. The shares of Common Stock proposed to be sold by the selling
stockholders named in the Registration Statement are, and when sold as
contemplated in the Registration Statement will be, legally and validly issued
and fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm wherever appearing
therein.
Very truly yours,
FAEGRE & BENSON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form
S-1 of our report dated December 11, 1998, on our audits of the consolidated
financial statements of Digi International Inc. and subsidiaries as of
September 30, 1998 and 1997, and for each of the three years in the period
ended September 30, 1998, and our report dated October 26, 1998, on our
audits of the consolidated financial statements of ITK International, Inc.
and its subsidiaries as of June 30, 1998 and 1997, and for each of the three
years in the period ended June 30, 1998. We also consent to the reference to
our firm under the caption "Experts."
Minneapolis, Minnesota /s/ PricewaterhouseCoopers LLP
December 29, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts"
in the Registration Statement (Form S-1) and related prospectus of Digi
International Inc. for the registration of 585,927 shares of its Common Stock
and to the use therein of our report dated October 28, 1997, with respect to
the financial statements of AetherWorks Corporation for the years ended
September 30, 1997 and 1996, and the period from February 24, 1993
(inception) to September 30, 1997.
ERNST & YOUNG LLP
Minneapolis, Minnesota
December 24, 1998
