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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-1532464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
(612) 912-3444
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of each class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based on a closing price of $10.188 per share as reported on the
National Association of Securities Dealers Automated Quotation System-National
Market System on December 11, 1998 was $133,119,994.
Shares of common stock outstanding as of December 11, 1998: 14,588,995
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DOCUMENTS INCORPORATED BY REFERENCE
The following table shows, except as otherwise noted, the location of
information required in this Form 10-K, in the Registrant's Annual Report to
Stockholders for the year ended September 30, 1998 and Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled for January 27, 1998, a
definitive copy of which will be filed on or about January 11, 1999. All such
information set forth below under the heading "Reference" is incorporated herein
by reference, or included in this Form 10-K on the pages indicated.
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PART I ITEM IN FORM 10-K REFERENCE
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Item 1. Business Business, pages 4 through 7, this
document; Note 1, Notes to
Consolidated Financial Statements
Annual Report to Stockholders
Item 2. Properties Properties, pages 7 and 8, this
document
Item 3. Legal Proceedings Legal Proceedings, pages 8 and 9,
this document
Item 4. Submission of Matters to a Submission of Matters to a Vote of
Vote of Security Holders Security Holders, page 9, this
document
PART II
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Item 5. Market for Registrant's Common Stock Listing; Dividend Policy,
Equity and Related Stockholder page 40, Annual Report to
Matters Stockholders
Item 6. Selected Financial Data Financial Highlights, page 2,
Annual Report to Stockholders;
Selected Financial Information,
page 17, Annual Report to
Stockholders
Item 7. Management's Discussion and Management's Discussion and
Analysis of Financial Condition Analysis of Financial Condition and
and Results of Operations Results of Operations, pages 17
through 24, Annual Report to
Stockholders
Item 7A. Quantitative and Qualitative Quantitative and Qualitative
Disclosures About Market Risk Disclosures About Market Risk,
page 9, this document
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Item 8. Financial Statements and Annual Report to Stockholders,
Supplementary Data pages 25 through 39
Item 9. Changes in and Disagreements Changes and Disagreements with
with Accountants on Accounting Accountants on Accounting and
and Financial Disclosure Financial Disclosure, page 9, this
document
PART III ITEM IN FORM 10-K REFERENCE
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Item 10. Directors of the Registrant Election of Directors, Proxy
Statement
Executive Officers of the Executive Officers of the
Registrant Registrant, pages 9 and 10, this
document
Compliance with Section 16(a) Section 16(a) Beneficial Ownership
of the Exchange Act Reporting Compliance, Proxy
Statement
Item 11. Executive Compensation Executive Compensation; Election of
Directors; Summary Compensation
Table; Option Grants in Last Fiscal
Year; Aggregated Option Exercises
in the Last Fiscal Year and Fiscal
Year-end Option Values; Employment
Contracts; Severance, Termination
of Employment and Change-in-Control
Arrangements; Performance
Evaluation, Proxy Statement
Item 12. Security Ownership of Certain Security Ownership of Principal
Beneficial Owners and Management Stockholders and Management, Proxy
Statement
Item 13. Certain Relationships and Not applicable
Related Transactions
PART IV
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Item 14. Exhibits, Financial Statement Exhibits, Financial Statement
Schedules and Reports on Schedules and Reports on Form 8-K,
Form 8-K pages 10 through 13, this document
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PART I
ITEM 1. BUSINESS
Digi International Inc. ("Digi" or the "Company") was formed in l985
as a Minnesota corporation and reorganized as a Delaware corporation
in l989. The Company 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.
The Company'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.
The Company'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.
The Company entered the LAN market with its acquisition of MiLAN
Technology Corporation in November 1993. The Company'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.
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The Company'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.
The Company entered the Internet telephony market with the acquisition
of ITK International, Inc. ("ITK International") in July of 1998 and
its Voice over Internet Protocol ("VoIP") technology. 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, the
Company 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.
The Company expanded its product lines with its acquisition of Central
Data Corporation ("Central Data") in July 1998. The Company 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. The Company expects to introduce USB products in
fiscal 1999. Digi acquired Central Data for approximately $19.2
million in cash, stock, replacement stock options and the assumption
of $4.4 million of liabilities and restructuring/integration costs.
The Company 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.
The Company 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, the Company opened a sales support office in Germany to
increase sales support to the European distribution network. The
Company expanded its presence in the
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German market in July 1998 with the acquisition of ITK International,
which maintains a sales and manufacturing office in Dortmund, Germany.
In October 1993, the Company opened a sales support office in
Singapore to increase sales support for its products to the Pacific
Rim distribution network. In 1996, the Company opened similar offices
in Hong Kong, Sydney and Tokyo and in 1997, the Company opened sales
offices in Paris and London to better serve its non-U.S. markets.
To serve its worldwide markets, the Company (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 the Company'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. The Company 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 the Company's competitors and potential
competitors have greater financial, technological, manufacturing,
marketing and personnel resources than the Company. The Company
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, the Company believes it commands less than a 5%
market share. The Company is currently establishing its position in
the remote access market for the Company's RAS product lines. The
Company will enter the Internet telephony market upon full development
of its VoIP technology.
The Company's manufacturing operations procure all parts and certain
services involved in the production of products. The Company
subcontracts most of its product manufacturing to outside firms that
specialize in providing such services. The Company believes that this
approach to manufacturing is beneficial because it permits the Company
to reduce its fixed costs, maintain production flexibility and
maximize its profit margins.
The Company's products are manufactured to its designs with
standard and semi-custom components. Most of these components are
available from multiple vendors. The Company does have several
single-sourced supplier relationships, either because alternative
sources are not available or because the relationship is
advantageous to the Company. If these suppliers are unable to
provide timely and reliable supply of components, the Company could
experience manufacturing delays adversely affecting its results of
operations.
During fiscal years 1996, 1997 and 1998, the Company's research and
development expenditures were $21.3, $18.0, and $17.0 million,
respectively.
Due to rapidly changing technology in the computer industry, the
Company believes that its success depends primarily upon the
engineering, marketing, manufacturing and support skills of its
personnel, rather than upon patent protection. Although the Company
may seek patents where appropriate and has certain patent applications
pending for proprietary technology, the Company's proprietary
technology or products are generally not patented. The Company relies
primarily on the copyright, trademark and trade secret laws to protect
its proprietary rights in its products. The Company has established
common law and registered trademark rights on a family of marks for a
number of its products.
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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 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. The Company
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, the Company 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.
ITEM 2. PROPERTIES
The Company's headquarters and research facilities are located in a
130,000 square foot office building in Minnetonka, Minnesota which the
Company acquired in August 1995 and has occupied since March 1996.
The Company's primary manufacturing facility is currently located in a
58,000 square foot building in Eden Prairie, Minnesota, which the
Company 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.
The Company'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. The Company's sales support office in Australia is located in a
886 square foot office in Sydney, the lease for which expires in
February 2001. The Company's sales support office in Hong Kong is
located in a 2,643
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square foot office in Causeway Bay, the lease for which expires in
2001. The Company's sales support office in London is located in a
2,000 square foot office, the lease for which expires in June 2002.
The Company'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 the Company's facilities are suitable and
adequate for current office, research and warehouse requirements, and
that its manufacturing facilities provide sufficient production
capacity to meet the Company's currently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Between January 3, 1997 and March 7, 1997, the Company 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 for 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 (the "Consolidated Amended 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 the Company and its
previous officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary L.
Deaner violated the federal securities laws by, among other things,
misrepresenting and/or omitting material information concerning the
Company's operations and financial results. The Consolidated Amended
Complaint seeks compensatory damages in an unspecified amount plus
interest against all defendants, jointly and severally, and an award
of attorneys' fees, experts' fees and costs.
On February 25, 1997, the Company and certain of its previous officers
also were named as defendants in a securities lawsuit filed in the
United States District Court for the District of Minnesota by the
Louisiana State Employees Retirement System, which is captioned
LOUISIANA STATE EMPLOYEES RETIREMENT SYSTEM V. DIGI 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"). The Louisiana Amended Complaint alleges that the Company
and its previous officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary
L. Deaner violated federal securities laws and state common law by,
among other things, misrepresenting and/or omitting material
information concerning the Company's operations and financial results.
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 misrepresentation 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
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11,000 shares of the Company'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 the
Company 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 the Company's financial position, liquidity
or future operations can be made.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended September 30, 1998.
PART II
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of filing this Form 10-K, the following individuals
were executive officers of the Registrant:
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NAME AGE POSITION
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Jerry A. Dusa 51 Director, President and
Chief Executive Officer
Douglas J. Glader 55 Senior Vice President,
Manufacturing Operations
Dino G. Kasdagly 44 Senior Vice President,
Development
</TABLE>
Mr. Dusa has been a member of the Board of Directors and President and
Chief Executive Officer of the Company since March 12, 1997, after
serving the Company 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 the Company in this
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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 Vice President of Operations in February 1995 and
Senior Vice President, Manufacturing Operations, on April 23, 1997.
Before that, he was Director of Manufacturing and Operations for MiLAN
Technology Corporation, which the Company 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 the Company in October 1997 as Senior Vice
President, Development. Prior to joining the Company, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedules of the Company
and Report of Independent Auditors for AetherWorks Corporation
1. Incorporated by reference to pages 25 through 38 of the
Company's 1998 Annual Report to Stockholders:
Consolidated Statements of Operations for the fiscal years
ended September 30, 1998, 1997 and 1996
Consolidated Balance Sheets as of September 30, 1998 and
1997
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the
fiscal years ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. All financial statement schedules are omitted because they
are not applicable or are not required.
3. Report of Ernst & Young LLP, Independent Auditors for
AetherWorks Corporation
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(b) Reports on Form 8-K
Form 8-K dated July 23, 1998, regarding the Company's acquisition
of Central Data Corporation on July 8, 1998.
Form 8-K dated August 12, 1998, regarding the Company's
acquisition of ITK International, Inc. on July 29, 1998.
Form 8-K dated September 4, 1998, regarding the authorization of
the Company to purchase up to 1 million shares of its Common
Stock and the resignation of Jonathan E. Killmer, Senior Vice
President, Chief Financial Officer and Treasurer, effective
October 30, 1998.
Form 8-K dated September 11, 1998, regarding the write-off and
restructuring charge associated with the acquisition of Central
Data Corporation and ITK International, Inc. in the fourth
quarter of fiscal 1998.
(c) Exhibits
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Exhibit
Number Description
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2(a) Agreement and Plan of Merger dated as of July 1, 1998
among the Company, Iroquois Acquisition Inc. and ITK
International, Inc. (1)
2(b) Agreement and Plan of Merger dated as of July 1, 1998
among the Company, CD Acquisition Inc. and Central Data
Corporation (2)
3(a) Restated Certificate of Incorporation of the Company (3)
3(b) Amended and Restated By-Laws of the Company (4)
10(a) Stock Option Plan of the Company
10(b) Form of indemnification agreement with directors and
officers of the Company (5)
10(c) Amended and Restated Employment Agreement between the
Company and John P. Schinas (6)
10(d) Restated and Amended Note Purchase Agreement between the
Company and AetherWorks Corporation, dated October 14,
1997 (7)
10(e) 401(k) Savings and Profit Sharing Plan of Digi
International Inc. (8)
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10(f) Employment Arrangement between the Company and Jonathon E.
Killmer, dated September 16, 1996 (9)
10(g) Employment Agreement between the Company and Jerry A.
Dusa, dated March 12, 1997 (10)
10(h) Employment Arrangement between the Company and Douglas
Glader (11)
10(h) (i) Amendment to Employment Agreement between the Company
and Douglas Glader (12)
10(i) Employment Agreement between the Company and Dino G.
Kasdagly, dated October 1, 1997 (13)
10(j) Employee Stock Purchase Plan of the Company (14)
13 1998 Annual Report to Stockholders (only those portions
specifically incorporated by reference herein shall be
deemed filed with the Securities and Exchange Commission)
21 Subsidiaries of the Company
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed
August 12, 1998 (File no. 0-17972).
(2) Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed July
23, 1998 (File no. 0-17972).
(3) Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for
the year ended September 30, 1993 (File no. 0-17972).
(4) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form S-1 (File no. 33-42384).
(5) Incorporated by reference to Exhibit 10(b) to the Company's Registration
Statement on Form S-1 (File no. 33-30725).
(6) Incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for
the year ended September 30, 1994 (File no. 0-17972).
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(7) Incorporated by reference to Exhibit 10(d) to the Company's Form 10-K for
the year ended September 30, 1997 (File no. 0-17972).
(8) Incorporated by reference to Exhibit 10(f) to Company's Form 10-K for the
year ended September 30, 1991 (File no. 0-17972).
(9) Incorporated by reference to Exhibit 10(k) to the Company's Form 10-K/A for
the year ended September 30, 1996 (File no. 0-17972).
(10) Incorporated by reference to Exhibit 10(m) to the Company's Form 10-Q for
the quarter ended March 31, 1997 (File no. 0-17972).
(11) Incorporated by reference to Exhibit 10(q) to the Company's Form 10-K for
the year ended September 30, 1995 (File no. 0-17972).
(12) Incorporated by reference to Exhibit 10(p) to the Company's Form 10-Q for
the quarter ended December 31, 1996 (File no. 0-17972).
(13) Incorporated by reference to Exhibit 10(r) to the Company's Form 10-K for
the year ended September 30, 1997 (File no. 0-17972).
(14) Incorporated by reference to Exhibit B to the Company's Proxy Statement for
its Annual Meeting of Stockholders held on January 31, 1996.
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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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIGI INTERNATIONAL INC.
December 29, 1998 By: /s/ Jerry A. Dusa
- ------------------------------- -----------------------------------------
Date Jerry A. Dusa
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
December 29, 1998 /s/ Jerry A. Dusa
- ------------------------------- -----------------------------------------
Date Jerry A. Dusa
President & Chief Executive Officer
(Principal Executive Officer)
December 29, 1998 /s/ William C. Nolte
- ------------------------------- -----------------------------------------
Date William C. Nolte
Director of Finance and Controller
(Acting Principal Financial and
Accounting Officer)
JOHN P. SCHINAS
WILLIS K. DRAKE
JERRY A. DUSA
RICHARD E. EICHHORN
MYKOLA MOROZ A majority of the Board of Directors*
DAVID STANLEY
ROBERT S. MOE
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.
/s/ Jerry A. Dusa
-----------------------------------------
Jerry A. Dusa,
Attorney-in-fact
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
2(a) Agreement and Plan of Merger dated as of July 1, Incorporated by
1998 among the Registrant, Iroquois Acquisition Reference
Inc. and ITK International, Inc.
2(b) Agreement and Plan of Merger dated as of July 1, Incorporated by
1998 among the Registrant, CD Acquisition Inc. Reference
and Central Data Corporation
3(a) Restated Certificate of Incorporation of the Incorporated by
Registrant, as amended Reference
3(b) Amended and Restated By-Laws of the Registrant Incorporated by
Reference
10(a) Stock Option Plan of the Registrant Filed
Electronically
10(b) Form of indemnification agreement with directors Incorporated by
and officers of the Registrant Reference
10(c) Amended and Restated Employment Agreement between Incorporated by
the Registrant and John P. Schinas Reference
10(d) Restated and Amended Note Purchase Agreement Incorporated by
between the Registrant and Aether Works Reference
Corporation, dated October 14, 1997
10(e) 401(k) Savings and Profit Sharing Plan of Digi Incorporated by
International Inc. Reference
10(f) Employment Arrangement between the Registrant and Incorporated by
Jonathon E. Killmer, dated September 16, 1996 Reference
10(g) Employment Agreement between the Registrant and Incorporated by
Jerry A. Dusa, dated March 12, 1997 Reference
10(h) Employment Arrangement between the Registrant and Incorporated by
Douglas Glader Reference
10(h) (i) Amendment to Employment Agreement between the Incorporated by
Registrant and Douglas Glader Reference
10(i) Employment Agreement between the Registrant and Incorporated by
Dino G. Kasdagly, dated October 1, 1997 Reference
10(j) Employee Stock Purchase Plan of the Registrant Incorporated by
Reference
23.1 Consent of Independent Accountants Filed
Electronically
23.2 Consent of Independent Accountants Filed
Electronically
24 Powers of Attorney Filed
Electronically
27 Financial Data Schedule Filed
Electronically
</TABLE>
<PAGE>
EXHIBIT 10(a)
DIGI INTERNATIONAL INC.
STOCK OPTION PLAN
AS AMENDED AND RESTATED
AS OF JULY 28, 1998
1. PURPOSE OF PLAN. The purpose of this Digi International Inc. Stock Option
Plan (the "Plan"), is to promote the interests of Digi International Inc., a
Delaware corporation (the "Company"), and its stockholders by providing key
personnel of the Company and its subsidiaries with an opportunity to acquire a
proprietary interest in the Company and thereby develop a stronger incentive to
put forth maximum effort for the continued success and growth of the Company and
its subsidiaries. In addition, the opportunity to acquire a proprietary interest
in the Company will aid in attracting and retaining key personnel of outstanding
ability.
2. ADMINISTRATION OF PLAN. This Plan shall be administered by a committee of
two or more directors (the "Committee") appointed by the Company's board of
directors (the "Board"). No person shall serve as a member of the Committee
unless such person shall be a "Non-Employee Director" as that term is defined in
Rule 16b-3(a)(3)(i), promulgated under the Securities Exchange Act of 1934, as
amended (the "Act"), or any successor statute or regulation comprehending the
same subject matter. A majority of the members of the Committee shall constitute
a quorum for any meeting of the Committee, and the acts of a majority of the
members present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be the
acts of the Committee. Subject to the provisions of this Plan, the Committee
may from time to time adopt such rules for the administration of this Plan as it
deems appropriate. The decision of the Committee on any matter affecting this
Plan or the rights and obligations arising under this Plan or any option granted
hereunder, shall be final, conclusive and binding upon all persons, including
without limitation the Company, stockholders, employees and optionees. To the
full extent permitted by law, (i) no member of the Committee or the CEO Stock
Option Committee (as defined in this paragraph 2) shall be liable for any action
or determination taken or made in good faith with respect to this Plan or any
option granted hereunder and (ii) the members of the Committee and the CEO Stock
Option Committee shall be entitled to indemnification by the Company against and
from any loss incurred by such member or person by reason of any such actions
and determinations. The Committee may delegate all or any part of its authority
under this Plan to a one person committee consisting of the Chief Executive
Officer of the Company as its sole member (the "CEO Stock Option Committee") for
purposes of granting and administering awards granted to persons other than
persons who are then subject to the reporting requirements of Section 16 of the
Exchange Act ("Section 16 Individuals").
3. SHARES SUBJECT TO PLAN. The shares that may be made subject to options
granted under this Plan shall be authorized and unissued shares of common stock
(the "Common Shares") of the Company, $.01 par value, or Common Shares held in
treasury, and they shall not exceed 4,129,400 in the aggregate, except that, if
any option lapses or terminates for any reason before such option has been
completely exercised, the Common Shares covered by the unexercised portion of
such
<PAGE>
option may again be made subject to options granted under this Plan. Appropriate
adjustments in the number of shares and in the purchase price per share may be
made by the Committee in its sole discretion to give effect to adjustments made
in the number of outstanding Common Shares of the Company through a merger,
consolidation, recapitalization, reclassification, combination, stock dividend,
stock split or other relevant change, provided that fractional shares shall be
rounded to the nearest whole share.
4. ELIGIBLE PARTICIPANTS. Options may be granted under this Plan to any key
employee of the Company or any subsidiary thereof, including any such employee
who is also an officer or director of the Company or any subsidiary thereof.
Nonstatutory stock options, as defined in paragraph 5(a) hereof, also shall be
granted to directors of the Company who are not employees of the Company or any
subsidiary thereof (the "Outside Directors") in accordance with paragraph 6
hereof and may also be granted to other individuals or entities who are not
"employees" but who provide services to the Company or a parent or subsidiary
thereof in the capacity of an Outside Director, advisor or consultant.
References herein to "employed," "employment" and similar terms (except
"employee") shall include the providing of services in any such capacity or as a
director. The employees and other individuals and entities to whom options may
be granted pursuant to this paragraph 4 are referred to herein as "Eligible
Participants."
5. TERMS AND CONDITIONS OF EMPLOYEE OPTIONS.
(a) Subject to the terms and conditions of this Plan, the Committee
may, from time to time prior to December 1, 2006, grant to such Eligible
Participants as the Committee may determine options to purchase such number
of Common Shares of the Company on such terms and conditions as the
Committee may determine; provided, however, that no Eligible Participant
may be granted options with respect to more than 250,000 Common Shares
during any calendar year. In determining the Eligible Participants to whom
options shall be granted and the number of Common Shares to be covered by
each option, the Committee may take into account the nature of the services
rendered by the respective Eligible Participants, their present and
potential contributions to the success of the Company, and such other
factors as the Committee in its sole discretion shall deem relevant. The
date and time of approval by the Committee of the granting of an option
shall be considered the date and the time of the grant of such option. The
Committee in its sole discretion may designate whether an option granted to
an employee is to be considered an "incentive stock option" (as that term
is defined in Section 422 of the Internal Revenue Code of 1986, as amended,
or any amendment thereto (the "Code")) or a nonstatutory stock option (an
option granted under this Plan that is not intended to be an "incentive
stock option"). The Committee may grant both incentive stock options and
nonstatutory stock options to the same employee. However, if an incentive
stock option and a nonstatutory stock option are awarded simultaneously,
such options shall be deemed to have been awarded in separate grants, shall
be clearly identified, and in no event shall the exercise of one such
option affect the right to exercise the other. To the extent that the
aggregate Fair Market Value (as defined in paragraph 5(c)) of Common Shares
with respect to which incentive stock options (determined without regard to
this sentence) are exercisable for the first time by any individual during
any calendar year (under all plans of the Company and its parent and
subsidiary corporations) exceeds $100,000, such options shall be treated as
nonstatutory stock options.
<PAGE>
(b) The purchase price of each Common Share subject to an option
granted pursuant to this paragraph 5 shall be fixed by the Committee. For
nonstatutory stock options, such purchase price may be set at not less than
50% of the Fair Market Value (as defined below) of a Common Share on the
date of grant. For incentive stock options, such purchase price shall be no
less than 100% of the Fair Market Value of a Common Share on the date of
grant, provided that if such incentive stock option is granted to an
employee who owns, or is deemed under Section 424(d) of the Code to own, at
the time such option is granted, stock of the Company (or of any parent or
subsidiary of the Company) possessing more than 10% of the total combined
voting power of all classes of stock therein (a "10% Stockholder"), such
purchase price shall be no less than 110% of the Fair Market Value of a
Common Share on the date of grant.
(c) For purposes of this Plan, the "Fair Market Value" of a Common
Share at a specified date shall, unless otherwise expressly provided in
this Plan, mean the closing sale price of a Common Share on the date
immediately preceding such date or, if no sale of such shares shall have
occurred on that date, on the next preceding day on which a sale of such
shares occurred, on the Composite Tape for New York Stock Exchange listed
shares or, if such shares are not quoted on the Composite Tape for New York
Stock Exchange listed shares, on the principal United States securities
exchange registered under the Act, on which the shares are listed, or, if
such shares are not listed on any such exchange, on the Nasdaq Stock Market
or any similar system then in use or, if such shares are not included on
the Nasdaq Stock Market or any similar system then in use, the mean between
the closing "bid" and the closing "asked" quotation of such a share on the
date immediately preceding the date as of which such Fair Market Value is
being determined, or, if no closing bid or asked quotation is made on that
date, on the next preceding day on which a quotation is made, on an NASD
System or any similar system then in use, provided that if the shares in
question are not quoted on any such system, Fair Market Value shall be what
the Committee determines in good faith to be 100% of the fair market value
of such a share as of the date in question. Notwithstanding anything stated
in this paragraph, if the applicable securities exchange or system has
closed for the day by the time the determination is being made, all
references in this paragraph to the date immediately preceding the date in
question shall be deemed to be references to the date in question.
(d) Each option agreement provided for in paragraph 14 hereof shall
specify when each option granted under this Plan shall become exercisable.
(e) Each option granted pursuant to this paragraph 5 and all rights
to purchase shares thereunder shall cease on the earliest of:
(i) ten years after the date such option is granted (or in the
case of an incentive stock option granted to a 10% Stockholder, five
years after the date such option is granted) or on such date prior
thereto as may be fixed by the Committee on or before the date such
option is granted;
(ii) the expiration of the period after the termination of the
optionee's employment within which the option is exercisable as
specified in paragraph 8(b) or 8(c), whichever is applicable; or
<PAGE>
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 9 of this Plan.
In no event shall any option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
6. TERMS AND CONDITIONS OF OUTSIDE DIRECTOR OPTIONS.
(a) Subject to the terms and conditions of this Plan, the Committee
shall grant options to each Outside Director who is not on the date such
option would be granted the beneficial owner (as defined in Rule 13d-3
under the Act) of more than 5% of the outstanding Common Shares, on the
terms and conditions set forth in this paragraph 6. During the term of this
Plan and provided that sufficient Common Shares are available pursuant to
paragraph 3:
(i) each person who is elected to be an Outside Director and who
was not at any time previously a director of the Company shall be
granted a nonstatutory stock option. The date such person is elected
to be an Outside Director of the Company shall be the date of grant
for such options granted pursuant to this subparagraph 6(a)(i). The
number of Common Shares covered by each such option shall be 5,000;
(ii) each person who is an Outside Director at the conclusion of
an Annual Meeting of Stockholders shall be granted a nonstatutory
stock option on the date of such Annual Meeting of Stockholders. The
date of such Annual Meeting of Stockholders shall also be the date of
grant for options granted pursuant to this subparagraph 6(a)(ii). The
number of Common Shares covered by each such option shall be 1,500;
(iii) each person who is elected to be an Outside Director between
Annual Meetings of Stockholders shall be granted a nonstatutory stock
option. The date such person is elected to be an Outside Director of
the Company by the Board shall be the date of grant for such options
granted pursuant to this subparagraph 6(a)(iii). The number of Common
Shares covered by each such option shall be 1,500 multiplied by a
fraction, the numerator of which shall be 12 minus the number of whole
30-day months that have elapsed from the date of the most recent
Annual Meeting of Stockholders to the date such person is elected to
be an Outside Director, and the denominator of which shall be 12;
(iv) each person who is an Outside Director at the conclusion of
an Annual Meeting of Stockholders may elect in writing to be granted a
nonstatutory stock option on the date of such Annual Meeting of
Stockholders in lieu of all cash compensation to which such Outside
Director would be entitled for the Board year of the Company
commencing with such Annual Meeting of Stockholders. The date of such
Annual Meeting of Stockholders shall also be the date of grant for
options granted pursuant to this subparagraph 6(a)(iv). The number of
Common Shares
<PAGE>
covered by each such option shall be 6,000. Any such election by an
Outside Director shall be subject to prior approval by the Committee;
and
(v) each person who is elected to be an Outside Director between
Annual Meetings of Stockholders may elect in writing to be granted a
nonstatutory stock option in lieu of all cash compensation to which
such Outside Director would otherwise be entitled for the period
commencing with the date such person is elected to be an Outside
Director of the Company by the Board and ending on the date of the
next Annual Meeting of Stockholders. The date such person is elected
to be an Outside Director of the Company by the Board shall be the
date of grant for such options granted pursuant to this
subparagraph 6(a)(v). The number of Common Shares covered by each such
option shall be 6,000 multiplied by a fraction, the numerator of which
shall be 12 minus the number of whole 30-day months that have elapsed
from the date of the most recent Annual Meeting of Stockholders to the
date such person is elected to be an Outside Director, and the
denominator of which shall be 12. Such election by an Outside Director
shall be subject to prior approval by the Committee.
(b) The purchase price of each Common Share subject to an option
granted to an Outside Director pursuant to this paragraph 6 shall be the
Fair Market Value of a Common Share on the date of grant.
(c)(i) Subject to the provisions of paragraphs 6(d) and 6(e)
hereof, (x) options granted to Outside Directors pursuant to subparagraph
6(a)(ii) and (iv) and (y) options granted to Outside Directors pursuant to
subparagraph 6(a)(i) if the date of grant of such options is the date of an
Annual Meeting of Stockholders shall vest and become exercisable in
accordance with the following schedule:
<TABLE>
<CAPTION>
Annual Meeting Cumulative Percentage
of Stockholders Becoming Exercisable
--------------- --------------------
<S> <C>
One Year After Grant 50%
Two Years After Grant 100%
</TABLE>
(ii) Subject to the provisions of paragraph 6(d) and 6(e) hereof,
(x) the options granted to Outside Directors pursuant to subparagraphs
6(a)(iii) and (v) and (y) options granted to Outside Directors
pursuant to subparagraph 6(a)(i) if the date of grant of such options
is a date other than the date of an Annual Meeting of Stockholders
shall vest and become exercisable in accordance with the following
schedule:
<TABLE>
<CAPTION>
Anniversary of the Cumulative Percentage
Date of Grant Becoming Exercisable
--------------- --------------------
<S> <C>
One Year After Grant 50%
Two Years After Grant 100%
</TABLE>
<PAGE>
(d) Notwithstanding the vesting schedules set forth in paragraph 6(c)
hereof, an option held by an Outside Director shall vest and become
immediately exercisable upon the latest of (i) the date on which such
Outside Director attains 62 years of age, (ii) the date on which such
Outside Director has completed five years of Service (as hereinafter
defined) and (iii) the first anniversary of the date of grant of such
option or, if applicable, the Annual Meeting of Stockholders next
succeeding the Annual Meeting at which such option was granted. Any option
granted to an Outside Director on or after the first accelerated vesting
date for such Outside Director shall automatically vest on the Annual
Meeting of Stockholders next succeeding the Annual Meeting at which such
option was granted. As used herein, "Service" shall mean service to the
Company or any subsidiary thereof in the capacity of any advisor,
consultant, employee, officer or director, and Service as a director from
an Annual Meeting of Stockholders to the next succeeding Annual Meeting
shall constitute a year of Service, notwithstanding that such period may
actually be more or less than one year.
(e) Each option granted to an Outside Director pursuant to this
paragraph 6 and all rights to purchase shares thereunder shall terminate on
the earliest of:
(i) ten years after the date such option is granted;
(ii) the expiration of the period specified in paragraph 8(b) or
8(c), whichever is applicable, after an Outside Director ceases to be
a director of the Company; or
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 9 of this Plan.
In no event shall such option be exercisable at any time after its original
expiration date. When an option is no longer exercisable, it shall be deemed to
have lapsed or terminated and will no longer be outstanding.
7. MANNER OF EXERCISING OPTIONS. A person entitled to exercise an option
granted under this Plan may, subject to its terms and conditions and the terms
and conditions of this Plan, exercise it in whole at any time, or in part from
time to time, by delivery to the Company at its principal executive office, to
the attention of its President, of written notice of exercise, specifying the
number of shares with respect to which the option is being exercised,
accompanied by payment in full of the purchase price of the shares to be
purchased at the time. The purchase price of each share on the exercise of any
option shall be paid in full in cash (including check, bank draft or money
order) at the time of exercise or, at the discretion of the holder of the
option, by delivery to the Company of unencumbered Common Shares having an
aggregate Fair Market Value on the date of exercise equal to the purchase price,
or by a combination of cash and such unencumbered Common Shares. Provided,
however, that a person exercising a stock option shall not be permitted to pay
any portion of the purchase price with stock if, in the opinion of the
Committee, payment in such manner could have adverse financial accounting
consequences for the Company. No shares shall be issued until full payment
therefor has been made, and the granting of an option to an individual shall
give such individual no rights as a stockholder except as to shares issued to
such individual.
<PAGE>
8. TRANSFERABILITY AND TERMINATION OF OPTIONS.
(a) During the lifetime of an optionee, only such optionee or his or
her guardian or legal representative may exercise options granted under
this Plan, and no option granted under this Plan shall be assignable or
transferable by the optionee otherwise than by will or the laws of descent
and distribution or pursuant to a domestic relations order as defined in
the Code or Title I of the Employee Retirement Income Security Act
("ERISA"), or the rules thereunder; provided, however, that any optionee
may transfer a nonstatutory stock option granted under this Plan to a
member or members of his or her immediate family (i.e., his or her
children, grandchildren and spouse) or to one or more trusts for the
benefit of such family members or partnerships in which such family members
are the only partners, if (i) the option agreement with respect to such
options, which must be approved by the Committee, expressly so provides
either at the time of initial grant or by amendment to an outstanding
option agreement and (ii) the optionee does not receive any consideration
for the transfer. Any options held by any such transferee shall continue
to be subject to the same terms and conditions that were applicable to such
options immediately prior to their transfer and may be exercised by such
transferee as and to the extent that such option has become exercisable and
has not terminated in accordance with the provisions of the Plan and the
applicable option agreement. For purposes of any provision of this Plan
relating to notice to an optionee or to vesting or termination of an option
upon the death, disability or termination of employment of an optionee, the
references to "optionee" shall mean the original grantee of an option and
not any transferee.
(b) During the lifetime of an optionee, an option may be exercised
only while the optionee is employed by the Company or a parent or
subsidiary thereof, and only if such optionee has been continuously so
employed since the date the option was granted, except that:
(i) unless otherwise provided in a stock option agreement, an
option granted to an optionee who is not an Outside Director shall
continue to be exercisable for three months after termination of such
optionee's employment but, unless otherwise provided in a stock option
agreement, only to the extent that the option was exercisable
immediately prior to such optionee's termination of employment, and
unless otherwise provided in a stock option agreement, an option
granted to an optionee who is an Outside Director shall continue to be
exercisable after such Outside Director ceases to be a director of the
Company but, unless otherwise provided in a stock option agreement,
only to the extent that the option was exercisable immediately prior
to such Outside Director's ceasing to be a director;
(ii) in the case of an optionee who is disabled (within the
meaning of Section 22(e)(3) of the Code) while employed, the option
granted to such optionee may be exercised within one year after
termination of such optionee's employment; and
<PAGE>
(iii) as to any optionee whose termination occurs following a
declaration pursuant to paragraph 9 of this Plan, the option granted
to such optionee may be exercised at any time permitted by such
declaration.
(c) An option may be exercised after the death of the optionee, but
only within one year after the death of such optionee.
(d) In the event of the disability (within the meaning of
Section 22(e)(3) of the Code) or death of an optionee, any option granted
to such optionee that was not previously exercisable shall become
immediately exercisable in full if the disabled or deceased optionee shall
have been continuously employed by the Company or a parent or subsidiary
thereof between the date such option was granted and the date of such
disability, or, in the event of death, a date not more than three months
prior to such death.
9. DISSOLUTION, LIQUIDATION, MERGER. In the event of (a) a proposed merger or
consolidation of the Company with or into any other corporation, regardless of
whether the Company is the surviving corporation, unless appropriate provision
shall have been made for the protection of the outstanding options granted under
this Plan by the substitution, in lieu of such options, of options to purchase
appropriate voting common stock (the "Survivor's Stock") of the corporation
surviving any such merger or consolidation or, if appropriate, the parent
corporation of the Company or such surviving corporation, or, alternatively, by
the delivery of a number of shares of the Survivor's Stock which has a Fair
Market Value as of the effective date of such merger or consolidation equal to
the product of (i) the excess of (x) the Event Proceeds per Common Share (as
hereinafter defined) covered by the option as of such effective date, over
(y) the option price per Common Share, times (ii) the number of Common Shares
covered by such option, or (b) the proposed dissolution or liquidation of the
Company (such merger, consolidation, dissolution or liquidation being herein
called an "Event"), the Committee shall declare, at least ten days prior to the
actual effective date of an Event, and provide written notice to each optionee
of the declaration, that each outstanding option, whether or not then
exercisable, shall be cancelled at the time of, or immediately prior to the
occurrence of, the Event (unless it shall have been exercised prior to the
occurrence of the Event) in exchange for payment to the holder of each cancelled
option, within ten days after the Event, of cash equal to the amount (if any),
for each Common Share covered by the cancelled option, by which the Event
Proceeds per Common Share (as hereinafter defined) exceeds the exercise price
per Common Share covered by such option. At the time of the declaration provided
for in the immediately preceding sentence, each option shall immediately become
exercisable in full and each holder of an option shall have the right, during
the period preceding the time of cancellation of the option, to exercise his or
her option as to all or any part of the Common Shares covered thereby. Each
outstanding option granted pursuant to this Plan that shall not have been
exercised prior to the Event shall be cancelled at the time of, or immediately
prior to, the Event, as provided in the declaration, and this Plan shall
terminate at the time of such cancellation, subject to the payment obligations
of the Company provided in this paragraph 9. For purposes of this paragraph,
"Event Proceeds per Common Share" shall mean the cash plus the fair market
value, as determined in good faith by the Committee, of the non-cash
consideration to be received per Common Share by the stockholders of the Company
upon the occurrence of the Event.
<PAGE>
10. SUBSTITUTION OPTIONS. Options may be granted under this Plan from time to
time in substitution for stock options held by employees of other corporations
who are about to become employees of the Company or a subsidiary of the Company,
or whose employer is about to become a subsidiary of the Company, as the result
of a merger or consolidation of the Company or a subsidiary of the Company with
another corporation, the acquisition by the Company or a subsidiary of the
Company of all or substantially all the assets of another corporation or the
acquisition by the Company or a subsidiary of the Company of at least 50% of the
issued and outstanding stock of another corporation. The terms and conditions of
the substitute options so granted may vary from the terms and conditions set
forth in this Plan to such extent as the Board at the time of the grant may deem
appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted, but with respect to stock
options which are incentive stock options, no such variation shall be permitted
which affects the status of any such substitute option as an incentive stock
option under Section 422A of the Code.
11. TAX WITHHOLDING. Delivery of Common Shares upon exercise of any
nonstatutory stock option granted under this Plan shall be subject to any
required withholding taxes. A person exercising such an option may, as a
condition precedent to receiving the Common Shares, be required to pay the
Company a cash amount equal to the amount of any required withholdings. In lieu
of all or any part of such a cash payment, the Committee may, but shall not be
required to, permit the optionee to elect to cover all or any part of the
required withholdings, and to cover any additional withholdings up to the amount
needed to cover such optionee's full FICA and federal, state and local income
tax liability with respect to income arising from the exercise of the option,
through a reduction of the number of Common Shares delivered to the person
exercising the option or through a subsequent return to the Company of shares
delivered to the person exercising the option.
12. TERMINATION OF EMPLOYMENT. Neither the transfer of employment of an
optionee between any combination of the Company, a parent corporation or a
subsidiary thereof, nor a leave of absence granted to such optionee and approved
by the Committee, shall be deemed a termination of employment for purposes of
this Plan. The terms "parent" or "parent corporation" and "subsidiary" as used
in this Plan shall have the meaning ascribed to "parent corporation" and
"subsidiary corporation", respectively, in Sections 424(e) and (f) of the Code.
13. OTHER TERMS AND CONDITIONS. The Committee shall have the power, subject to
the other limitations contained herein, to fix any other terms and conditions
for the grant or exercise of any option under this Plan. Nothing contained in
this Plan, or in any option granted pursuant to this Plan, shall confer upon any
optionee any right to continued employment by the Company or any parent or
subsidiary of the Company or limit in any way the right of the Company or any
such parent or subsidiary to terminate an optionee's employment at any time.
14. OPTION AGREEMENTS. All options granted under this Plan shall be evidenced
by a written agreement in such form or forms as the Committee may from time to
time determine, which agreement shall, among other things, designate whether the
options being granted thereunder are nonstatutory stock options or incentive
stock options under Section 422 of the Code.
15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time amend,
suspend or discontinue this Plan; provided, however, that no amendment by the
Board shall, without further
<PAGE>
approval of the Stockholders of the Company, if required in order for the Plan
to continue to meet the requirements of the Code:
(a) change the persons eligible to receive options;
(b) except as provided in paragraph 3 hereof, increase the total number of
Common Shares of the Company which may be made subject to options granted
under this Plan;
(c) except as provided in paragraph 3 hereof, change the minimum purchase
price for the exercise of an option; or
(d) extend the term of this Plan beyond December 1, 2006.
No amendment to this Plan shall, without the consent of the holder of the
option, alter or impair any options previously granted under this Plan.
16. EFFECTIVE DATE. This Plan shall be effective July 26, 1989.
<PAGE>
SELECTED FINANCIAL INFORMATION >>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $182,932 $165,598 $193,151 $164,978 $130,945
Percentage increase (decrease) 10.5% (14.3)% 17.1% 26.0% 40.2%
Net (loss) income (22,659) (15,791) 9,300 19,331 16,701
Percentage increase (decrease) (43.5)% (269.8)% (51.9)% 15.7% 12.0%
Net (loss) income per share - basic (1.65) (1.18) 0.70 1.42 1.17
Percentage increase (decrease) (39.8)% (268.6)% (50.7)% (21.4)% 13.6%
Net (loss) income per share - assuming dilution (1.65) (1.18) 0.68 1.39 1.16
Percentage increase (decrease) (39.8)% (268.6)% (51.1)% 19.8% 13.6%
Total assets 160,735 118,311 129,939 126,043 102,758
Percentage increase (decrease) 35.8% (8.9)% 3.1% 22.7% 15.6%
Long-term debt 11,124
Stockholders' equity 94,821 95,471 109,943 105,827 91,113
Percentage increase (decrease) (0.7)% (13.2)% 3.9% 16.1% 13.2%
</TABLE>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
MANAGEMENT'S DISCUSSION AND ANALYSIS >>
RESULTS OF OPERATIONS >>
The following table sets forth selected information from the Company's
Consolidated Statements of Operations, expressed as a percentage of net sales.
<TABLE>
<CAPTION> PERCENTAGE
YEAR ENDED SEPTEMBER 30, 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>
17
DIGI INTERNATIONAL INC.
<PAGE>
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:
- - DIGI'S STRATEGY OF ENHANCING SEASONED BUSINESSES WHILE ACHIEVING SIGNIFICANT
MARKET SHARE IN NEW HIGH-GROWTH MARKETS SUCH AS REMOTE ACCESS AND INTERNET
TELEPHONY AND THE FISCAL 1999 FOCUS ON ACCELERATING BUSINESS GROWTH AND LAYING
A FOUNDATION FOR CONSISTENT EARNINGS IMPROVEMENT SHOULD BE CHARACTERIZED AS
FORWARD-LOOKING AND, AS SUCH, MAY INVOLVE RISKS AND UNCERTAINTIES.
- - THE EXPECTATION OF CONTINUED GROWTH IN DEMAND FOR AND SALES OF THE COMPANY'S
REMOTE ACCESS, INTERNET TELEPHONY AND VOIP PRODUCTS, THE COMPANY'S ABILITY TO
PROVIDE PRODUCTS THAT TAKE ADVANTAGE OF NEW MARKET OPPORTUNITIES AND THE
COMPANY'S BELIEF THAT NEW PRODUCTS WILL BE PROFITABLE -- This expectation may
be impacted by general market conditions and competitive conditions within
these markets, development and acceptance of new products offered by the
Company and the introduction of products by competitors in these markets.
- - 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 THE
COMPANY IN THE FUTURE AND THE COMPANY'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.
- - THE COMPANY'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 THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH GENERATED
FROM OPERATIONS AND THE COMPANY'S POTENTIAL CAPACITY FOR DEBT AND/OR EQUITY
FINANCING WILL BE SUFFICIENT TO FUND CURRENT AND ANTICIPATED BUSINESS
OPERATIONS -- Changes in anticipated operating results, credit availability
and equity market conditions may further enhance or inhibit the Company's
ability to maintain or raise appropriate levels of cash.
- - THE COMPANY'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 THE COMPANY'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.
- - THE COMPANY'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.
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 the Company'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 the
Company 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, the
Company 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. The Company'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 the Company'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 the Company'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.
18
DIGI INTERNATIONAL INC.
<PAGE>
During fiscal years 1998, 1997 and 1996, the Company'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. The Company 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 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, the Company 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, 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 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.
19
DIGI INTERNATIONAL INC.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------
<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 to
create new products in the area of Internet Protocol telephony, which will
become part of the Company's product line over the next several years. The
Company anticipates the initial Internet Protocol telephony products developed
from acquired in-process research and development will be released in 2000 and
2001. The Company 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 $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 the
Company'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 the Company'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 the Company utilizing certain ITK
technologies under development in conjunction with the Company's products,
the Company marketing and distributing the resulting products through the
Company's resellers, and the Company 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 the Company'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 the Company'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 the Company'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 the Company, as a corporate business
enterprise, is 14%. The discount rate used in discounting the net
20
DIGI INTERNATIONAL INC.
<PAGE>
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. The Company 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, the Company 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, 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>
- ----------------------------------------------------------------------------
<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 is emerging as a new industry-standard serial
communications bus architecture, and which will become part of the Company's
product line over the next several years. The Company anticipates that Universal
Serial Bus products developed from acquired in-process research and development
will be released in 1999. The Company 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
21
DIGI INTERNATIONAL INC.
<PAGE>
values. The resulting net cash flows from such projects are based on estimates
made by the Company'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 the Company'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 the Company utilizing certain CDC
technologies under development in conjunction with the Company's products,
the Company marketing and distributing the resulting products through the
Company's resellers, and the Company 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 the Company'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 the Company and CDC
(approximately 33% of revenues for both the Company 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 the Company, 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. The Company 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.
The Company has responded to questions provided by the staff of the
Securities and Exchange Commission about the Company's write-offs of acquired
in-process research and development in connection with the ITK and CDC
acquisitions. As of December 11, 1998, the Company had not received any further
comments from the Securities and Exchange Commission.
OTHER INCOME >>
Other income for 1998 increased approximately $3.0 million, as the Company
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 the Company is no longer the primary guarantor for
these leases.
AETHERWORKS CORPORATION
NET LOSS AND WRITE-OFF >>
In connection with the Company's previously purchased $13.8 million of
convertible notes from AetherWorks Corporation, in May 1998 the Company
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 the Company as having
no carrying value. In fiscal 1997 and 1996, the Company 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 the Company's financial statements was based upon the percentage of
financial support provided by the Company (versus other investors) during those
years. The Company 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
22
DIGI INTERNATIONAL INC.
<PAGE>
$2.0 million remaining obligation to purchase additional notes and $1.4 million
for the obligation to guarantee certain AetherWorks leases. The Company no
longer has any funding obligations or any potential equity interest in or
management control over AetherWorks. Consequently, the Company has not included
any of AetherWorks' net losses in its results of operations during fiscal 1998.
INCOME TAXES >>
The Company 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, the Company 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 AetherWorks net losses and the related investment
write-off. In addition, the Company had also provided additional provision in
connection with an IRS examination of certain tax returns filed in prior years.
In 1996, the Company 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 >>
The Company believes inflation has not had a material effect on its
operations or its financial condition.
LIQUIDITY AND CAPITAL RESOURCES >>
The Company 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, the Company
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 the Company's common stock for use in the
Company'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, the Company had working capital of $37.9 million and
debt totaling $22.1 million. The Company 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. The Company's
management believes that current financial resources, cash generated from
operations and the Company's potential capacity for debt and/or equity financing
will be sufficient to fund current and future business operations.
FOREIGN CURRENCY TRANSLATION >>
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars -- except for approximately $5.8 million in
Deutschemark-denominated sales made through the Company'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. The Company 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 the Company'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 the Company'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 >>
The Company began a comprehensive project in 1996 to prepare its products
and its internal computer systems for the year 2000. Most of the Company'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 the Company is in the process of
notifying impacted customers.
The Company believes its implementation of a new enterprise-wide
information management system, principally installed to improve operating
efficiency, will address the Company'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
23
DIGI INTERNATIONAL INC.
<PAGE>
a material adverse effect on the Company's operations. Overall, management
believes the year 2000 will not have a significant impact on operations.
The Company 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, the Company 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,
the Company will continue to assess the need for a contingency plan based on the
Company's periodic evaluation of target dates for the completion of the year
2000 project.
The Company faces risk to the extent that suppliers of products and
services purchased by the Company and others with whom the Company transacts
business on a world-wide basis do not have business products and services that
comply with year 2000 requirements. The Company 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 the Company with products and services that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected.
The costs associated with the year 2000 project are minimal and are not
incremental to the Company, but include temporary reallocation of existing
resources. Although the Company believes that the remaining cost of year 2000
modifications for both internal-use systems and the Company'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 the Company'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 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 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
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.
24
DIGI INTERNATIONAL INC.
<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.
25
DIGI INTERNATIONAL INC.
<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.
26
DIGI INTERNATIONAL INC.
<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.
27
DIGI INTERNATIONAL INC.
<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.
28
DIGI INTERNATIONAL INC.
<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
29
DIGI INTERNATIONAL INC.
<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
30
DIGI INTERNATIONAL INC.
<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,
31
DIGI INTERNATIONAL INC.
<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
32
DIGI INTERNATIONAL INC.
<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.
33
DIGI INTERNATIONAL INC.
<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.
34
DIGI INTERNATIONAL INC.
<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.
35
DIGI INTERNATIONAL INC.
<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
36
DIGI INTERNATIONAL INC.
<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.
37
DIGI INTERNATIONAL INC.
<PAGE>
REPORT OF MANAGEMENT >>
TO THE STOCKHOLDERS OF DIGI INTERNATIONAL INC.
The Company's management is responsible for the integrity, objectivity and
consistency of the financial information presented in this annual report. The
consolidated financial statements contained herein were prepared in accordance
with generally accepted accounting principles and were based on informed
judgments and management's best estimates as required. Financial information
elsewhere in this annual report is consistent with that contained in the
consolidated financial statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are properly
executed in accordance with management's authorization, and accounting records
may be relied upon for the preparation of financial statements and other
?nancial information. The system is monitored by direct management review.
Limitations exist in any system of internal control, based upon the recognition
that the cost of the system should not exceed the benefits derived.
The Company's consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. Their
audit was conducted in accordance with generally accepted auditing standards. As
part of their audits of the Company's consolidated financial statements, these
independent accountants considered the Company's internal controls to the extent
they deemed necessary to determine the nature, timing and extent of their audit
tests.
The Audit Committee of the Board of Directors is composed entirely of
non-employee directors and is responsible for monitoring and overseeing the
quality of the Company's accounting and reporting policies, internal controls
and other matters deemed appropriate. The independent certified public
accountants have free access to the Audit Committee without management present.
/s/ Jerry Dusa
Jerry A. Dusa
President and Chief Executive Officer
/s/ William C. Nolte
William C. Nolte
Director of Finance and Controller
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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 11, 1998
38
DIGI INTERNATIONAL INC.
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED) >>
<TABLE>
<CAPTION>
QUARTER ENDED
IN THOUSANDS EXCEPT PER SHARE AMOUNTS DEC. 31 MAR. 31 JUNE 30 SEPT. 30
- -------------------------------------------------------------------- -------- --------- ----------
<S> <C> <C> <C> <C>
1998
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 dilution 0.27 0.33 0.45 (2.62)
1997
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 (loss) income (2,578) (9,400) 67 (2,431)
Net (loss) income per share - basic (0.19) (0.70) 0.01 (0.29)
Net (loss) income per share - assuming dilution (0.19) (0.70) 0.01 (0.29)
1996
Net sales $ 43,716 $ 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 PRERIOD ENDED SEPTEMBER 30, 1998.
39
DIGI INTERNATIONAL INC.
<PAGE>
STOCKHOLDER AND INVESTOR INFORMATION >>
STOCK LISTING
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock MarketSM under the symbol "DGII." At December 11, 1998, the number
of holders of the Company's Common Stock was approximately 6,651 consisting of
333 record holders and approximately 6,318 stockholders whose stock is held by a
bank, broker or other nominee.
High and low sale prices for each quarter during the years ended September
30, 1998 and 1997, as reported on the Nasdaq Stock Market, were as follows:
STOCK PRICES
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH
- ------------------------------ ------ ------- -------
<S> <C> <C> <C> <C>
High $22.75 $28.62 $29.50 $28.25
Low $13.75 $17.00 $19.50 $ 9.62
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- ------------------------------ ------ ------- -------
<S> <C> <C> <C> <C>
High $18.75 $10.50 $11.75 $16.00
Low $ 8.63 $ 6.75 $ 5.13 $ 9.88
</TABLE>
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
The Company does not have a Dividend Reinvestment Plan or a Direct Stock
Purchase Plan.
STOCKHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Norwest Shareowners Services
P.O. Box 64854
St. Paul, MN 55164-0854
651-450-4064
800-468-9716
LEGAL COUNSEL
Faegre & Benson LLP
2200 Norwest Center
Minneapolis, MN 55402-3901
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP
650 Third Avenue South
Minneapolis, MN 55402-4333
ANNUAL MEETING
The Company's Annual Meeting of Stockholders will be held on Wednesday, January
27, 1999, at 3:30 p.m., at the Marquette Hotel, 710 Marquette Avenue,
Minneapolis, Minnesota.
INVESTOR RELATIONS
A copy of the Company's Form 10-K, filed with the Securities and Exchange
Commission, is available free upon request. Contact:
Sue Mickelson
Investor Relations Administrator
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
or call 612-912-3104
e-mail request to: [email protected]
40
DIGI INTERNATIONAL INC.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Central Data Corporation
Digi International Asia Pte Ltd
Digi International GmbH
Digi International FSC
Digi International Israel Inc.
Digi International (HK) Ltd.
Digi International Australia PTY Ltd.
Digi International Limited
Digi International SARL
ITK International, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 registration
statements of Digi International Inc. for its Stock Option Plan (File No.
33-32956, File No. 33-38898, File No. 333-99 and File No. 333-23857); for its
Employee Stock Purchase Plan (File No. 333-1821); and for its Non-Officer
Stock Option Plan (File No. 33-57869) of our report dated December 11, 1998,
on our audits of the consolidated financial statements of Digi International
Inc. as of September 30, 1998 and 1997, and for the years ended September 30,
1998, 1997 and 1996, which report is included in or incorporated by reference
in this Annual Report on Form 10-K.
Minneapolis, Minnesota /s/ PricewaterhouseCoopers LLP
December 29, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 Registration
Statements (File No. 33-32956, File No. 33-38898, File No. 333-99 and File No.
333-23857) of Digi International Inc. for its Stock Option Plan; Form S-8
Registration Statement (File No. 333-1821) of Digi International Inc. for its
Employee Stock Purchase Plan; and Form S-8 Registration Statement (File No.
33-57869) of Digi International Inc. for its Non-Officer Stock Option Plan 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 included in the
Form 10-K of Digi International Inc. for the fiscal year ended
September 30, 1998.
/s/ Ernst & Young LLP
Minneapolis, MN
December 24, 1998
<PAGE>
EXHIBIT 24
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 24th of November, 1998.
/s/ John P. Schinas
-------------------------------
John P. Schinas
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 24th of November, 1998.
/s/ Robert S. Moe
------------------------------------
Robert S. Moe
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 24th of November, 1998.
/s/ Willis K. Drake
--------------------------------
Willis K. Drake
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 24th of November, 1998.
/s/ David Stanley
-----------------------------------
David Stanley
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 24th of November, 1998.
/s/ Richard E. Eichhorn
-----------------------------------
Richard E. Eichhorn
<PAGE>
DIGI INTERNATIONAL INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of Digi International Inc., a
Delaware corporation, does hereby make, constitute and appoint Jerry A. Dusa and
William C. Nolte, and either of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to an Annual Report on
Form 10-K or other applicable form, and all amendments thereto, to be filed by
said Corporation with the Securities and Exchange Commission, Washington, D.C.,
under the Securities Act of 1934, as amended, with all exhibits thereto and
other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and either of them, full power and authority to do and
perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 24th of November, 1998.
/s/ Mykola Moroz
-----------------------------------
Mykola Moroz
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 10,335,368
<SECURITIES> 0
<RECEIVABLES> 53,618,657
<ALLOWANCES> 5,069,512
<INVENTORY> 27,365,924
<CURRENT-ASSETS> 92,410,378
<PP&E> 51,999,720
<DEPRECIATION> 18,008,797
<TOTAL-ASSETS> 160,734,667
<CURRENT-LIABILITIES> 54,514,657
<BONDS> 0
0
0
<COMMON> 157,910
<OTHER-SE> 94,662,654
<TOTAL-LIABILITY-AND-EQUITY> 160,734,667
<SALES> 182,931,670
<TOTAL-REVENUES> 182,931,670
<CGS> 88,539,156
<TOTAL-COSTS> 70,254,583
<OTHER-EXPENSES> 41,570,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,913,783)
<INCOME-TAX> 9,745,088
<INCOME-CONTINUING> (22,658,871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,658,871)
<EPS-PRIMARY> (1.65)
<EPS-DILUTED> (1.65)
<FN>
<F1>Acquired in-process research and development $39,200,000, Write-off of
investment in AetherWorks $1,350,000, Restructuring $1,020,000.
</FN>
</TABLE>
