<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
----------------------------------
(Address of principal executive offices) (Zip Code)
(612) 912-3444
-------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On January 16, 1998, there were 13,491,801 shares of the registrant's $.01 par
value Common Stock outstanding.
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<PAGE>
<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. Financial Statements Page
----
Condensed Consolidated Statements of Operations
for the three month periods ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1997 . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows
for the three month periods ended December 31, 1997 and 1996 . . . .5
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Review Report of Independent Accountants . . . . . . . . . . . . . .9
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. . . . . . . . . . . 10
Forward-looking Statements . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 14
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 16
ITEM 4. Submission of Matters to a Vote of Securities Holders. . . . . . . 16
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 42,590,059 $ 42,236,213
Cost of sales 21,221,314 22,595,738
------------ -------------
Gross margin 21,368,745 19,640,475
------------ -------------
Operating expenses:
Sales and marketing 8,259,494 11,012,254
Research and development 3,810,900 5,620,679
General and administrative 3,610,125 4,747,224
------------ -------------
Total operating expenses 15,680,519 21,380,157
------------ -------------
Operating income (loss) 5,688,226 (1,739,682)
Other income, net 268,885 99,031
AetherWorks Corporation net loss - (1,519,789)
------------ -------------
Income (loss) before income taxes 5,957,111 (3,160,440)
Provision (benefit) for income taxes 2,114,775 (582,433)
------------ -------------
Net income (loss) $ 3,842,336 $ (2,578,007)
------------ -------------
------------ -------------
Net income (loss) per common share $ 0.28 $ (0.19)
------------ -------------
------------ -------------
Net income (loss) per common share, assuming dilution $ 0.27 $ (0.19)
------------ -------------
------------ -------------
Weighted average common shares 13,482,656 13,453,322
------------ -------------
------------ -------------
Weighted average common shares, assuming dilution 14,043,273 13,453,322
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1997 1997
----------------- ---------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 34,714,907 $ 31,329,666
Accounts receivable, net 21,963,208 25,658,522
Inventories, net 25,228,626 23,683,312
Other 4,369,158 4,147,942
-------------- --------------
Total current assets 86,275,899 84,819,442
Property, equipment and improvements, net 23,314,613 23,617,696
Intangible assets, net 7,572,352 6,876,597
Other 2,838,596 2,997,601
-------------- --------------
Total assets $ 120,001,460 $ 118,311,336
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,192,803 $ 10,118,921
Income taxes payable 3,857,710 1,771,986
Accrued expenses:
Advertising 2,826,403 2,847,672
Compensation 2,291,571 2,388,468
Accrued AetherWorks Corporation
funding obligations 2,350,000 3,350,000
Other 1,692,633 2,363,258
-------------- --------------
Total current liabilities 20,211,120 22,840,305
Commitments and contingency
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value; 60,000,000 shares
authorized; 14,751,846 and 14,727,256 shares issued 147,518 147,273
Additional paid-in capital 44,411,164 44,403,102
Retained earnings 78,956,238 75,113,902
-------------- --------------
123,514,920 119,664,277
Unearned stock compensation (1,514,224) (1,787,658)
Treasury stock, at cost, 1,288,026 and 1,338,894
shares (22,210,356) (22,405,588)
-------------- --------------
Total stockholders' equity 99,790,340 95,471,031
-------------- --------------
Total liabilities and stockholders' equity $ 120,001,460 $ 118,311,336
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 3,842,336 (2,578,007)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,720,414 1,994,649
AetherWorks Corporation net loss - 1,519,789
Provision for losses on accounts receivable 607,992 174,000
Provision for inventory obsolescence 1,397,098 964,000
Loss on sale of fixed assets 70,584 46,698
Stock compensation 113,382 25,448
Changes in operating assets and liabilities (1,645,933) 332,471
------------- ------------
Total adjustments 2,263,537 5,057,055
------------- ------------
Net cash provided by operating activities 6,105,873 2,479,048
------------- ------------
Investing activities:
Purchase of property, equipment, intangibles,
and improvements (2,084,223) (2,029,349)
Investment in AetherWorks Corporation (1,000,000) (2,000,000)
------------- ------------
Net cash used in investing activities (3,084,223) (4,029,349)
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Financing activities:
Stock benefit plan transactions, net 363,591 214,491
------------- ------------
Net cash provided by financing activities 363,591 214,491
------------- ------------
Net increase (decrease) in cash and cash equivalents 3,385,241 (1,335,810)
Cash and cash equivalents, beginning of period 31,329,666 8,943,390
------------- ------------
Cash and cash equivalents, end of period $ 34,714,907 $ 7,607,580
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included in this Form
10-Q have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted, pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes thereto included in the Company's 1997
Annual Report and Form 10-K.
The condensed consolidated financial statements presented herein as of December
31, 1997 and for the three month periods ended December 31, 1997 and 1996,
reflect, in the opinion of management, all adjustments (which consist only of
normal, recurring adjustments) necessary for a fair presentation of the
consolidated financial position and the consolidated results of operations and
cash flows for the periods presented. The consolidated results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. INVESTMENT IN AETHERWORKS CORPORATION
Through December 31, 1997, under a financing arrangement, the Company purchased
$12,796,525 of convertible notes from AetherWorks Corporation, a development
stage company engaged in the development of wireless and dial-up remote access
technology. At December 31, 1997, the Company is obligated to purchase up to an
additional $1,000,000 of convertible notes at the request of AetherWorks. The
convertible notes held by the Company at December 31, 1997 are convertible into
61.3% of AetherWorks' common stock, and upon the purchase of the additional
$1,000,000 of convertible notes, the Company's ownership interest upon
conversion would increase to 62.7%, based on AetherWorks' present
capitalization. In connection with the financing arrangement, the Company has
also guaranteed $3,060,000 of lease obligations of AetherWorks. In addition, in
the fourth quarter of fiscal 1997, the Company has also leased to AetherWorks
$1,325,000 of computer equipment under a three-year direct financing lease.
As of September 30, 1997, because of the significant uncertainty of the future
of AetherWorks Corporation, the Company wrote off the remaining investment in
AetherWorks and accrued and expensed its remaining future obligation to purchase
up to $13,796,525 in convertible notes. In addition, the Company has also
accrued $1,350,000 for its probable obligation resulting from its guarantees of
certain AetherWorks lease obligations.
For the three month period ended December 31, 1996, the Company reported its
investment in AetherWorks on the equity method and reported a loss of
$1,519,789. Such loss represented 100% of the AetherWorks net loss for the
period. The percentage of AetherWorks' net loss included in the Company's
financial statements was based upon the percentage of financial
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN AETHERWORKS CORPORATION (CONTINUED)
support provided by the Company (versus other investors) to AetherWorks during
the period. No such loss was recorded in the three month period ended December
31, 1997, due to the aforementioned write off of the Company's AetherWorks
investment and the accrual of its remaining funding obligations to AetherWorks.
3. INVENTORIES
Inventories, net are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at December 31, 1997 and
September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials $8,505,869 $7,967,598
Work in process 10,136,391 8,704,357
Finished goods 6,586,366 7,011,357
</TABLE>
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been calculated under the provisions of
Statement of Financial Accounting Standards No. 128, which the Company adopted
effective with its first quarter reporting for fiscal 1998. All earnings per
share data presented in the future will be on the basis of this new standard.
Basic net income (loss) per share is calculated based on only the weighted
average of common shares outstanding during the period. Net income (loss) per
share, assuming dilution, is computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during each period. The only common stock equivalents are those that result
from dilutive common stock options. Common stock equivalents were excluded in
determining the weighted average common and common stock equivalents outstanding
for the three month period ended December 31, 1996, because their effect was
antidilutive.
5. RECLASSIFICATION OF CERTAIN EXPENSES
Certain costs relating to systems support and communication costs, which
previously were included in general and administrative expenses, have been
reclassified into sales and marketing and research and development expenses for
the three months ended December 31, 1997 and 1996. Such amounts were $853,158
for the three month period ended December 31, 1997 and $666,641 for the three
month period ended December 31, 1996, respectively. These reclassifications had
no impact on previously reported operating income (loss), or net income (loss).
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEGAL PROCEEDINGS
Discussion of legal matters is incorporated by reference from Part II, Item I of
this Form 10-Q "Legal Proceedings" and should be considered an integral part of
these Consolidated Condensed Financial Statements and Accompanying Notes.
8
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of
Digi International Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Digi
International Inc. and subsidiaries as of December 31, 1997, and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended December 31, 1997 and 1996. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1997, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated December 15, 1997, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of September 30, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 28, 1998
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from the Company's
interim condensed consolidated statements of operations expressed as percentages
of sales:
<TABLE>
<CAPTION>
Three months %
ended Increase
December 31 (decrease)
---------------------------
1997 1996
---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 0.8%
Cost of sales 49.8 53.5 (6.1)
---- ---- ----
Gross margin 50.2 46.5 8.8
---- ---- ---
Operating expenses:
Sales and marketing 19.4 26.0 (24.9)
Research and development 8.9 13.3 (32.2)
General and administrative 8.5 11.3 (23.9)
--- ---- ----
Total operating expenses 36.8 50.6 (26.7)
---- ---- ----
Operating income (loss) 13.4 (4.1) 427.0
Other income (expense), net 0.6 0.2 171.5
AetherWorks Corporation net loss - (3.6) 100.0
--- --- -----
Income (loss) before income taxes 14.0 (7.5) 288.5
Provision (benefit) for income taxes 5.0 (1.4) 463.1
--- --- -----
Net income (loss) 9.0% (6.1%) 249.0%
--- --- -----
--- --- -----
</TABLE>
NET SALES
Net sales for the three month period ended December 31, 1997 were higher than
net sales for the corresponding three month period ended December 31, 1996 by
$353,846 or 0.8%. This marginal sales growth was due to the continued effort by
the Company to reduce inventory levels in the distribution channel. This was
the fourth consecutive quarter of such efforts to reduce inventory levels. The
reduction program has proven successful and is now essentially complete.
Sales to the distribution markets, as a percentage of total net sales, declined
to 63.4% for the three month period ended December 31, 1997, as compared to
68.9% for the three month period ended December 31, 1996. Such decline is
directly due to the conscious effort to reduce inventory in the distribution
channel.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
Due to increased product demand, net sales to original equipment manufacturers
(OEM's), as a percentage of total net sales, rose to 27.5% for the three month
period ended December 31, 1997, as compared to 19.9% for the three month period
ended December 31, 1996. Sequentially, net sales to OEM's for the three month
period ended December 31, 1997 increased 4.5% as compared to the three month
period ended September 30, 1997.
GROSS MARGIN
Gross margin for the three month period ended December 31, 1997 increased to
50.2%, as compared to 46.5% for the three month period ended December 31, 1996.
Such increase was principally due to a $1 million reduction in rebates in the
1997 period, which was a direct result of the Company's program to reduce the
amount of inventory in the distribution channel.
OPERATING EXPENSES
Operating expenses for the three month period ended December 31, 1997 declined
26.7% relative to operating expenses for the corresponding period ended December
31,1996 and decreased as a percentage of net sales to 36.8% for the three month
period ended December 31, 1997 from 50.6% for the three month period ended
December 31, 1996. Such decline was due to reductions in the workforce,
decreased marketing costs, and cost savings achieved through consolidation of
research and development functions. Although all major categories of expenses
have been impacted, significant reductions in sales and marketing expenses,
through more focused programs, have been achieved.
The Company expects that operating expenses for subsequent quarters of fiscal
1998 will be similar to or slightly higher than the $16.4 million incurred in
the fourth quarter of fiscal 1997.
OTHER INCOME
The increase in other income for the three month period ended December 31, 1997
was a result of interest income earned on increased cash and cash equivalent
balances.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
AETHERWORKS CORPORATION NET LOSS
In connection with the Company's commitment to purchase up to $13.8 million of
convertible notes from AetherWorks Corporation, a development stage company
engaged in the development of wireless and dial-up remote access technology, the
Company has the ability, under certain conditions, to convert its investment
into a majority of AetherWorks' common stock. For the three month period ended
December 31, 1996, the Company reported its investment in AetherWorks on the
equity method and recorded a net loss of $1,519,789. This net loss represents
100% of AetherWorks' net loss for the period. The percentage of AetherWorks'
net loss included in the Company's financial statements was based upon the
percentage of financial support provided by the Company (versus other investors)
during the three month period. No such loss was recorded in the three month
period ended December 31, 1997, due to the write off of the Company's remaining
AetherWorks investment and the accrual of the remaining future obligations to
AetherWorks during the fourth quarter of fiscal 1997.
INCOME TAXES
Income taxes have been accrued at an overall effective rate of 35.5% for the
three month period ended December 31, 1997. Due to the net loss incurred in the
three month period ended December 31, 1996, the Company recorded an income tax
benefit of $582,433. Such benefit was lower than that which would have been
determined using the overall effective income tax rate of the Company due to the
non-deductibility of the AetherWorks' net loss.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed it operations principally with funds generated from
operations. Investing activities for the three month period ended December 31,
1997 consisted of purchases of approximately $2 million in equipment, capital
improvements, including a new enterprise-wide computer system and intangibles
and the additional purchase of $1 million in convertible notes from AetherWorks
Corporation. As of December 31, 1997, the Company is obligated to purchase an
additional $1 million in convertible notes from time to time at the request of
AetherWorks. The Company accrued for this remaining obligation in the fourth
quarter of fiscal 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At December 31, 1997, the Company has working capital of $66 million and no
debt. The Company has negotiated a $5 million unsecured line of credit with its
bank, but has not utilized such line. The Company's management believes that
current financial resources, cash generated from operations and the Company's
potential capacity for debt and/or equity financing will be sufficient to fund
current and future business operations.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated, invoiced
and paid in U.S. dollars.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial position.
NEW ACCOUNTING STANDARD
During the three months ended December 31, 1997, the Emerging Issues Task Force
of the Financial Accounting Standards Board released Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation" (EITF 97-13). The Task Force reached a consensus
that the cost of business process reengineering activities, whether done
internally or by third parties, is to be expensed as incurred. This consensus
did not have a significant impact on the Company. The Company, however, will
incur future costs associated with an existing enterprise-wide system
implementation project that will be required to be expensed as incurred pursuant
to EITF 97-13.
FORWARD LOOKING STATEMENTS
Certain statements made above, which are summarized below, are forward-looking
statements that involve risks and uncertainties, and actual results may be
materially different. Factors that could cause actual results to differ include
those identified below:
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
FORWARD LOOKING STATEMENTS (CONTINUED)
THE EXPECTATION THAT OPERATING EXPENSES IN THE REMAINING QUARTERS OF FISCAL 1998
WILL BE AT LEVELS SIMILAR TO OR SLIGHTLY HIGHER THAN THOSE INCURRED IN THE
FOURTH QUARTER OF FISCAL 1997 - This expectation may be impacted by presently
unanticipated revenue opportunities or by unanticipated expenses.
THE BELIEF THAT THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH GENERATED FROM
OPERATIONS AND THE COMPANY'S POTENTIAL CAPACITY FOR DEBT AND/OR EQUITY FINANCING
WILL BE SUFFICIENT TO FUND CURRENT AND ANTICIPATED BUSINESS OPERATIONS - Changes
in anticipated operating results, credit availability and equity market
conditions may further enhance or inhibit the Company's ability to maintain or
raise appropriate levels of cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 3, 1997, the Company and certain of its previous officers were named
as defendants in a putative securities class action lawsuit in the United States
District Court for the District of Minnesota on behalf of an alleged class of
purchasers of its common stock during the period January 25, 1996, through
December 23, 1996. Between January 17, 1997 and March 7, 1997, four similar
putative securities class actions also were commenced. By Memorandum and Order
dated April 2, 1997, the District Court consolidated all five of the putative
securities class actions for all purposes including trial, appointed 21 persons
to serve as lead plaintiffs in the consolidated class actions, and allowed the
lead plaintiffs to file and serve a consolidated class action complaint.
On May 12, 1997, a consolidated amended class action complaint (the
"Consolidated Amended Complaint") was filed in the combined actions, which are
captioned IN RE DIGI INTERNATIONAL INC. SECURITIES LITIGATION, Master File No.
97-5 (JRT/RLE) (U.S. District Court for the District of Minnesota). The
Consolidated Amended Complaint alleges that the Company and its previous
officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary L. Deaner violated the
federal securities laws by, among other things, misrepresenting and/or omitting
material information concerning the Company's operations and financial results.
The Consolidated Amended Complaint seeks compensatory damages in an unspecified
amount plus interest against all defendants, jointly and severally, and an award
of attorneys' fees, experts' fees and costs.
On July 3, 1997, defendants served a motion to dismiss the Consolidated Amended
Complaint on the ground, among others, that it fails to plead claims in
accordance with applicable law. The motion to dismiss was argued before the
District Court on October 31, 1997. A ruling has not yet been received.
On February 25, 1997, the Company and certain of its previous officers also were
named as defendants in a securities lawsuit filed in the United States District
Court for the District of Minnesota by the Louisiana State Employees Retirement
System and entitled LOUISIANA STATE EMPLOYEES RETIREMENT SYSTEM IN BEHALF OF
ITSELF AND IN BEHALF OF ALL OTHER PARTIES SIMILARLY SITUATED AND CIRCUMSTANCED
WHO DESIRE TO PERSONALLY JOIN IN THIS ACTION AND TO CONTRIBUTE TO THE COSTS AND
EXPENSES THEREOF, PLAINTIFFS, VS. DIGI INTERNATIONAL INC., GARY L. DEANER, ERVIN
F. KAMM, JR., GERALD A. WALL, AND "JOHN DOE AND "RICHARD ROE", THE NAMES "JOHN
DOE" AND "RICHARD ROE" BEING FICTITIOUS, THE PARTIES INTENDED BEING THOSE
PARTIES, PRESENTLY UNKNOWN TO THE PLAINTIFF, WHO PARTICIPATED IN THE WRONGFUL
ACTS SET FORTH HEREIN, DEFENDANTS, Civil File No. 97-440, Master File No. 97-5
(JRT/RLE) (U.S. District Court for the District of Minnesota). On June 3, 1997,
the Louisiana State Employees Retirement System filed an Amended Complaint (the
"Louisiana Amended Complaint"). The Louisiana Amended Complaint alleges that
the Company and its previous officers Ervin F. Kamm, Jr., Gerald A. Wall and
Gary L. Deaner violated federal securities laws and state common law by, among
other things, misrepresenting and/or omitting material information concerning
the Company's operations and financial results.
15
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The Louisiana Amended Complaint seeks compensatory damages in the amount of
$718,404.70 plus interest against all defendants, jointly and severally, and an
award of attorneys' fees, disbursements and costs. This action has been
consolidated with the consolidated class actions for pretrial purposes.
On July 17, 1997, defendants served a motion to dismiss the Louisiana Amended
Complaint on the ground, among others, that it fails to plead claims in
accordance with applicable law. The motion to dismiss was argued before the
District Court on October 31, 1997. A ruling has not yet been received.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on January 28, 1998, the stockholders
approved the following:
(a) Proposal to elect three directors, Richard E. Eichhorn, Mykola Moroz and
Jerry A. Dusa.
(b) Proposal to ratify the appointment of Coopers & Lybrand L.L.P. as
independent public accountants for fiscal year 1998.
ITEM 5. OTHER INFORMATION
None
16
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
3(a) Restated Certificate of Incorporation of the Registrant, As
Amended*
3(b) Amended and Restated By-Laws of the Registrant**
15 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
- -----------------------------------------
*Incorporated by reference to the corresponding exhibit number of the Company's
Form 10-K for the year ended September 30, 1992 (File No. 0-17972)
**Incorporated by reference to the corresponding exhibit number of the Company's
Registration Statement on Form S-1 (File No. 33-42384)
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: February 12, 1998 By: /s/ Jonathon E. Killmer
-------------------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
18
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
We are aware that our report dated January 28, 1998 on our reviews of interim
condensed consolidated financial information of Digi International Inc. and
Subsidiaries (the Company) for the three month periods ended December 31, 1997
and 1996, and included in the Company's Form 10-Q for the quarter ended December
31, 1997, is incorporated by reference in the Company's registration statements
on Form S-8 (Registration Nos. 33-32956, 33-38898, 333-99, and 333-1821) and
Form S-3 (Registration No. 33-59223). Pursuant to Rule 436(c), under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 6, 1998
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<FISCAL-YEAR-END> SEP-30-1998
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