<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JULY 29, 1998
DIGI INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-17972 41-1532464
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
11001 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (612) 912-3444
<PAGE>
Item 5 OTHER EVENTS
RESTATEMENT
The Registrant previously announced that it would revise the accounting
treatment of its July 1998 acquisitions of ITK International, Inc. (ITK) and
Central Data Corporation (CDC) in response to comments received from the
Securities and Exchange Commission. Accordingly, this Current Report on Form
8-K/A is being filed as Amendment No. 2 to the Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission (SEC) on July 29,
1998 for the purpose of restating financial information and related disclosures
for the ITK acquisition. See Notes 2 and 3 to the Company's Consolidated
Financial Statements as of and for the year ended September 30, 1998 included in
the Company's Form 10-K/A filed with the SEC on August 16, 1999.
2
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
On July 29, 1998, ITK International, Inc., a Delaware corporation
(ITK), merged (the Merger) with and into Iroquois Acquisition Inc., a Delaware
corporation and wholly owned subsidiary of the Registrant (Merger Sub). Merger
Sub, as the surviving corporation in the Merger, will remain a wholly owned
subsidiary of the Registrant and has adopted the name "ITK International, Inc."
in connection with the Merger. This Current Report on Form 8-K/A amends certain
financial information required by Item 7 that was previously filed on Form 8-K/A
Amendment No. 1 dated October 27, 1998.
The following information is attached hereto as an exhibit:
(a) FINANCIAL STATEMENTS OF ITK.
The following information is attached hereto as Exhibit 99.2:
Report of PricewaterhouseCoopers LLP, Independent Accountants (1)
Consolidated Balance Sheet as of June 30, 1998 and 1997 (1)
Consolidated Statement of Operations for the Years Ended
June 30, 1998, 1997 and 1996 (1)
Consolidated Statement of Changes in Stockholders' Deficit
for the Years Ended June 30, 1998, 1997 and 1996 (1)
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996 (1)
Notes to Consolidated Financial Statements (1)
(b) PRO FORMA FINANCIAL INFORMATION OF REGISTRANT AND ITK.
The following information is attached hereto as Exhibit 99.3:
Unaudited Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Balance Sheet as of June 30,
1998
Notes to Unaudited Pro Forma Condensed Balance Sheet
Unaudited Pro Forma Condensed Statement of Operations for
the Year Ended September 30, 1997
Unaudited Pro Forma Condensed Statement of Operations for
the Nine Months Ended June 30, 1998
Unaudited Pro Forma Condensed Statement of Operations for
the Nine Months Ended June 30, 1997
Notes to Unaudited Pro Forma Condensed Statement of
Operations
3
<PAGE>
(c) EXHIBITS.
2 Agreement and Plan of Merger dated as of July 1, 1998 among
the Registrant, Merger Sub and ITK.(2)
The Registrant hereby agrees to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission
upon request.
23 Consent of PricewaterhouseCoopers LLP. (1)
99.1 Press Release of the Registrant dated July 29, 1998.(2)
99.2 Financial Statements of ITK. (1)
99.3 Pro Forma Financial Information of Registrant and ITK.
(1) Incorporated by reference to the like numbered Exhibit to the
Registrant's Current Report on Form 8-K/A dated October 27, 1998 and
filed with the Commission on October 27, 1998 (File No. 0-17972).
(2) Incorporated by reference to the like numbered Exhibit to the
Registrant's Current Report on Form 8-K dated July 29, 1998 and filed
with the Commission on August 12, 1998 (File No. 0-17972).
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: August 18, 1999 By /s/ Subramanian Krishnan
Subramanian Krishnan
Sr. Vice President and Chief Financial Officer
5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit Page
<S> <C> <C>
99.3 Pro Forma Financial Information of Registrant and Filed
ITK. Electronically
</TABLE>
<PAGE>
EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements give effect to
the acquisition of ITK International, Inc. (ITK) by Digi International, Inc.
(the Company) using the purchase method of accounting. These unaudited pro forma
condensed financial statements are presented for illustrative purposes only and
are not necessarily indicative of the combined financial position or results of
operations for future periods or the results that actually would have been
realized had the Company and ITK been a combined company during the specified
periods. The pro forma condensed financial statements, including the notes
thereto, are qualified in their entirety and should be read in conjunction with
the historical consolidated financial statements of the Company and ITK.
After discussion with the staff of the Securities and Exchange Commission (the
SEC) the consolidated financial statements as of September 30, 1998 and for the
year ended September 30, 1998 have been restated to reflect a change in the
measurement and allocations of the purchase prices related to the July 1998
acquisition of ITK.
The Company allocated amounts to acquired in process research and development
(IPR&D) and intangible assets in the fourth quarter of 1998 in a manner
consistent with widely recognized appraisal practices at the date of the
acquisition of ITK. Subsequent to the acquisition, the SEC staff expressed broad
views that took issue with certain appraisal practices generally employed by
many public companies in determining the fair value of IPR&D. As a result of
these developments, the Company has modified its valuation of IPR&D using the
alternative income valuation approach. In addition, in response to questions
raised by the SEC Staff about the Company's measurement of the fair value of
common stock and common stock options issued in the ITK acquisition, the Company
has revised its valuation of this portion of the purchase prices.
As a result of valuing IPR&D using the alternative income valuation approach and
adjusting the measurement of the purchase price, the Company, in consultation
with their independent accountants, has revised its measurement and allocations
of the purchase price, including the amounts allocated to IPR&D. The effect of
these adjustments on previously reported proforma amounts were as follows:
CHANGES TO PROFORMA AMOUNTS
<TABLE>
<CAPTION>
Pro Forma
June 30, 1998
Balance Sheet Data As Reported As Restated
- ------------------ ----------- -----------
<S> <C> <C>
Cash and cash equivalents $32,884 $32,551
Total current assets 96,854 96,521
Intangible assets, net 22,438 45,252
Total assets 155,834 178,315
Accrued expenses 10,952 14,436
Total current liabilities 44,960 48,444
Net deferred income taxes - 2,457
Total liabilities 54,471 60,412
Common stock and capital in excess of par value 61,123 62,030
Retained earnings 64,032 78,702
Unearned stock compensation (1,938) (975)
Total shareholders' equity $101,363 $117,903
</TABLE>
<PAGE>
EXHIBIT 99.3 (CONTINUED)
CHANGES TO PROFORMA AMOUNTS (CONTINUED)
<TABLE>
<CAPTION>
Pro Forma
For the Year Ended
September 30, 1997
STATEMENT OF OPERATIONS DATA
Dollars in Thousands
As Reported As Restated
----------- -----------
<S> <C> <C>
General and administrative $29,004 $32,743
Total operating expenses 109,463 113,202
Operating loss (21,476) (25,215)
Loss before income taxes (33,816) (37,555)
Net loss $(33,655) $(37,394)
Net loss per common and common
equivalent share, basic and diluted $(0.82) $(2.68)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
For the Nine Months
Ended June 30, 1998
STATEMENT OF OPERATIONS DATA
Dollars in Thousands
As Reported As Restated
----------- -----------
<S> <C> <C>
General and administrative $18,845 $21,649
Total operating expenses 74,061 76,865
Operating income (loss) 581 (2,223)
Income (loss) before income taxes 1,938 (866)
Net income (loss) $1,225 $(1,579)
Net income (loss) per common and common
equivalent share, basic and diluted $0.03 $(0.11)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
For the Nine Months
Ended June 30, 1997
STATEMENT OF OPERATIONS DATA
Dollars in Thousands
As Reported As Restated
----------- -----------
<S> <C> <C>
General and administrative $16,091 $18,895
Total operating expenses 85,983 88,787
Operating loss (22,001) (24,805)
Loss before income taxes (26,683) (29,487)
Net loss $(25,137) $(27,941)
Net loss per common and common $(0.62) $(2.00)
equivalent share, basic and diluted
</TABLE>
The unaudited pro forma condensed financial statements are based on the
respective historical consolidated financial statements and the notes thereto of
the Company and ITK. The purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed.
2
<PAGE>
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
ASSETS INC. INC. ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 44,945 $ 2,373 $(14,767)(a) $ 32,551
Accounts receivable, net 34,699 3,019 37,718
Inventories, net 16,404 5,267 21,671
Other 3,903 678 4,581
Total current assets 99,951 11,337 (14,767) 96,521
Property, equipment and improvements, net 22,572 10,668 33,240
Intangible assets, net 7,339 4,405 33,508(d) 45,252
Other 8,055 247 (5,000)(c) 3,302
Total assets $137,917 $26,657 $ 13,741 $178,315
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes payable 14,168 (5,000)(c) 9,168
Accounts payable 8,105 4,756 12,861
Income taxes payable 6,873 6,873
Accrued expenses 5,379 5,573 3,484 14,436
Compensation 3,144 1,847 4,991
Current portion of long-term debt 115 115
Total current liabilities 23,501 26,459 (1,516) 48,444
Long-term liabilities, net of current portion 9,511 9,511
Net deferred income taxes 2,457(d) 2,457
Total liabilities 23,501 35,970 941 60,412
Stockholders' equity:
Common stock and capital in excess of par value
(Digi: 14,951,203 shares; ITK: 27,392,904
shares; and 15,527,560 shares on a
pro forma combined basis) 47,213 36,975 14,817 (a) 62,030
(36,975)(b)
Retained earnings (accumulated deficit) 90,032 (42,891) 42,891 (b) 78,702
(11,330)(d)
Foreign currency translation adjustment (90) 90 (b)
137,245 (6,006) 9,493 140,732
Unearned stock compensation (975) (3,307) 3,307(b) (975)
Treasury stock, at cost (21,854) (21,854)
Total stockholders' equity 114,416 (9,313) 12,800 117,903
Total liabilities and stockholders' equity $137,917 $26,657 $ 13,741 $178,315
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED PRO FORMA CONDENSED
BALANCE SHEET.
3
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
1. FINANCIAL STATEMENTS:
Digi International Inc. (the Company) has a September 30 fiscal year end.
The unaudited historical balance sheet information of the Company as of
June 30, 1998 was derived from the unaudited consolidated condensed
financial statements of the Company which are included in the Company's
report on Form 10-Q for the quarter ended June 30, 1998. Prior to its
acquisition by the Company, ITK International, Inc. (ITK) had a June 30
fiscal year-end. The unaudited historical consolidated balance sheet
information of ITK as of June 30, 1998 was derived from the consolidated
financial statements of ITK included elsewhere in this Form 8-K/A. The pro
forma condensed balance sheet assumes the business combination took place
on June 30, 1998.
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS:
The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed. The pro forma adjustments presented are
as of June 30, 1998.
(a) Adjustment reflects the components of the purchase consideration and
related transaction costs, which included $14,767 in cash, the
Company's common stock with a market value of $12,501 and $2,316 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 is based on a
per share value of approximately $21.69, calculated as the average
market price of the Company's common stock during the two business
days immediately preceding and subsequent to the date the parties
reached agreement on terms and announced the transaction. The value of
the Company's common stock options is based on the estimated fair
value of these options, as of the date the transaction was
consummated, using the Black-Scholes valuation model.
(b) Adjustment reflects the elimination of ITK's historical stockholders'
equity.
(c) Adjustment reflects the elimination of note payable to the Company
from ITK resulting from funds advanced to ITK during June 1998.
4
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED (DOLLARS IN
THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
(d) Adjustment reflects portion of purchase price allocated to
identifiable intangible assets, including purchased in-process
research and development. Valuation of the intangible assets acquired
was conducted by an independent third-party appraisal company and
consists of purchased in-process research and development, proven
technology and an assembled workforce. The purchase price exceeded
the estimated fair value of tangible assets acquired and liabilities
assumed by approximately $41,014. This excess purchase price was
allocated to purchased in-process research and development,
identifiable intangible assets and goodwill, including certain
existing identifiable intangible assets and goodwill of ITK as of
June 30, 1998.
The table below is a summary of the preliminary amounts allocated to
purchased in-process research and development, identifiable intangible assets
and goodwill.
<TABLE>
<S> <C>
Cash and fair value of the Company's common stock and common
stock options issued $28,146
Direct acquisition costs 1,438
ITK liabilities assumed, including estimated
restructuring and integration costs
of $3,484,000 39,454
-------
Total purchase price 69,038
Estimated fair value of tangible assets acquired,
including $5,772,000 of deferred tax assets
28,024
Estimated fair value of in-process research and development,
identifiable intangible assets and goodwill:
In-process research and development 11,330
Identifiable intangible assets 21,100
Goodwill 16,813
Deferred tax liabilities related
to identifiable intangibles (8,229)
-------
$69,038
</TABLE>
Management estimates that $11,330 of the purchase price represents the fair
value of purchased in-process research and development that has not yet reached
technological feasibility and has no alternative future use. This amount was
expensed as a non-recurring, non-tax-deductible charge upon consummation of the
acquisition. This amount has been reflected as a reduction in stockholders'
equity and has not been included in the pro forma condensed statements of
operations due to its non-recurring nature.
5
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED (DOLLARS IN
THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
At the time of the Company's acquisition, ITK described itself as a Remote
Access Server (RAS) product company. Although ITK did offer its own line of ISDN
cards and networking boards, the Company's acquisition was made principally to
acquire the voice over Internet Protocol (VoIP) technology under development by
ITK. This VoIP technology, if successfully developed, would allow users to send
packetized voice signals through the Internet. The Company believes that the
VoIP technology under development at the time of the acquisition could provide
for the development of products which would be a natural extension of the
Company's current product offerings and could position the Company to address
substantially larger markets than the markets served by the Company's current
products.
At the time of the acquisition, ITK had developed a proof of concept prototype
product (NetBlazer 8500) which demonstrated that the method of voice and data
compression under development by ITK and the method of combining VoIP and remote
access functionality under development by ITK had the potential to be further
developed into a product marketable to "Carrier Class" telephone companies.
However, the NetBlazer 8500 required further development before it could meet
the technical and functional requirements of such customers. Accordingly, the
Company is uncertain whether the VoIP technology being developed will ultimately
meet the technical requirements of Carrier Class telephony customers or whether
it will be commercially viable.
As of the date of the acquisition, the nature of the development efforts related
to the purchased, in-process research and development projects, as well as the
efforts required to complete development of those projects into commercially
viable products included development projects to address the following: (a)
development of enhanced technical attributes, including enhanced port density,
redundancy, network management capabilities, a higher fault tolerance,
compliance with telephone industry standards such as "SS7" and "NEBS"
compliancy; (b) development of significant hardware and software functions
considered integral to a product with broad appeal to end users and the
telephone companies, including computer-to-phone capabilities, interoperability
with other vendor's gateways, one-stage dialing , local tone simulation and
announcements, end-to-end transparent disconnect cause delivery and real-time
FAX-over capabilities, among others; and (c) re-engineering of the prototype
design to permit cost effective manufacture and commercial use, including
migration from a UNIX operating system to a Windows NT operating system.
It is not certain that development efforts on these projects will allow for
Carrier Class telephone company and end-user specifications to be met. Failure
to achieve these specifications or to achieve market viability will cause the
VoIP projects to fail. 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 identifiable intangible assets
and goodwill acquired may become impaired.
Management estimates that $11.3 million of the purchase price represents the
fair value of purchased in-process research and development related to the VoIP
projects referred to above, that had not yet reached technological feasibility
and had no alternative future uses. These amounts were expensed as a
non-recurring, non tax-deductible charge upon consummation of the acquisition.
The Company utilized the alternative income valuation approach to determine the
estimated fair value of the purchased in-process research and development. This
estimate is 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, starting with an estimated growth rate of 65% from 2000 to
2001 with steadily declining rates of estimated revenue growth 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.
6
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED (DOLLARS IN
THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
- - The estimated costs of sales are based upon the historical, stand-alone
costs of ITK without considering any synergies due to the acquisition by
the Company.
- - The estimated selling, general and administrative expenses of between 37%
and 32% of revenues from 2000 through 2003 and between 29% and 27% of
revenues between 2004 and 2007, are based upon the estimated expense levels
of ITK as derived from the historical, stand-alone costs of ITK without
considering any synergies due to the acquisition by the Company.
- - The discount rate utilized in the alternative income valuation approach 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 estimated by an
independent third-party appraiser for the Company, as a corporate business
enterprise is 14%. The discount rate used in the alternative valuation
approach was 30%. This discount rate is higher than the WACC due to the
inherent uncertainties in the estimates described above including
uncertainty surrounding the successful development of purchased research
and development, the estimated 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.
The Company estimated that the purchased in-process research and development
related to VoIP was 83% complete as of the acquisition date. This estimate was
based upon research and development costs incurred to date compared to total
estimated development costs. As of the date of acquisition, the estimated cost
to complete the VoIP to a point of technological feasibility was approximately
$2.3 million, expected to be incurred over a period of approximately 20 months
following the acquisition. This estimate is subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur.
The Company is continuing development of the acquired in-process VoIP technology
and, as of June 30, 1999, believes that its development efforts are on schedule
to meet the product release schedule referred to above without any significant
changes in its research and development costs. However, these expectations are
subject to change, given the uncertainties of the development process and
changes in market expectations.
The identifiable intangible assets of $21,100,000 included in the purchase price
allocation set forth above are comprised of proven technology with an estimated
fair value of $19,700,000 and an assembled workforce with an estimated 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 of $16,813,086, which is being amortized over seven years. With regard
to the proven technology, the Company intends to further enhance the strengths
of this product range and implement a plan to gain leadership in the ISDN
market. The Company's core asset is the comprehensive set of common application
programming interface (CAPI) and CAPI-enhancing features combined with highly
intelligent ISDN protocol implementation which provide for integration into
server-based communication solutions for the media communication market.
7
<PAGE>
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $ 165,598 $ 21,028 $ 186,626
Cost of sales 85,483 13,156 98,639
Gross margin 80,115 7,872 87,987
Operating expenses:
Sales and marketing 36,671 10,148 46,819
Research and development 17,978 5,191 23,169
General and administrative 19,325 6,843 $ 6,575(a) 32,743
Restructuring 10,471 10,471
Total operating expenses 84,445 22,182 6,575 113,202
Operating loss (4,330) (14,310) (6,575) (25,215)
Other income (expense), net 154 (249) (722)(b) (817)
Aetherworks Corporation net loss (5,764) (5,764)
Aetherworks Corporation write off (5,759) (5,759)
Loss before income taxes (15,699) (14,559) (7,297) (37,555)
Income tax provision (benefit) 92 (253)(b) (161)
Net loss $ (15,791) $ (14,559) $ (7,044) $ (37,394)
Net loss per common and common equivalent $(1.18) - $(2.68)
share, basic and diluted
Weighted average common shares,
basic and diluted 13,393,408 576,357(d) 13,969,765
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS.
8
<PAGE>
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $ 134,098 $ 25,105 $ 159,203
Cost of sales 65,105 19,456 84,561
Gross margin 68,993 5,649 74,642
Operating expenses:
Sales and marketing 26,303 12,166 38,469
Research and development 11,887 4,860 16,747
General and administrative 10,025 6,693 $ 4,931(a) 21,649
Total operating expenses 48,215 23,719 (4,931) 76,865
Operating income (loss) 20,778 (18,070) (4,931) (2,223)
Other income (expense), net 1,477 (929) (541)(b) 7
Aetherworks Corporation net loss 1,350 1,350
Income (loss) before income taxes 23,605 (18,999) (5,472) (866)
Income tax provision (benefit) 8,686 8 (189)(b) 713
(7,792)(c)
Net income (loss) $ 14,919 $ (19,007) $ 2,509 $ (1,579)
Net income (loss) per common share,
basic $1.10 - $(0.11)
Net income (loss) per common share,
assuming dilution $1.05 - $(0.11)
Weighted average common shares, basic 13,535,512 576,357(d) 14,111,869
Weighted average common shares,
assuming dilution 14,216,915 (105,046)(d) 14,111,869
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS.
9
<PAGE>
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net sales $ 123,473 $ 13,040 $ 136,513
Cost of sales 64,420 8,111 72,531
Gross margin 59,053 4,929 63,982
Operating expenses:
Sales and marketing 29,310 11,910 41,220
Research and development 14,284 3,916 18,200
General and administrative 13,964 $ 4,931(a) 18,895
Restructuring 10,472 10,472
Total operating expenses 68,030 15,826 4,931 88,787
Operating loss (8,977) (10,897) (4,931) (24,805)
Other income (expense), net 343 150 (541)(b) (48)
Aetherworks Corporation net loss (4,634) (4,634)
Loss before income taxes (13,268) (10,747) (5,472) (29,487)
Income tax benefit (1,357) (189)(b) (1,546)
Net loss $ (11,911) $(10,747) $ (5,283) $ (27,941)
Net loss per common and common
equivalent share, basic
and diluted $(0.89) - $(2.00)
Weighted average common shares,
basic and diluted 13,379,899 576,357(d) 13,956,256
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS.
10
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (DOLLARS IN
THOUSANDS)
1. FINANCIAL STATEMENTS:
Digi International Inc. (the Company) has a September 30 fiscal year-end.
The unaudited historical statement of operations information of the Company
for the year ended September 30, 1997 was derived from the consolidated
financial statements of the Company, which are included in the Company's
annual report on Form 10-K for the year ended September 30, 1997. The
historical statement of operations information of the Company for the
nine-month periods ended June 30, 1998 and 1997 was derived from the
condensed financial statements of the Company which are included in the
Company's reports on Form 10-Q for the quarters ended June 30, 1997 and
1998.
Prior to the acquisition by the Company, ITK International, Inc. (ITK) had
a June 30 fiscal year-end. Accordingly, the ITK statement of operations
information for the twelve-month period ended September 30, 1997 and the
nine-month periods ended June 30, 1998 and 1997 has been derived by
combining ITK's unaudited consolidated results of operations for the
applicable calendar quarters.
The pro forma condensed statements of operations assume the business
combination took place as of the beginning of the periods presented. The
pro forma condensed statement of operations for the twelve-month period
ended September 30, 1997 combines the Company's consolidated statement of
operations and ITK's consolidated statement of operations for the
twelve-month period then ended. The pro forma condensed statements of
operations for the nine-month periods ended June 30, 1998 and 1997 combine
the Company's unaudited consolidated statement of operations and ITK's
unaudited consolidated statement of operations for the nine-month periods
ended June 30, 1998 and 1997, respectively. On a combined basis there were
no material transactions between the Company and ITK during the periods
presented.
The pro forma combined provision for income taxes may not necessarily be
indicative of amounts that would have resulted had the Company and ITK
filed consolidated income tax returns during the periods presented.
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS:
The purchase price was allocated based upon the estimated fair value of
assets acquired and liabilities assumed. The preliminary purchase price
allocation is based on the Company's estimates of fair value.
11
<PAGE>
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS CONTINUED
(DOLLARS IN THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS,
CONTINUED:
(a) Adjustment reflects amortization of acquired identifiable intangible
assets and goodwill. Identifiable intangible assets of $21,100 are
comprised of proven technology with an appraised value of $19,700, and
an assembled workforce with an appraised value of $1,400 which have
estimated useful lives of five years and six years, respectively. The
estimated annual non-tax-deductible amortization charge related to the
proven technology and workforce is approximately $4,173. The
estimated annual non-tax-deductible amortization charge related to
amortization of the $16,813 allocated to goodwill, which has an
estimated useful life of seven years, is approximately $2,402.
(b) Adjustment reflects the decrease in interest income and related tax
effect resulting from the use of cash and cash equivalents to complete
the acquisition. The assumed rate of return on the cash balance was
5%.
(c) Adjustment reflects the portion of Digi's income tax provision which
would not have been recognized due to ITK's U.S. net operating losses
for the nine-moth period ended June 30, 1998.
(d) Adjustment reflects net increase (decrease) in weighted average common
shares and common equivalent shares outstanding for common stock and
common stock options issued in connection with the acquisition, as
well as equivalent shares of the Company that have an antidilutive
effect on pro forma diluted earnings per common share.
Pro forma basic earnings per common share for the periods presented
were calculated assuming that the 576,357 shares of the Company's
common stock issued in connection with the acquisition were issued
at the beginning of the periods presented.
The calculation of pro forma diluted earnings per common share
excludes the 71,904 equivalent shares of the Company attributable to
the common stock options issued by the Company in connection with
the acquisition, to replace existing ITK common stock options. Such
equivalent shares were excluded in determining the weighted average
equivalent shares outstanding for the year ended September 30, 1997
and the nine-month periods ended June 30, 1998 and 1997, because
their effect was antidilutive.
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