<PAGE>
- ------------------------------------------------------------------------------
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, 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.
------------------------------------------------------
(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 February 2, 1999, there were 14,624,269 shares of the registrant's $.01
par value Common Stock outstanding.
- ------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations
for the three months ended
December 31, 1998 and 1997...........................................................................3
Condensed Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1998.............................................................4
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31, 1998 and 1997................................................5
Notes to Condensed Consolidated Financial
Statements...........................................................................................6
Review Report of Independent Accountants.............................................................9
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.......................................................10
Forward-looking Statements..........................................................................14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........................................14
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. Legal Proceedings...................................................................................15
ITEM 2. Changes in Securities...............................................................................16
ITEM 3. Defaults Upon Senior Securities.....................................................................16
ITEM 4. Submission of Matters to a Vote of Securities Holders...............................................16
ITEM 5. Other Information...................................................................................16
ITEM 6. Exhibits and Reports on Form 8-K....................................................................17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 51,395,021 $ 42,590,059
Cost of sales 24,904,313 21,221,314
------------ ------------
Gross margin 26,490,708 21,368,745
------------ ------------
Operating expenses:
Sales and marketing 11,974,080 8,259,494
Research and development 6,476,216 3,810,900
General and administrative 5,152,292 3,610,125
------------- ------------
Total operating expenses 23,602,588 15,680,519
------------- ------------
Operating income 2,888,120 5,688,226
Other (expense) income, principally
interest (209,786) 268,885
------------ ------------
Income before income taxes 2,678,334 5,957,111
Provision for income taxes 1,312,385 2,114,775
------------ ------------
Net income $ 1,365,949 $ 3,842,336
------------ ------------
------------ ------------
Net income per common share, basic $ 0.09 $ 0.28
------------ ------------
------------ ------------
Net income per common share,
assuming dilution $ 0.09 $ 0.27
------------ ------------
------------ ------------
Weighted average common shares, basic 14,572,022 13,480,656
------------ ------------
------------ ------------
Weighted average common shares,
assuming dilution 14,701,519 14,043,273
------------ ------------
------------ ------------
</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 1998 1998
------------ ------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 4,041,170 $ 10,355,368
Accounts receivable, net 43,100,046 48,549,145
Inventories, net 29,508,100 27,365,924
Other 6,055,093 6,139,941
------------ ------------
Total current assets 82,704,409 92,410,378
Property, equipment and improvements, net 33,098,851 33,990,923
Intangible assets, net 34,190,135 31,354,483
Other 2,595,137 2,978,883
------------ ------------
Total assets $152,588,532 $160,734,667
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 6,278,303 $ 10,707,000
Current portion of long-term debt 41,748 264,025
Accounts payable 12,234,996 15,255,175
Income taxes payable 4,733,321 3,797,588
Accrued expenses:
Advertising 2,662,924 2,651,742
Compensation 3,948,904 6,776,292
Other 6,657,119 9,808,835
Restructuring accruals 3,566,658 5,254,000
------------ ------------
Total current liabilities 40,123,973 54,514,657
Long-term debt 11,051,206 11,124,446
Other 308,339 275,000
------------ ------------
Total liabilities 51,483,518 65,914,103
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000
shares authorized; none outstanding
Common stock, $.01 par value; 60,000,000
shares authorized; 15,837,625 and 15,790,975
shares issued 158,376 157,910
Additional paid-in capital 70,386,446 68,695,448
Retained earnings 53,820,980 52,455,031
Cumulative foreign currency translation
adjustment (334,723) (815,809)
------------ ------------
124,031,079 120,492,580
Unearned stock compensation (1,220,077) (3,777,204)
Treasury stock, at cost, 1,236,384 and
1,247,094 shares (21,705,988) (21,894,812)
------------ ------------
Total stockholders' equity 101,105,014 94,820,564
------------ ------------
Total liabilities and stockholders' equity $152,588,532 $160,734,667
------------ ------------
------------ ------------
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 1,365,949 $ 3,842,336
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,257,895 1,720,414
Provision for losses on accounts receivable 150,000 607,992
Provision for inventory obsolescence 1,175,399 1,397,098
Loss on sale of fixed assets 19,625 70,584
Stock compensation 338,470 113,382
Changes in operating assets and liabilities (7,006,819) (1,645,933)
----------- -----------
Total adjustments (2,065,430) 2,263,537
----------- -----------
Net cash (used in) provided by operating
activities (699,481) 6,105,873
----------- -----------
Investing activities:
Purchase of property, equipment, intangibles,
and improvements (1,453,323) (2,084,223)
Investment in AetherWorks Corporation - (1,000,000)
----------- -----------
Net cash (used in) investing activities (1,453,323) (3,084,223)
----------- -----------
Financing activities:
Principal payments on borrowings (4,521,071) -
Stock benefit plan transactions, net 256,870 363,591
----------- -----------
Net cash (used in) provided by
financing activities (4,264,201) 363,591
----------- -----------
Effect of exchange rate changes on cash and
and cash equivalents 102,807 -
Net (decrease) increase in cash and cash equivalents (6,314,198) 3,385,241
Cash and cash equivalents, beginning of period 10,355,368 31,329,666
----------- -----------
Cash and cash equivalents, end of period $ 4,041,170 $34,714,907
----------- -----------
----------- -----------
</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 (SEC). 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 1998 Annual Report and Form 10-K.
The condensed consolidated financial statements presented herein as of
December 31, 1998, and for the three months ended December 31, 1998, and
1997, 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. ACQUISITIONS
In connection with a review of the Company's annual report on Form 10-K for
the year ended September 30, 1998, the Staff of the Securities and Exchange
Commission (SEC) has made several inquiries about the Company's accounting
for its acquisitions of ITK International, Inc. (ITK) and Central Data
Corporation (CDC). The most significant of these inquiries relates to the
appropriateness of the amounts of the acquired in-process research and
development charges recorded by the Company in the fourth quarter of fiscal
year 1998. Any decrease in the amount of such charges would result in an
increase in the value of identifiable intangible assets and goodwill as well
as an increase in future amortization expense. The amount of such
adjustments, if any, are not known at this time, although they could be
material to the Company's financial position and results of operations.
Also, as a result of the SEC's review of the Company's accounting for its
acquisitions of ITK and CDC, certain adjustments to the measurement and
allocations of the purchase prices recorded for ITK and CDC were required.
The effects of these adjustments have been reflected in the accompanying
balance sheet as of December 31, 1998:
- - A net increase in goodwill of $3,450,834
- - A decrease in deferred compensation of $1,685,329
- - An increase in additional paid-in capital of $1,765,505
The above adjustments did not have a material effect on the Company's
financial position or results of operations as of December 31, 1998 or for
the quarter then ended.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) recorded in the fourth quarter of
fiscal 1998 consisted of $61,483 of existing commitments for rent, $100,110
of contractual payments for office equipment, $202,039 of write-offs of
leasehold improvements and $656,368 of severance costs associated with the
elimination of six positions. As of December 31, 1998, $165,111 of payments
have been made relating to this restructuring charge. The Company expects to
complete these restructuring activities by June 30, 1999.
In connection with the Company's acquisition of ITK in July 1998, the Company
implemented a plan of reorganization and accordingly, recognized a $3,484,000
restructuring liability which the Company included in the liabilities assumed
in the acquisition. Components of this estimated liability included
$1,844,000 of personnel costs and $1,640,000 related to facilities closures.
As of December 31, 1998, $1,298,959 of payments have been made relating to
personnel costs and $107,598 of payments have been made related to facilities
closure costs. The Company expects to complete these restructuring activities
by June 30, 1999.
In connection with the Company's acquisition of CDC in July 1998, the Company
implemented a plan of reorganization and accordingly, recognized a $750,000
restructuring liability which the Company included in the total liabilities
assumed in the acquisition. Components of this estimated liability included
$675,000 of personnel costs and $75,000 related to a facility closure. As of
December 31, 1998, $115,674 of payments have been made relating to personnel
costs and no payments have been made related to facilities closure costs. The
Company expects to complete these restructuring activities by March 31, 1999.
4. 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,
1998 and September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Raw materials $14,502,604 $13,707,999
Work in process 4,449,426 2,922,442
Finished goods 10,556,070 10,735,483
----------- -----------
$29,508,100 $27,365,924
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NET INCOME PER SHARE
Basic net income per share is calculated based on only the weighted average
of common shares outstanding during the period. Net income per share,
assuming dilution, is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding during each period.
The Company's only common stock equivalents are those that result from
dilutive common stock options. The calculation of dilutive earnings per share
excludes the 1,123,201 and 168,073 equivalent shares of the Company for the
three month periods ended December 31, 1998 and 1997, respectively,
attributable to the common stock options issued by the Company because their
effect was anti-dilutive.
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, 1998, and the
related condensed consolidated statements of operations and cash flows for
the three months ended December 31, 1998, and 1997. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1998, and the
related consolidated statements of operations and cash flows for the year
then ended (not presented herein); and in our report dated December 11, 1998,
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, 1998, is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 22, 1999,
except for the information
in Note 2 as to which the date
is January 27, 1999
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)
------------------ ----------
1998 1997
------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 20.7%
Cost of sales 48.5 49.8 17.4
----- ----- -----
Gross margin 51.5 50.2 24.0
----- ----- -----
Operating expenses:
Sales and marketing 23.3 19.4 45.0
Research and development 12.6 8.9 69.9
General and administrative 10.0 8.5 42.7
----- ----- -----
Total operating expenses 45.9 36.8 50.5
----- ----- -----
Operating income 5.6 13.4 (49.2)
Other (expense) income, net (0.4) 0.6 (178.0)
----- ----- -----
Income before income taxes 5.2 14.0 (55.0)
Provision for income taxes 2.5 5.0 (37.9)
----- ----- -----
Net income 2.7% 9.0% (64.5)%
----- ----- -----
----- ----- -----
</TABLE>
NET SALES
Net sales for the three month period ended December 31, 1998, were higher
than net sales for the corresponding three month period ended December
31,1997 by $8,804,962 or 20.7 %. The acquisitions of ITK and CDC contributed
$13,651,509 in increased revenue for the three month period ended December
31, 1998. Offsetting this revenue growth were reduced sales in physical layer
products versus the comparable period in 1997 due to decreased product
demand. In addition, also offsetting this revenue growth were reduced sales
to the distribution markets. The decline in distribution sales is primarily
due to increased sales to distributors during the third and fourth quarter of
fiscal 1998, as the Company gave incentives to distributors to increase their
purchases.
GROSS MARGIN
Gross margin for the three month period ended December 31, 1998 increased to
51.5%, as compared to 50.2% for the three month period ended December 31,
1997. Such increase was principally due to increased sales of higher margin
server-based products to the distribution channel. In particular, gross
margins for the three month period ended December 31, 1998, were
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN (CONTINUED)
enhanced by a favorable product mix, resulting in higher sales of higher
margin products. Offsetting the increase in margins were ITK and CDC products
sold during the three month period ended December 31, 1998, which had margins
of 47.2%.
OPERATING EXPENSES
Operating expenses for the three month period ended December 31, 1998,
increased approximately $7.9 million or 50.5 % as compared to operating
expenses for the three month period ended December 31, 1997. The operations
of ITK and CDC, which were acquired in the fourth quarter of the 1998 fiscal
year, accounted for approximately $5.8 million or a 37% increase in operating
expenses. In addition, the Company increased its sales and marketing efforts
related to new product introductions. The Company also increased its research
and development efforts for new products.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of ITK in July 1998, the Company
recorded a $26.0 million non-recurring, non-tax-deductible charge related to
the portion of the purchase price that represented, based upon an independent
appraisal, the fair value of acquired in-process research and development
(IPR&D) upon consummation of the acquisition. The Company is continuing its
efforts to develop the acquired IPR&D into commercially viable products.
In connection with the Company's acquisition of CDC in July 1998, the Company
recorded a $13.2 million non-recurring, non-tax-deductible charge related to
the portion of the purchase price that represented, based upon an independent
appraisal, the fair value of acquired IPR&D upon consummation of the
acquisition. The Company is continuing its efforts to develop the acquired
IPR&D into commercially viable products.
See discussion at Note 2 in the Notes to the Condensed Consolidated Financial
Statements of the Company.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME
Other expense, principally interest for the three month period ended December
31, 1998, results from debt assumed in the acquisition of ITK. Other income
for the three month period ended December 31, 1997 resulted from interest
earned on cash and cash equivalent balances.
INCOME TAXES
Income taxes have been provided for at an estimated annual effective rate of
49% for the three month period ended December 31, 1998. This effective tax
rate exceeds the U.S. statutory income tax rate and the effective tax rate of
35.5% in the three month period ended December 31, 1997 primarily due to
approximately $5 million of annual amortization expense related to the
Company's acquisitions of ITK and CDC which is not deductible for income tax
reporting purposes.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations. Investing activities for the three months ended December 31,
1998, consisted primarily of purchases of equipment and capital improvements
totaling approximately $1.5 million. Financing activities for the three
months ended December 31, 1998, consisted primarily of payments on line of
credit and debt obligations totaling approximately $4.5 million. At December
31, 1998, the Company had working capital of approximately $42.6 million. The
Company is currently negotiating to extend a $15 million unsecured line of
credit, which expires February 28, 1999. The Company 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
Effective January 1, 1999, eleven countries of the European Union converted
to a common currency called the "Euro." This action will cause some 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.
For the three month period ended December 31, 1998, the Company had foreign
transactions that were negotiated, invoiced and paid amounting to
approximately $15.6 million, of which $8.9 million were in U.S. dollars and
$6.7 million were Deutschemark-dominated sales through the
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
FOREIGN CURRENCY TRANSLATION (CONTINUED)
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 December 31, 1998.
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 worldwide rollout of this system will
not be completed until the late summer of calendar 1999. If necessary
conversions are not completed on a timely basis, the year 2000 could have 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.
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.
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial position.
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:
THE EXPECTATION THAT VARIOUS RESTRUCTURING ACTIVITIES IN CONNECTION WITH THE
ACQUISITIONS OF ITK AND CDC WILL BE COMPLETED ACCORDING TO SCHEDULE - This
expectation may be impacted by presently unanticipated delays or expenses.
THE EXPECTATION THAT THE COMPANY'S 1999 EFFECTIVE TAX RATE WILL BE 49 PERCENT
- -This expectation may be impacted by the changes in the Company's level of
profitability or changes in the allocation of the purchase prices made in
connection with the ITK and CDC acquisitions.
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 BELIEF THAT IMPLEMENTATION OF A NEW ENTERPRISE-WIDE INFORMATION
MANAGEMENT SYSTEM WILL ADDRESS THE COMPANY'S INTERNAL YEAR 2000 COMPLIANCE
ISSUES AND THE BELIEF THAT THE YEAR 2000 WILL NOT HAVE A SIGNIFICANT IMPACT
ON OPERATIONS - These beliefs may be impacted by presently unanticipated
delays in assessment or remediation, unanticipated increases in costs or
non-compliance by third parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 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, 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.
14
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
15
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3(a) Restated Certificate of Incorporation of the Registrant, As Amended*
3(b) Amended and Restated By-Laws of the Registrant**
4(a) Form of Rights Agreement, dated as of June 10, 1998 between Digi International Inc. and Norwest Bank Minnesota,
National Association, as Rights Agent***
4(b) Amendment dated January 26, 1998, to Share Rights Agreement, dated as of June 10, 1998 between Digi
International Inc. and Norwest Bank Minnesota, National Association, as Rights Agent ****
10(h)(i) Amendment to Employment Agreement between the Company and Douglas J. Glader dated February 1, 1999
15 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
</TABLE>
(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)
***Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A dated June 24, 1998 (File No. 0-17972)
****Incorporated by reference to Exhibit 1 to Amendment No. 1 to the
Company's Registration Statement on Form 8-A dated February 5, 1999 (File No.
0-17972)
16
<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 16, 1999 By: /s/ S. Krishnan
-----------------------------------
S. Krishnan
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
17
<PAGE>
EXHIBIT 10(h)(i)
AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN THE COMPANY AND DOUGLAS J. GLADER
DATED FEBRUARY 1, 1999
<PAGE>
February 1, 1999
PERSONAL AND CONFIDENTIAL
Mr. Douglas J. Glader
Digi International Inc.
11001 Bren Road East
Minnetonka, MN 55343
Dear Doug:
This letter confirms the terms of an amendment to your employment
agreement with the Company dated February 6, 1995, as previously amended by
letter agreement dated January 16, 1997 (the "Agreement"). Except as
specifically provided for herein, the terms of the Agreement remain in full
force and effect.
If you are terminated by the Company without "cause" on or before
September 30, 1999, you would be entitled to severance equal to one year's
base salary and a bonus (if earned) that would be pro-rated for the portion
of the fiscal year through the termination date. The definition of "cause" is
attached as an appendix to the Agreement. Neither this letter nor the
Agreement shall be construed so as to amend the definition of "cause"
contained in the terms and conditions of your options to purchase shares of
the Company's Common Stock.
The Agreement as amended by this letter constitutes the entire agreement
between you and the Company regarding the subject matter contained therein
and supersedes all prior agreements and understandings relating thereto.
If the terms outlined above are acceptable, please confirm by signing
the enclosed copy below and returning it to me.
Very truly yours,
DIGI INTERNATIONAL INC.
/s/Jerry A. Dusa
President and Chief Executive Officer
ACCEPTED:
/s/Douglas J. Glader
---------------------------------------
<PAGE>
EXHIBIT 15
UNAUDITED INTERIM FINANCIAL INFORMATION LETTER
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
We are aware that our report dated January 22, 1999, except for the
information in Note 2 as to which the date is January 27, 1999, 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, 1998 and 1997, and included in the Company's Form 10-Q for
the quarter ended December 31, 1998, is incorporated by reference in the
Company's registration statements on Form S-8 (Registration Nos. 33-32956,
33-38898, 333-99, 333-1821, 333-23857 and 333-57869). 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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,041,170
<SECURITIES> 0
<RECEIVABLES> 43,100,046
<ALLOWANCES> 0
<INVENTORY> 29,508,100
<CURRENT-ASSETS> 82,704,409
<PP&E> 33,098,851
<DEPRECIATION> 0
<TOTAL-ASSETS> 152,588,532
<CURRENT-LIABILITIES> 40,123,973
<BONDS> 0
0
0
<COMMON> 158,376
<OTHER-SE> 100,946,638
<TOTAL-LIABILITY-AND-EQUITY> 152,588,532
<SALES> 51,395,021
<TOTAL-REVENUES> 51,395,021
<CGS> 24,904,313
<TOTAL-COSTS> 23,602,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209,786
<INCOME-PRETAX> 2,678,334
<INCOME-TAX> 1,312,385
<INCOME-CONTINUING> 1,312,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,312,389
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
