<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: June 30, 1999.
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 August 6, 1999, there were 14,910,085 shares of the registrant's $.01 par
value Common Stock outstanding.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Condensed Consolidated Statement of Operations
for the three months and nine months ended
June 30, 1999 and 1998................................................3
Condensed Consolidated Balance Sheet as of
June 30, 1999 and September 30, 1998..................................4
Condensed Consolidated Statement of Cash Flows
for the nine months ended June 30, 1999 and 1998......................5
Notes to Condensed Consolidated Financial
Statements............................................................6
Review Report of Independent Accountants.............................12
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition........................13
Forward-looking Statements...........................................20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...........20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................21
ITEM 2. Changes in Securities................................................22
ITEM 3. Defaults Upon Senior Securities......................................22
ITEM 4. Submission of Matters to a Vote of Securities Holders................22
ITEM 5. Other Information....................................................22
ITEM 6. Exhibits and Reports on Form 8-K.....................................23
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30 Nine months ended June 30
-------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 51,144,524 $46,449,286 $ 145,171,035 $134,098,319
Cost of sales 23,997,831 21,890,041 73,055,760 65,104,699
------------ ----------- ------------- ------------
Gross margin 27,146,693 24,559,245 72,115,275 68,993,620
------------ ----------- ------------- ------------
Operating expenses:
Sales and marketing 9,323,592 9,036,250 32,270,668 26,303,159
Research and development 6,003,762 4,127,946 18,367,708 11,886,956
General and administrative 5,941,674 2,969,649 19,126,262 10,025,425
Restructuring (685,397) -- 767,512 --
------------ ----------- ------------- ------------
Total operating expenses 20,583,631 16,133,845 70,532,150 48,215,540
------------ ----------- ------------- ------------
Operating income 6,563,062 8,425,400 1,583,125 20,778,080
Other income (expense), net 64,251 659,916 (181,050) 1,477,270
AetherWorks Corporation net gain -- 1,350,000 -- 1,350,000
------------ ----------- ------------- ------------
Income before income taxes 6,627,313 10,435,316 1,402,075 23,605,350
Provision for income taxes 4,374,028 4,024,409 925,370 8,686,768
------------ ----------- ------------- ------------
Net income $ 2,253,285 $ 6,410,907 $ 476,705 $ 14,918,582
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Net income per common share,
basic $ 0.15 $ 0.47 $ 0.03 $ 1.10
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Net income per common share,
assuming dilution $ 0.15 $ 0.45 $ 0.03 $ 1.05
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average common shares,
basic 14,714,942 13,617,518 14,625,908 13,535,512
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average common shares,
assuming dilution 14,772,315 14,385,012 14,767,841 14,216,915
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
3
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
----------- -------------
(unaudited) (as restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,770,254 $ 10,355,368
Accounts receivable, net 35,330,537 48,549,145
Inventories, net 21,968,124 27,365,924
Other 5,128,023 6,139,941
------------- -------------
Total current assets 88,196,938 92,410,378
Property, equipment and improvements, net 30,376,062 33,990,923
Intangible assets, net 52,489,501 63,602,435
Other 2,384,553 2,978,883
------------- -------------
Total assets $ 173,447,054 $ 192,982,619
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 5,213,322 $ 10,707,000
Current portion of long-term debt 202,910 264,025
Accounts payable 8,634,942 15,255,175
Income taxes payable 5,077,369 3,797,588
Accrued expenses:
Advertising 2,514,273 2,651,742
Compensation 5,324,280 6,776,292
Other 6,984,064 9,808,835
Restructuring 1,462,344 5,254,000
------------- -------------
Total current liabilities 35,413,504 54,514,657
Long-term debt 9,070,890 11,124,446
Net deferred income taxes 4,027,833 5,817,933
Other -- 275,000
------------- -------------
Total liabilities 48,512,227 71,732,036
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; 16,170,583 and 15,790,975 shares issued 161,706 157,910
Additional paid-in capital 71,563,903 70,461,123
Retained earnings 75,519,511 75,042,806
Cumulative foreign currency translation adjustment (140,818) (815,809)
------------- -------------
147,104,302 144,846,030
Unearned stock compensation (400,305) (1,700,635)
Treasury stock, at cost, 1,297,818 and 1,247,094
common shares (21,769,170) (21,894,812)
------------- -------------
Total stockholders' equity 124,934,827 121,250,583
------------- -------------
Total liabilities and stockholders' equity $ 173,447,054 $ 192,982,619
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 476,705 $ 14,918,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring 208,266 --
Depreciation and amortization 11,264,831 4,877,165
AetherWorks Corporation net gain -- (1,350,000)
Provision for losses on accounts receivable 420,000 707,992
Provision for inventory obsolescence 3,495,399 5,354,569
Loss on sale of fixed assets 14,215 183,057
Stock compensation 529,738 656,940
Changes in operating assets and liabilities 6,183,006 (3,695,118)
------------ ------------
Total adjustments 22,115,455 6,734,605
------------ ------------
Net cash provided by operating activities 22,592,160 21,653,187
------------ ------------
Investing activities:
Purchase of property, equipment and
improvements (3,008,585) (4,407,189)
Investment in AetherWorks Corporation -- (2,000,000)
Advance related to impending acquisition -- (5,000,000)
------------ ------------
Net cash used in investing activities (3,008,585) (11,407,189)
------------ ------------
Financing activities:
Principal payments on borrowings (5,346,233) --
Stock benefit plan transactions, net 2,002,977 3,369,749
------------ ------------
Net cash (used in) provided by financing activities (3,343,256) 3,369,749
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (825,433) --
Net increase in cash and cash equivalents 15,414,886 13,615,747
Cash and cash equivalents, beginning of period 10,355,368 31,329,666
------------ ------------
Cash and cash equivalents, end of period $ 25,770,254 $ 44,945,413
------------ ------------
------------ ------------
</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 on Form 10-K/A.
The condensed consolidated financial statements presented herein as of June 30,
1999, and for the three months and nine months ended June 30, 1999, and 1998,
reflect, in the opinion of management, all adjustments (which, other than
adjustments to restructuring charges, 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.
After discussion with the staff of the Securities and Exchange Commission (the
SEC) the condensed consolidated financial statements as of September 30, 1998,
December 31, 1998 and March 31, 1999, and for the year ended September 30, 1998,
the three month period ended December 31, 1998, and the three and six month
periods ended March 31, 1999, have been restated to reflect a change in the
measurement and allocations of the purchase prices related to the July 1998
acquisitions of ITK International, Inc. ("ITK") and Central Data Corporation
("CDC").
The Company allocated amounts to In Process Research & 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 acquisitions of ITK and
CDC. Subsequent to the acquisitions, 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 about the Company's measurement of the fair value of common
stock and common stock options issued in the ITK and CDC acquisitions, the
Company has modified its valuation of this portion of the purchase prices.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
As a result of valuing IPR&D using the alternative income valuation approach and
adjusting the measurement of the purchase prices, the Company, in consultation
with its independent accountants, has revised its measurement and allocations of
the purchase prices, including the amounts allocated to IPR&D. The effect of
these adjustments was to: reduce the aggregate amount originally allocated to
IPR&D from $39.2 million to $16.1 million; increase the aggregate amount
allocated to current technologies from $15.0 to $29.1 million; increase the
amount of net deferred tax liabilities from $0 to $6.3 million; increase
goodwill from $8.2 million to $27.4 million; increase additional paid in-capital
from $68.7 million to $70.5 million; and reduce unearned stock compensation from
$3.8 million to $1.7 million. These adjustments will also result in additional,
annual amortization expense, related to identifiable intangibles and goodwill of
approximately $5.0 million (assuming there are no future adjustments to reflect
impairments of such intangibles and goodwill).
The restatement does not affect previously reported net cash flows for the
periods presented. The effect of this restatement on previously reported
condensed consolidated financial statements included herein is as follows:
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------
As Previously
Balance Sheet Data Reported As Restated
- ------------------ ------------- ------------
<S> <C> <C>
Intangible assets, net $31,354,483 $63,602,435
Total assets 160,734,667 192,982,619
Net deferred income taxes - 5,817,933
Total liabilities 65,914,103 71,732,036
Additional paid-in capital 68,695,448 70,461,123
Retained earnings 52,455,031 75,042,806
Unearned stock compensation (3,777,204) (1,700,635)
Total stockholders' equity $94,820,564 $121,250,583
</TABLE>
2. RESTRUCTURING
In July 1998, the Company's Board of Directors approved a restructuring plan
related to the consolidation of its offices in Germany and England. The
restructuring plan relates to the closure of existing leased facilities rendered
redundant by the acquisition of ITK. The charge of $1,020,000 ($647,000 net of
tax benefits), consisted of $61,483 of noncancellable rent commitments the
Company expects to incur following closure of the Cologne, Germany facility,
$100,100 of contractual payment obligations for office furniture and other
equipment the Company expects to incur following the closure of the Cologne,
Germany facility, $202,039 related to the write-off of leasehold improvements in
connection with the closure of the Cologne, Germany facility and $656,368 of
termination payments associated with the elimination of six positions in
Cologne, Germany and Bagshot, England. The Company closed the Cologne facility
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING (CONTINUED)
during December 1998. As of June 30, 1999, the Company paid $266,854 of
termination costs relating to the elimination of two positions. During the third
quarter of 1999, the Company reduced the restructuring accrual by $572,191 due
to management's decision during the quarter to retain four employees previously
notified that they would be terminated, a final settlement negotiated by the
Company which reduced the remaining contractual rent commitments for office
space and equipment in Cologne, Germany which was previously vacated and
abandoned by the Company, and a decision by current management to utilize
certain equipment which prior management had planned to abandon. Adjustments to
the restructuring accrual are reflected as a reduction in the restructuring
accrual and a corresponding increase to operating income. Management of the
Company expects that remaining restructuring activities will be completed by
June 1999. A summary of payments and adjustments is included in the table below.
<TABLE>
<CAPTION>
Balance at Change in
September 30, Estimate Balance
Description 1998 Payments Adjustments Junes30, 1999
- ----------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Severance and termination costs $ 656,368 $(266,854) $ (355,324) $ 34,190
Rent committments 61,483 (25,005) (16,374) 20,104
Contractual pyaments for office equipment 100,110 (49,972) (50,138) -
Write-offs of leasehold improvements 202,039 - (150,355) 51,684
----------- ---------- ---------- ---------
TOTAL $ 1,020,000 $ (341,831) $ (572,191) $ 105,978
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
In connection with the Company's acquisition of ITK, the Company has formulated
a plan of reorganization and accordingly, has recognized a $3,484,000
restructuring liability which the Company has included as a component of total
liabilities assumed in the acquisition. Components of this estimated liability
include $1,844,000 of termination payments associated with 10 employees the
Company expects to eliminate at the Chelmsford, Massachusetts ITK location and
20 employees the Company expects to eliminate at the Dortmund, Germany location
and $1,640,000 of noncancellable rent obligations for facilities the Company
expects to incur following closure of facilities in Chelmsford, Massachusetts
and Bristol and Newbury, England. The Company vacated the Chelmsford, Bristol,
and Newbury facilities in March 1999, October 1998 and May 1999, respectively.
During the third quarter of fiscal 1999, the Company reduced the restructuring
accrual by $1,451,882 as management determined during the quarter that the
number of positions to be terminated was 26 rather than 30 due to unanticipated
employee turnover and other changes in management of the Company during fiscal
1999. In addition, during the third quarter of 1999, the Company and the lessor
of the Newbury facility reached a final, negotiated settlement which
significantly reduced the Company's remaining contractual rent obligation.
Adjustments to the restructuring accrual are reflected as a reduction in the
restructuring accrual and a corresponding decrease in goodwill. Management of
the Company expects that these restructuring activities will be completed by
June 1999. A summary of payments and adjustments is included in the table below.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING (CONTINUED)
<TABLE>
<CAPTION>
Balance at Change in
September 30, Estimate Balance
Description 1998 Payments Adjustments June 30, 1999
- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Severance and termination costs $ 1,844,000 $ (1,423,168) $ (378,792) $ 42,040
Facility closures 1,640,000 (236,910) (1,073,090) 330,000
----------- ------------ ------------- -------------
TOTAL $ 3,484,000 $ (1,660,078) $ (1,451,882) $ 372,040
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
</TABLE>
In connection with the Company's acquisition of CDC, the Company has formulated
a plan of reorganization and accordingly, the Company has recognized a $750,000
restructuring liability which the Company has included as a component of total
liabilities assumed in the acquisition. Components of this estimated liability
include $675,000 of termination payments, associated with 22 employees the
Company expects to eliminate when it closes the Champaign, Illinois facility in
January 1999 and $75,000 related to facility closure costs the Company expects
to incur following closure and sale of the Champaign, Illinois facility. During
the third quarter of fiscal 1999, the Company reduced the restructuring accrual
by $222,513 due to management's decision during the quarter to reduce the number
of employees to be terminated from 22 to 20 due to unanticipated employee
turnover and other changes in management. In addition, during the third quarter,
management determined that it would not incur significant additional closure
costs from the sale of the Champaign, Illinois facility. Adjustments to the
restructuring accrual are reflected as a reduction in the restructuring accrual
and a corresponding decrease in goodwill. Management of the Company expects that
these restructuring activities will be completed by June 1999.
A summary of payments and adjustments is included in the table below.
<TABLE>
<CAPTION>
Balance at Change in
September 30, Estimate Balance
Description 1998 Payments Adjustments June 30, 1999
- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Severance and termination costs $ 675,000 $ (321,226) $ (147,513) $ 206,261
Facility closure 75,000 - (75,000) -
----------- ----------- ----------- -------------
TOTAL $ 750,000 $ (321,226) $ (222,513) $ 206,261
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
In March 1999, the Company's Board of Directors approved a restructuring plan
related to the reorganization of sales and marketing functions in Germany,
England and the United States, by consolidating worldwide sales and marketing
resources into strategic locations. The related charge of $1,452,909 ($493,989
net of tax benefits) consisted of $151,038 of existing commitments for rent on
facilities vacated by the Company in Hamburg, Nurnberg, and Frankfurt Germany
and $1,301,871 of termination payments associated with the elimination of 44
positions in Dortmund, Germany, Bagshot, England, Sunnyvale, California, and
Minneapolis, Minnesota. As of June 30, 1999, the Company paid $553,639 of
termination costs relating to the elimination of 32 positions. During the third
quarter of fiscal 1999, management of the
9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRUCTURING (CONTINUED)
Company determined that $33,100 of severance costs in Dortmund would not be
payable due to a decision to retain two employees previously notified that they
would be terminated. In addition, the Company reduced its estimated remaining
rent commitment by $80,106 as it successfully sublet the vacated office space in
Nurnberg, Germany. Adjustments to the restructuring accrual are reflected as a
reduction in the restructuring accrual and a corresponding increase to operating
income. Management of the Company expects that these restructuring activities
will be completed by December 1999. A summary of payments and adjustments is
included in the table below.
<TABLE>
<CAPTION>
Balance at Change in
September 30, Estimate Balance at
Description 1998 Payments Adjustments June 30, 1999
- ---------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C>
Severance and termination costs $ 1,301,871 $(553,639) $ (33,100) $715,132
Rent commitments 151,038 (8,000) (80,106) 62,932
------------ --------- ----------- --------------
TOTAL $ 1,452,909 $(561,639) $ (113,206) $778,064
------------ --------- ----------- --------------
------------ --------- ----------- --------------
</TABLE>
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 June 30, 1999 and September
30, 1998 consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
------------- ------------------
<S> <C> <C>
Raw materials $15,036,070 $13,707,999
Work in process 1,992,117 2,922,442
Finished goods 4,939,937 10,735,483
------------- ----------
$21,968,124 $27,365,924
------------- ----------
------------- ----------
</TABLE>
4. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The statement establishes
standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive income includes net income and foreign
currency translation adjustments that are charged or credited to stockholders'
equity.
10
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPREHENSIVE INCOME (CONTINUED)
Comprehensive income for the three months and nine months ended June 30, 1999
and 1998 was as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30 June 30
------------------------ ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $2,253,285 $6,410,907 $476,705 $14,918,582
Foreign currency
translation adjustments 121,496 -- 674,991 --
---------- ---------- ---------- -----------
Comprehensive
income $2,374,781 $6,410,907 $1,151,696 $14,918,582
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
5. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average of common shares outstanding during the period. Net income per share,
assuming dilution, is calculated 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
1,683,099 and 1,331,169 equivalent shares of the Company for the three months
and nine months ended June 30, 1999, attributable to the common stock options
issued by the Company because their effect was anti-dilutive. Shares used in the
computations for the nine months ended June 30, 1999 and 1998 are as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Weighted average shares used in basic computation 14,714,942 14,625,908
Common stock equivalents - stock options 57,373 141,933
---------- ----------
Weighted average shares used in diluted computation 14,772,315 14,767,841
---------- ----------
---------- ----------
</TABLE>
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 Condensed Consolidated Financial Statements.
11
<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 June 30, 1999, and the related
condensed consolidated statements of operations for the three month and nine
month periods ended June 30, 1999, and 1998, and cash flows for the nine month
periods ended June 30, 1999, and 1998. 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, except
as to Notes 2 and 3, for which the date is July 23, 1999, we expressed an
unqualified opinion on those consolidated financial statements. Such financial
statements have been restated as described in the following paragraph. 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.
As more fully described in Note 1 to the accompanying condensed consolidated
financial statements and Note 2 of the Company's consolidated financial
statements as of and for the year ended September 30, 1998, the Company and the
staff of the Securities and Exchange Commission have had discussions regarding
the accounting treatment related to the July 1998 acquisitions of ITK
International, Inc. and Central Data Corporation. As a result of these
discussions, the Company has changed the method used to allocate the purchase
price to in-process technologies. In connection with this modification, the
Company has adjusted the measurement and allocations of the purchase prices
recorded for the aforementioned acquisitions. Accordingly, the consolidated
financial statements as of and for the year ended September 30, 1998 have been
restated.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 23, 1999
12
<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 % NINE MONTHS %
ENDED INCREASE ENDED INCREASE
JUNE 30 (DECREASE) JUNE 30 (DECREASE)
------------------ --------- ----------------- ----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 10.1% 100.0% 100.0% 8.2%
Cost of sales 46.9 47.1 9.6 50.3 48.5 12.2
---- ---- ---- ---- ---- -----
Gross margin 53.1 52.9 10.5 49.7 51.5 4.5
---- ---- ---- ---- ---- -----
Operating expenses:
Sales and marketing 18.3 19.5 3.2 22.2 19.7 22.7
Research and development 11.7 8.9 45.4 12.7 8.9 54.5
General and administrative 11.6 6.4 100.0 13.2 7.5 90.8
Restructuring (1.3) -- -- 0.5 -- --
---- ----- ----- ----- ----- -----
Total operating expenses 40.3 34.7 27.6 48.6 36.0 46.3
---- ---- ----- ---- ---- -----
Operating income 12.8 18.2 (22.1) 1.1 15.5 (92.4)
Other income, net 0.2 1.4 (90.3) (0.1) 1.1 (112.3)
AetherWorks Corporation loss - 2.9 (100.0) - 1.0 -
----- --- ----- ----- --- -----
Income before income taxes 13.0 22.5 (36.5) 1.0 17.6 (94.1)
Provision for income taxes 8.6 8.7 8.7 0.7 6.5 (89.4)
----- --- ----- --- --- -----
Net income 4.4 13.8 (64.9)% 0.3% 11.1% (96.8)%
----- --- ----- --- --- -----
----- --- ----- --- --- -----
</TABLE>
NET SALES
Net sales for the three months ended June 30, 1999, were higher than net sales
for the corresponding three months ended June 30, 1998, by $4,695,238 or 10.1%.
Net sales for the nine months ended June 30, 1999 were higher than net sales for
the corresponding nine months ended June 30, 1998, by $11,072,716 or 8.3%. Sales
of the products added in connection with the acquisitions of ITK and CDC in July
1998 generated revenues of $9,050,900 and $32,827,800 for the three months and
nine months ended June 30, 1999, respectively. These revenue increases were
mitigated by a decrease in demand for the Company's legacy asynchronous products
resulting in reduced revenues of $1,791,800 and $10,710,000 for the three and
nine months ended June 30, 1999 relative to comparable periods of 1998, and a
decrease in demand for the Company's physical layer products resulting in a
decrease in related revenues of $5,046,900 and $15,551,100 for the three and
nine months ended June 30, 1999 relative to comparable periods of 1998. Net
sales of the Company's new digital RAS products were approximately $2,483,000
and $4,506,000 for the three and nine months ended June 30, 1999, respectively.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
The following table sets forth revenue by principal product group expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
Three months Nine months
Ended June 30 Ended June 30
------------------ ------------------
1999 1998 1999 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Server Based 72.0% 65.3% 67.1% 62.4%
Physical Layer 8.6% 16.6% 7.6% 16.0%
OEM 19.4% 18.1% 25.3% 21.6%
Total 100.0% 100.0% 100.0% 100.0%
</TABLE>
GROSS MARGIN
Gross margin for the three months and nine months ended June 30, 1999 was 53.1%
and 49.7%, as compared to 52.9% and 51.5% for the three months and nine months
ended June 30, 1998. For the three months ended June 30, 1999, gross margin was
positively impacted by the increased proportion of sales from higher gross
margin server-based communication products. Gross margin for the three and nine
months ended June 30, 1999, continues to be negatively impacted by sales of
lower gross margin products related to ITK operations which accounted for 10% of
total sales for the quarter ended June 30, 1999 and 14% of total sales for nine
six-month period ended June 30, 1999. In addition, margins generated from
physical layer LAN products have declined in fiscal 1999 due to market-driven
reductions in selling prices.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 1999, increased
approximately $4.4 million or 27.6% as compared to operating expenses for the
three months ended June 30, 1998. The operations of ITK, which was acquired in
the fourth quarter of fiscal 1998, accounted for $4.8 million or 94.1% of the
increase in operating expenses. General and administrative expense also
increased in the three months ended June 30, 1999, due to the approximately $2.5
million ($1.6 million included in ITK expenses of $4.8 million) increase in
amortization expense resulting from identifiable intangible assets and goodwill
acquired in the ITK and CDC transactions. Excluding ITK, research and
development increased by $0.9 million due to development of new products
released during the quarter ended June 30, 1999. Marketing expenses decreased by
$2.0 million due to timing of major advertising campaigns.
Research and development expense was $6,003,762, or 12% of net sales, compared
with $4,127,946, or 9% of net sales, for the three months ended June 30, 1999
and 1998. The dollar increase is primarily due to new product development
efforts in digital remote access technology and the addition of research and
development costs related to ongoing development of in-process technologies
acquired from ITK and CDC in July 1998.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
Selling, general and administrative expense was $15,265,266, or 30% of net sales
compared to $12,005,899, or 26% of net sales, for the three months ended June
30, 1999 and 1998. The expense increase relates primarily to increased operating
expenses and increased amortization of intangible assets acquired in the
acquisition of ITK and CDC.
Included in operating income for the three and nine months ended June 30, 1999
are reversals of $572,191 of restructuring accruals originally established in
the fourth quarter of 1998 and $113,206 of restructuring accruals originally
established in the second quarter of 1999. (See Note 2 to the condensed
consolidated financial statements).
Operating expenses for the nine months ended June 30, 1999 increased by
approximately $22.3 million, excluding second quarter restructuring charges, or
46.3% as compared to operating expenses for the nine months ended June 30, 1998.
The operations of ITK accounted for approximately $16.5 million of this
increase. General and administrative expenses increased due to the approximately
$7.5 million increase in amortization expense resulting from identifiable
intangible assets and goodwill acquired in the ITK and CDC transactions ($4.8
million included in ITK expenses of $16.5 million). Excluding ITK, selling,
marketing and research and development costs increased $3.1 million due to
development of new products and preparation for new product launches.
The Company anticipated annual cost savings of approximately $5.2 million
relating to restructuring plans implemented by the Company (see Footnote 2 of
the condensed consolidated financial statements). These cost savings will
principally reduce future selling, general and administrative expenses and were
expected to begin during first quarter of fiscal 1999. As a result of changes in
management during fiscal 1999, the execution of restructuring plans were
delayed. As described in Note 2 to the condensed consolidated financial
statements, the Company made certain changes to these restructuring plans during
third quarter of fiscal 1999. These changes to the restructuring plans have
reduced the aforementioned expected annual cost savings to approximately $4.2
million. The Company expects to begin to realize the full effect of the
aforementioned cost savings by December of 1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
During July, 1998 the Company acquired ITK and CDC. These transactions were
accounted for using the purchase method of accounting. The purchase prices were
allocated to the net assets acquired based on their estimated fair market values
at the date of acquisitions.
After discussion with the staff of the Securities and Exchange Commission (the
SEC) the condensed consolidated financial statements as of September 30, 1998
have been restated to reflect a change in the measurement and allocations of the
purchase prices related to the July 1998 acquisitions of ITK and CDC.
The Company allocated amounts to 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 acquisitions of ITK and CDC. Subsequent to the
acquisitions, 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.
As a result of valuing IPR&D using the alternative income valuation approach and
adjusting the measurement of the purchase prices, the Company, in consultation
with its independent accountants, has revised its measurement and allocations of
the purchase prices, including the amounts allocated to IPR&D. The effect of
these adjustments was to: reduce the aggregate amount originally allocated to
IPR&D from $39.2 million to $16.1 million; increase the aggregate amount
allocated to current technologies from $15.0 to $29.1 million; increase the
amount of net deferred tax liabilities from $0 to $6.3 million; increase
goodwill from $8.2 million to $27.4 million; increase additional paid in-capital
from $68.7 million to $70.5 million; and reduce unearned stock compensation from
$3.8 million to $1.7 million.
The value assigned to purchased in-process technology was related to research
projects for which technological feasibility had not been established, Internet
Protocol (VoIP) technology ($11.3 million) and Universal Serial Bus (USB)
technology ($4.8 million).
The Company is continuing development of the acquired in-process VoIP technology
and, as of June 30, 1999,7 believes that its development efforts are on schedule
to meet the product release schedule referred to in the Company's Annual Report
on Form 10-K/A 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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
The Company is continuing development of the acquired in-process USB research
and development and has developed and released USB products, with initial
product revenues generated during November 1998. Included in revenues for the
nine month period ended June 30, 1999 is approximately $225,000 of revenues from
the first release of certain USB products. Actual revenues for the first nine
months of fiscal 1999 are below original projections due to delays in the
release and marketing of certain USB products. Development of the USB in-process
research and development continues without significant changes in the estimated
research and development costs or projected revenues.
OTHER INCOME (EXPENSE)
Other income for the three months ended June 30, 1999, resulted from interest
earned on cash and cash equivalent balances. Other expense, principally interest
expense for the nine months ended June 30, 1999, results from debt assumed in
the acquisition of ITK, net of interest earned on cash and cash equivalents.
INCOME TAXES
Income taxes have been provided for at an estimated annual effective rate of 66%
for the nine months ended June 30, 1999. This effective tax rate exceeds the
U.S. statutory income tax rate and the effective tax rate of 36.8% in the nine
months ended June 30, 1998 primarily due to the additional $10.0 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. The Company's working capital increased from $37.9 million at
September 30, 1998, to $52.8 million at June 30, 1999. The increase was
principally due to improved accounts receivable collections, paying down
borrowings under line of credit agreements, accounts payable and accrued
expenses.
Net cash provided by operating activities was $22,592,160 for the nine months
ended June 30, 1999, compared to $21,653,187 for the nine months ended June 30,
1998. The increase was primarily due to a decrease in accounts receivable
balances, offset by reduced operating income.
Net cash used in investing activities for the nine months ended June 30, 1999,
consisted primarily of purchases of equipment and capital improvements totaling
$3.0 million for engineering and office equipment and the expansion of the
Company's enterprise software ystem into locations outside the Minneapolis
headquarters.
17
<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)
Net cash used for financing activities for the nine months ended June 30, 1999,
consisted primarily of payments on line of credit and debt obligations totaling
approximately $5.3 million which was primarily offset by cash received from the
exercise of $2.0 million of employee stock options.
The Company is negotiating to extend the unsecured line of credit which expired
May 31, 1999. The Company has no borrowings outstanding on this line of credit.
The Company's management believes that current financial resources, cash
generated from operations and the Company's potential capacity for additional
debt and/or equity financing will be sufficient to fund current and future
capital requirements.
During the quarter ended March 31, 1999, the Company used $815,000 of cash to
repurchase 105,000 shares of the Company's stock at an average price of $7.76
per share.
FOREIGN CURRENCY
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 nine months ended June 30, 1999, the Company had foreign transactions
that were negotiated and invoiced amounting to approximately $37.7 million, of
which $17.8 million were in U.S. dollars and $19.9 million were
Deutschemark-denominated sales through the 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 June 30, 1999.
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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUES (CONTINUED)
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 end of fiscal 1999. If necessary conversions are not
completed on a timely basis, the effects of being unable to adequately process
year 2000 dated transactions 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 is 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.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
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 AND THAT THE REORGANIZATION OF THE SALES AND
MARKETING FUNCTIONS IN GERMANY, ENGLAND AND THE UNITED STATES WILL BE
COMPLETED ACCORDING TO SCHEDULE AND WILL RESULT IN ANNUAL COST SAVINGS OF
APPROXIMATELY $4.2 MILLION - This expectation may be impacted by presently
unanticipated delays or expenses.
THE EXPECTATION THAT THE COMPANY'S 1999 EFFECTIVE TAX RATE WILL BE 66 PERCENT -
This expectation may be impacted by the changes in the Company's level of
profitability.
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.
THE BELIEF THAT THE PRODUCTS DEVELOPED UTILIZING ACQUIRED IN-PROCESS
TECHNOLOGIES RELATED TO THE CDC ACQUISITION WILL BE SUCCESSFULLY RELEASED AND
RESULTING REVENUE WILL MEET ORIGINAL PROJECTIONS - Delays in product releases
and unanticipated changes in market demand may impact these expectations.
THE BELIEF THAT THE CONTINUING DEVELOPMENT OF THE IN-PROCESS RESEARCH AND
DEVELOPMENT ACQUIRED FROM ITK WILL RESULT IN VIABLE PRODUCTS AND THAT SUCH
DEVELOPMENT WILL BE COMPLETED ON SCHEDULE. Delays in product development and
unanticipated changes in market demand may impact these expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material exposure to market risk from market risk
sensitive financial instruments.
20
<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. Plaintiffs seek compensatory damages
of approximately $37.5 million 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.
21
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
LEGAL PROCEEDINGS (CONTINUED)
Plaintiffs in the consolidated putative class actions have moved for class
certification; the Company and its former officers have not yet responded to the
motion but intend to oppose it. No date has been set for a hearing on the class
certification motion. On August 11, 1999, defendants filed a motion to dismiss
the Louisiana Amended Complaint on the ground that the Louisiana Retirement
System has failed to prosecute the action and comply with the court orders and
applicable discover rules. Discovery in the actions is proceeding.
Because the lawsuits are in preliminary stages, the ultimate outcomes cannot be
determined at this time, and no potential assessment of their effect, if any, on
the Company's financial position, liquidity or future operations can be made.
ITEM 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
22
<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**
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****
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 to 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 to 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)
23
<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: August 16, 1999 By: /s/ S. Krishnan
----------------------------
S. Krishnan
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
24
<PAGE>
EXHIBIT 15
UNAUDITED INTERIM FINANCIAL INFORMATION LETTER
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated July 23, 1999 on our reviews of interim
condensed consolidated financial information of Digi International Inc. and
subsidiaries (the Company) for the three month and nine month periods ended June
30, 1999 and 1998, and included in the Company's Form 10-Q for the quarter ended
June 30, 1999, 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).
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
August 16, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 25770254
<SECURITIES> 0
<RECEIVABLES> 35330537
<ALLOWANCES> 0
<INVENTORY> 21968124
<CURRENT-ASSETS> 88196938
<PP&E> 30376062
<DEPRECIATION> 0
<TOTAL-ASSETS> 173447054
<CURRENT-LIABILITIES> 35413504
<BONDS> 0
0
0
<COMMON> 161706
<OTHER-SE> 124773121
<TOTAL-LIABILITY-AND-EQUITY> 173447054
<SALES> 0
<TOTAL-REVENUES> 145171035
<CGS> 73055761
<TOTAL-COSTS> 70532150
<OTHER-EXPENSES> (181050)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1402075
<INCOME-TAX> 925370
<INCOME-CONTINUING> 0
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<CHANGES> 0
<NET-INCOME> 476705
<EPS-BASIC> .03
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