<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 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 February 7, 2000, there were 15,067,561 shares of the registrant's $.01 par
value Common Stock outstanding.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Statement of Operations for
the three months ended December 31, 1999 and 1998...................3
Condensed Consolidated Balance Sheet as of
December 31, 1999 and September 30, 1999............................4
Condensed Consolidated Statement of Cash Flows for
the three months ended December 31, 1999 and 1998...................5
Notes to Condensed Consolidated Financial
Statements..........................................................6
Review Report of Independent Accountants...........................11
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition......................12
Forward-looking Statements.........................................17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................18
ITEM 2. Changes in Securities..............................................19
ITEM 3. Defaults Upon Senior Securities....................................19
ITEM 4. Submission of Matters to a Vote of Securities Holders..............19
ITEM 5. Other Information..................................................19
ITEM 6. Exhibits and Reports on Form 8-K...................................20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 40,140,205 $ 51,395,021
Cost of sales 17,965,228 24,904,313
------------ ------------
Gross Margin 22,174,977 26,490,708
Operating expenses:
Sales and marketing 7,994,988 11,974,080
Research and development 6,494,124 6,476,216
General and administrative 6,190,939 6,414,486
------------ ------------
Total operating expenses 20,680,051 24,864,782
------------ ------------
Operating income 1,494,926 1,625,926
------------ ------------
Other income (expense), principally interest 461,825 (209,786)
------------ ------------
Income before income taxes 1,956,751 1,416,140
Provision for income taxes 939,240 941,595
------------ ------------
Net income $ 1,017,511 $ 474,545
============ ============
Net income per common share $ 0.07 $ 0.03
============ ============
Net income per common share, assuming dilution $ 0.07 $ 0.03
============ ============
Weighted average common shares 14,967,793 14,572,022
============ ============
Weighted average common shares, assuming dilution 15,337,788 14,701,519
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
------------ ------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 13,247,651 $ 20,963,607
Marketable securities 25,777,414 13,714,422
Accounts receivable, net 30,160,668 33,955,669
Inventories, net 22,288,232 22,446,667
Other 5,497,950 5,394,346
------------ ------------
Total current assets 96,971,915 96,474,711
Property, equipment and improvements, net 29,191,497 30,242,877
Intangible assets, net 45,132,628 47,804,611
Other 2,066,525 1,807,829
------------ ------------
Total assets $173,362,565 $176,330,028
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit agreements $ 4,518,654 $ 4,759,095
Current portion of long-term debt 304,525 330,028
Accounts payable 9,474,307 10,779,998
Income taxes payable 5,355,666 5,274,181
Accrued expenses:
Advertising 2,159,077 2,461,437
Compensation 3,939,518 6,078,230
Other 7,428,121 6,357,348
Restructuring 282,680 488,298
------------ ------------
Total current liabilities 33,462,548 36,528,615
Long-term debt 8,670,877 9,205,918
Net deferred income taxes 2,834,433 3,431,133
------------ ------------
Total liabilities 44,967,858 49,165,666
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; 16,288,300 and 16,192,997 issued 162,883 161,930
Additional paid-in capital 72,374,670 71,460,612
Retained earnings 79,252,050 78,234,541
Cumulative foreign currency translation adjustment (2,069,096) (1,027,533)
------------ ------------
149,720,507 148,829,550
Unearned stock compensation (254,666) (339,686)
Treasury stock, at cost, 1,257,193 and 1,271,612 shares (21,071,134) (21,325,502)
------------ ------------
Total stockholders' equity 128,394,707 127,164,362
------------ ------------
Total liabilities and stockholders' equity $173,362,565 $176,330,028
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net Income $ 1,017,511 $ 474,545
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation and amortization 3,842,867 4,534,061
Provision for losses on accounts receivable 192,910 150,000
Provision for inventory obsolescence 615,409 1,183,297
Loss on sale of fixed assets 8,084 19,625
Stock compensation 50,700 338,470
Changes in operating assets and liabilities (1,391,592) (7,399,479)
------------ ------------
Total adjustments 3,318,378 (1,174,026)
------------ ------------
Net cash provided by (used in) operating activities 4,335,889 (699,481)
------------ ------------
Investing activities:
Purchase of short term investments (12,062,992) --
Purchase of property, equipment, intangibles and improvements (671,130) (1,453,323)
Proceeds from the sales of fixed assets -- --
------------ ------------
Net cash used in investing activities (12,734,122) (1,453,323)
------------ ------------
Financing activities:
Borrowings under line of credit agreements 26,780 --
Principal payments on borrowings -- (4,521,071)
Stock benefit plan transactions, net 969,661 256,870
------------ ------------
Net cash provided by (used in) financing activities 996,441 (4,264,201)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (314,164) 102,807
------------ ------------
Net (decrease) in cash and cash equivalents (7,715,956) (6,314,198)
Cash and cash equivalents, beginning of period 20,963,607 10,355,368
------------ ------------
Cash and cash equivalents, end of period $ 13,247,651 $ 4,041,170
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
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 1999
Annual Report on Form 10-K.
The condensed consolidated financial statements presented herein as of December
31, 1999, and for the three months ended December 31, 1999, and 1998, 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. RESTRUCTURING
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 original related charge of $1,452,909
($581,164 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 December 31, 1999, the Company had paid $906,299 of termination costs
relating to the elimination of 33 positions. During the third quarter of fiscal
1999, management of the 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. During the fourth quarter
of fiscal 1999, management of the Company determined that $160,114 of severance
costs in Minneapolis would not be payable due to a decision to retain two
additional employees previously notified that they would be terminated.
Adjustments to the restructuring accrual were reflected as a reduction in the
restructuring accrual and a corresponding increase to operating income.
Restructuring activities were completed as of December 1999. A summary of
payments, adjustments, and the remaining costs accrued as of December 31, 1999
is included in the table below.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING (CONTINUED)
<TABLE>
<CAPTION>
Balance at Change in Balance at
September 30, Estimate December 31,
Description 1999 Payments Adjustments 1999
- ----------------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Severance and
termination costs $271,704 $(69,346) $0 $202,358
Rent commitments 20,472 (7,312) 0 13,160
------------- -------- ----------- ------------
TOTAL $292,176 $(76,658) $0 $215,518
------------- -------- ----------- ------------
</TABLE>
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 original charge of $1,020,000 ($647,000
net of tax benefits), consisted of $61,483 of noncancellable rent commitments
the Company expected to incur following closure of the Cologne, Germany
facility, $100,110 of contractual payment obligations for office furniture and
other equipment the Company expected 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 in December 1998. As of December 31,
1999, the Company had paid $301,044 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 accrual were reflected as
a reduction in the restructuring accrual and a corresponding increase to
operating income. Restructuring activities were completed as of June 1999. A
summary of payments, adjustments, and the remaining costs accrued as of December
31, 1999 is included in the table below.
<TABLE>
<CAPTION>
Balance at Change in Balance at
September 30, Estimate December 31,
Description 1999 Payments Adjustments 1999
- ----------------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Rent commitments $15,209 (12,636) $0 2,573
Write-off of leasehold
improvements 37,326 (27,646) 0 9,680
------------- -------- ----------- ------------
TOTAL $52,535 $(40,282) $0 $12,253
------------- -------- ----------- ------------
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING (CONTINUED)
In connection with the Company's acquisition of ITK, the Company formulated a
plan of reorganization and accordingly, recognized a $3,484,000 restructuring
liability which the Company has included as a component of total liabilities
assumed in the acquisition. Components of the original estimated liability
included $1,844,000 of termination payments associated with 10 employees the
Company expected to eliminate at the Chelmsford, Massachusetts ITK location and
20 employees the Company expected to eliminate at the Dortmund, Germany location
and $1,640,000 of noncancellable rent obligations for facilities the Company
expected 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 were reflected as a reduction in the restructuring accrual
and a corresponding decrease in goodwill. Restructuring activities were
completed as of June 1999. A summary of payments, adjustments, and the remaining
costs accrued as of December 31, 1999 is included in the table below.
<TABLE>
<CAPTION>
Balance at Change in Balance at
September 30, Estimate December 31,
Description 1999 Payments Adjustments 1999
- ----------------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Severance and
termination costs $22,869 $(5,217) $0 $17,652
Facility closures 35,397 (1,928) 0 33,469
------------- -------- ----------- ------------
TOTAL $58,266 $(7,145) $0 $51,121
------------- -------- ----------- ------------
</TABLE>
In connection with the Company's acquisition of CDC, the Company formulated a
plan of reorganization and accordingly 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 included
$675,000 of termination payments, associated with 22 employees the Company
expected to eliminate when it closed the Champaign, Illinois facility in January
1999 and $75,000 related to facility closure costs the Company expected 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
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RESTRUCTURING (CONTINUED)
the Champaign, Illinois facility. Adjustments to the restructuring accrual were
reflected as a reduction in the restructuring accrual and a corresponding
decrease in goodwill. Restructuring activities were completed as of June 1999. A
summary of payments, adjustments, and the remaining costs accrued as of December
31, 1999 is included in the table below.
<TABLE>
<CAPTION>
Balance at Change in Balance at
September 30, Estimate December 31,
Description 1999 Payments Adjustments 1999
- ----------------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Severance and
termination costs $85,321 $(81,533) $0 $3,788
------------- -------- ----------- ------------
TOTAL $85,321 $(81,533) $0 $3,788
------------- -------- ----------- ------------
</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 December 31, 1999 and
September 30, 1999 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Raw materials $ 12,418,826 $ 12,948,286
Work in process 2,495,761 2,162,626
Finished goods 7,373,645 7,335,755
------------------ ------------------
$ 22,288,232 $ 22,446,667
================== ==================
</TABLE>
4. COMPREHENSIVE INCOME
The components of total comprehensive income are shown below. Comprehensive
income includes net income and foreign currency translation adjustments that are
charged or credited to stockholders' equity.
Comprehensive income for the three months ended December 31, 1999 and 1998 was
as follows:
<TABLE>
<CAPTION>
Three months ended
December 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income $ 1,017,511 $ 474,545
Foreign currency
translation adjustments (1,041,563) 481,086
------------ ------------
Comprehensive
(loss) income $ (24,052) $ 955,631
============ ============
</TABLE>
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
534,091 equivalent shares of the Company for the three months ended December 31,
1999, attributable to the common stock options issued by the Company because
their effect was anti-dilutive. Shares used in the computations for the three
months ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Weighted average shares used in basic computation 14,967,793 14,572,022
Common stock equivalents - stock options 369,995 129,497
---------- ----------
Weighted average shares used in diluted computation 15,337,788 14,701,519
========== ==========
</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.
10
<PAGE> 11
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, 1999, and the related
condensed consolidated statements of operations for the three month periods
ended December 31, 1999, and 1998, and cash flows for the three month periods
ended December 31, 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 accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet as of September
30, 1999, and the related consolidated statements of operations and cash flows
for the year then ended (not presented herein); and in our report dated December
15, 1999, 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, 1999, 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 18, 2000
11
<PAGE> 12
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)
----------------------- ----------
1999 1998
---------- ----------
<S> <C> <C> <C>
Net sales 100.0 100.0 (21.9)%
Cost of sales 44.8 48.5 (27.9)
---------- ---------- ----------
Gross margin 55.2 51.5 (16.3)
---------- ---------- ----------
Operating expenses:
Sales and marketing 19.9 23.3 (33.2)
Research and development 16.2 12.6 0.3
General and administrative 15.4 12.4 (3.5)
---------- ---------- ----------
Total operating expenses 51.5 48.3 (16.8)
---------- ---------- ----------
Operating income 3.7 3.2 (8.1)
Other income, net 1.2 (0.4) --
---------- ---------- ----------
Income before income taxes 4.9 2.8 38.2
Provision for income taxes 2.4 1.8 (0.3)
---------- ---------- ----------
Net income 2.5 1.0 114.4%
========== ========== ==========
</TABLE>
NET SALES
Net sales for the three months ended December 31, 1999, were lower than net
sales for the corresponding three months ended December 31, 1998, by $11.3
million or 21.9%. Net sales of the products added in connection with the July
1998 acquisitions of ITK and CDC generated revenues of $7.0 million for the
three months ended December 31, 1999 versus $13.7 million in the year ago
period. The Company also experienced a decline in sales of its legacy
asynchronous products in the quarter ended December 31, 1999, resulting in
reduced revenues of $5.0 million and a decrease in demand for the Company's
physical layer products resulting in reduced revenues of $3.2 million versus the
comparable quarter in 1998. Net sales of the Company's new digital RAS products
were $4.8 million during the three month period ended December 31, 1999 as
compared to $1.2 million in the comparable year ago period.
During the quarter ended December 31, 1999, the Company experienced a reduction
in net sales due to a change in purchasing patterns of customers related to
concerns of the effects of the Year 2000. This trend may continue into the
Company's second quarter ending March 31, 2000.
12
<PAGE> 13
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
Ended December 31
---------------------
1999 1998
-------- --------
<S> <C> <C>
Server Based 93.7% 88.9%
Physical Layer 6.3% 11.1%
-------- --------
Total 100.0% 100.0%
</TABLE>
GROSS MARGIN
Gross margin for the three months ended December 31, 1999 was 55.2% compared to
51.5% for the three months ended December 31, 1998. Such increase was
principally due to favorable product mix, resulting in increased sales of
higher-margin server-based communication products. ITK products were sold at
improved margins as compared to the year ago period as certain lower margin ITK
products were discontinued during the second quarter of fiscal 1999.
OPERATING EXPENSES
Operating expenses for the three months ended December 31, 1999, decreased $4.2
million or 16.8% as compared to operating expenses for the three months ended
December 31, 1998. Such decline was due to reductions in workforce, decreased
marketing costs and other costs savings achieved through the closing of certain
German sales offices and other restructuring activities.
Sales and Marketing expenses for the three months ended December 31, 1999 were
$8.0 million or 19.9% of net sales compared to $12.0 million or 23.3% of net
sales for the year ago period. The expense decrease of 33.2% is primarily due to
restructuring activities that took place during fiscal 1999 as described in Note
2 to the condensed consolidated financial statements.
Research and Development expenses were $6.5 million, or 16.2% of net sales,
compared with $6.5 million, or 12.6% of net sales, for the three months ended
December 31, 1999 and 1998, respectively. The Company continued to invest in
research and development activities relating to its digital RAS and VoIP
products.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
General and Administrative expenses were $6.2 million, or 15.4% of net sales
compared to $6.4 million, or 12.5% of net sales, for the three months ended
December 31, 1999 and 1998, respectively. The decrease is primarily due to
integrating CDC administrative functions into the Company's headquarters as of
January 1, 1999.
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.
The portion of the purchase price allocated 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 December 31, 1999, believes that its development efforts are behind
the product release schedule referred to in the Company's 1999 Annual Report on
Form 10-K. These development delays could result in greater research and
development costs than originally anticipated and could result in delays in
future product releases. As of December 31, 1999, the Company has not concluded
that such additional costs or product delays will occur. However, these
expectations are subject to change, given the uncertainties of the development
process and changes in market expectations.
The Company has developed the acquired in-process USB research and development
and has developed and released USB products, with initial product revenues
generated during November 1998. Since acquisition, total revenues through
December 31, 1999 from the first release of certain USB products are
approximately $411,000 of which $145,000 was from the quarter ended December 31,
1999. Actual total USB revenues are below original projections due to delays in
the release and marketing of certain USB products. The Company has not concluded
on the impact, if any, that these delays will have on the original revenue
projections relating to the USB products. However, these expectations are
subject to change, given changes in market expectations.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE)
Other income of $462,000 for the three months ended December 31, 1999 consisted
of $842,000 of interest income on short term marketable securities, $534,000 of
interest expense on lines of credit and long term debt, $200,000 of gain
resulting from a settlement of a dispute with a vendor, and $46,000 of
miscellaneous other expenses. Other expense for the three month period ended
December 31, 1998 consisted principally of interest related to the debt assumed
in the acquisition of ITK.
INCOME TAXES
Income taxes have been provided for at an estimated annual effective rate of 48%
for the three months ended December 31, 1999. This effective tax rate exceeds
the U.S. statutory income tax rate 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 $59.9 million at
September 30, 1999, to $63.5 million at December 31, 1999.
Net cash provided by operating activities was $4.3 million for the three months
ended December 31, 1999, compared to a net use of cash of $699,500 for the three
months ended December 31, 1998.
Net cash used in investing activities for the three months ended December 31,
1999, consisted of net purchases of marketable securities of $12.1 million and
$671,000 of purchases of equipment and other capital improvements. For the three
months ended December 31, 1998, $1.5 million was used for the purchase of
equipment and capital improvements.
Net cash used for financing activities for the three months ended December 31,
1999, consisted primarily of cash received from the exercise of employee stock
options and employee stock purchase plan transactions. For the three months
ended December 31, 1998 net cash used for financing activities consisted of $4.5
million of payments on line of credit and debt obligations.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
FOREIGN CURRENCY
Effective January 1, 1999, eleven countries of the European Union converted to a
common currency called the "Euro." All invoicing activity within the European
Union is required to be transacted in Euros, effective January 1, 2002. This
action will cause some of the Company's European transactions to be negotiated,
invoiced, and paid in Euros. Additional currency risk may exist when sales from
the United States into the European Union are transacted in Euros rather than US
dollars. Such costs and risks are not quantifiable at this time.
For the three months ended December 31 1999, the Company had approximately $14.8
million of net sales related to foreign customers, of which $11.4 million were
denominated in U.S. dollars and $3.4 million were denominated in Deutschemarks.
In future periods, a significant portion of sales 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.
YEAR 2000 ISSUES
The Company experienced no adverse systems or product performance effects of the
Year 2000 issue and, therefore, the Company's business, operating results, or
financial position were not impacted negatively. The Company has analyzed its
financial systems, products, and procurement process and believes that no
material adverse effects of the Year 2000 issue will impact future results of
operations other than as described in the Net Sales section of the Management's
Discussion and Analysis, Consolidated Results of Operation.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial position.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains certain statements that are "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995, and within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe," "expect," "anticipate," "intend," "estimate," "target," "may,"
"will," "plan," "project," "should," "continue," or the negative thereof or
other expressions, which are predictions of or indicate future events and trends
and which do not relate to historical matters, identify forward-looking
statements. Such statements are based on information available to management as
of the time of such statements and relate to, among other things, expectations
of the business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding the
Company's mission and vision. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
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 other than the currency risk associated with
certain transactions being denominated in Deutschemarks.
17
<PAGE> 18
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 putative securities class action
lawsuits filed in the United States District Court for the District of Minnesota
by 21 lead plaintiffs on behalf of an alleged class of purchasers of the
Company's common stock during the period January 25, 1996 through December 23,
1996. The putative class actions were thereafter consolidated (Master File No.
97-5 DWF/RLE). The Consolidated Amended Class Action Complaint ("Consolidated
Amended Complaint") alleges that the Company and certain of its previous
officers violated the federal securities laws by, among other things,
misrepresenting and/or omitting material information concerning the Company's
operations and financial results.
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 (Civil File No. 97-440, Master File No. 97-5 DWF/RLE) (the "Louisiana
Amended Complaint"). The Louisiana Amended Complaint alleges that the Company
and certain of its previous officers violated the 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.
In a decision issued on May 22, 1998, 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 and seeks an
award of attorneys' fees, disbursements and costs. The Consolidated Amended
Complaint seeks compensatory damages of approximately $43.1 million, plus
interest, against all defendants, jointly and severally, and an award of
attorneys' fees, experts' fees and costs. The claims in the two actions remain
pending against the Company and its former officers Ervin F. Kamm, Jr. and
Gerald A. Wall.
The 21 lead plaintiffs have moved for class certification with respect to the
claims asserted in the Consolidated Amended Complaint. The Company and its
former officers intend to oppose the motion. No date has been set for a hearing
on the class certification motion. With the possible exception of additional
depositions of certain lead plaintiffs, discovery in all of the actions has been
completed.
18
<PAGE> 19
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The Company and its former officers served motions for summary judgment in all
actions on November 19, 1999. Briefing on the motions was completed on February
4, 2000, and a hearing is scheduled to be held before the Court on April 28,
2000.
The ultimate outcomes of these actions 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
19
<PAGE> 20
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 (1)
3(b) Amended and Restated By-Laws of the Registrant (2)
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 (3)
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
(4)
15 Letter Re: Unaudited Interim Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarterly period
ended December 31, 1999.
- ------------------------------------
(1) Incorporated by reference to the corresponding exhibit number to the
Company's Form 10-K for the year ended September 30, 1993 (File No.
0-17972)
(2) Incorporated by reference to the corresponding exhibit number to the
Company's Registration Statement on Form S-1 (File No. 33-42384)
(3) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A dated June 24, 1998 (File No. 0-17972)
(4) 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)
20
<PAGE> 21
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 11, 2000 By: /s/ S. Krishnan
------------------------------------
S. Krishnan
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
<PAGE> 1
EXHIBIT 15
UNAUDITED INTERIM FINANCIAL INFORMATION LETTER
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated January 18, 2000 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, 1999
and 1998, and included in the Company's Form 10-Q for the quarter ended December
31, 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
February 11, 2000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,247,651
<SECURITIES> 25,777,414
<RECEIVABLES> 30,160,668
<ALLOWANCES> 0
<INVENTORY> 22,288,232
<CURRENT-ASSETS> 96,971,915
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0
<COMMON> 162,883
<OTHER-SE> 128,231,824
<TOTAL-LIABILITY-AND-EQUITY> 173,362,565
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