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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2000
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.
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(Exact name of registrant as specified in its charter)
Delaware 41-1532464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
(952) 912-3444
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of each class)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based on a closing price of $7.38 per share as reported on the
National Association of Securities Dealers Automated Quotation System-National
Market System on December 12, 2000 was $110,919,562.
Shares of common stock outstanding as of December 8, 2000: 15,187,743
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INDEX
DOCUMENTS INCORPORATED BY REFERENCE
The following table shows, except as otherwise noted, the location of
information required in this Form 10-K, in the Registrant's Annual Report to
Stockholders for the year ended September 30, 2000 and Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled for January 24, 2001, a
definitive copy of which will be filed on or about December 21, 2000. All such
information set forth below under the heading "Page/Reference" is incorporated
herein by reference, or included in this Form 10-K on the pages indicated.
<TABLE>
<CAPTION>
PART I. ITEM IN FORM 10-K PAGE/REFERENCE
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<S> <C> <C>
ITEM 1. Business 4
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a
Vote of Security Holders 9
PART II.
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ITEM 5. Market for Registrant's Common Stock Listing; Dividend
Equity and Related Stockholder Policy, pocket of Annual
Matters Report to Stockholders
ITEM 6. Selected Financial Data:
Financial Highlights Page 1, Annual Report to
Stockholders
Selected Financial Information 10
ITEM 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 11
ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk 21
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 52
</TABLE>
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<TABLE>
<CAPTION>
PART III. ITEM IN FORM 10-K PAGE/REFERENCE
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<S> <C> <C>
ITEM 10. Directors of the Registrant Election of Directors,
Proxy Statement
Executive Officers of the Registrant 53
Compliance with Section 16(a) of the Section 16(a) Beneficial
Exchange Act Ownership Reporting Compliance,
Proxy Statement.
ITEM 11. Executive Compensation Executive Compensation;
Election of Directors; Summary
Compensation Table; Option
Grants in Last Fiscal
Year; Aggregated Option Exercises
in the Last Fiscal Year
and Fiscal Year-end Option
Values; Employment Contracts;
Severance, Termination of
Employment and Change-in-Control
Arrangements; Performance
Evaluation, Proxy Statement
ITEM 12. Security Ownership of Certain Beneficial Security Ownership of Principal
Stockholders and Management, Stockholders and Management,
Owners and Management Proxy Statement
ITEM 13. Certain Relationships and Related Not Applicable
Transactions
PART IV.
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ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 55
</TABLE>
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PART I
ITEM 1. BUSINESS
Digi International Inc. (Digi or the Company) was formed in 1985 as a Minnesota
corporation and reorganized as a Delaware corporation in 1989 in conjunction
with its initial public offering. The Company is a worldwide provider of
communications hardware and software delivering seamless connectivity solutions
for peripheral server-based remote access and local area networking (LAN)
markets.
The Company operates exclusively in a single business segment and sells its
products through a global network of distributors, systems integrators,
value-added resellers (VARs) and original equipment manufacturers (OEMs). The
Company also sells direct to select accounts and the government.
Digi International Inc. is traded on the Nasdaq National Market under the symbol
DGII. The Company has its worldwide headquarters in Minnetonka, Minnesota, with
regional and sales offices throughout the U.S. and worldwide, including Germany,
Paris, Amsterdam, Copenhagen, Singapore, Hong Kong, and Sydney.
PRODUCTS
Digi is the worldwide leader in connecting peripherals to networks. From
multi-port serial control to Universal Serial Bus (USB) connectivity to remote
access to LAN infrastructure, Digi's products enable a virtually unlimited
number of devices or users to be connected locally or remotely to LANs,
multi-user systems and the Internet. The Company's products are compatible with
all PC platforms, including Compaq, IBM, Hewlett-Packard and Sun Microsystems,
as well as popular operating systems, such as Microsoft Windows NT/95/2000,
Novell NetWare, Linux and UNIX.
The Company has sales offices located throughout North America, Europe,
Australia and Asia. Digi products are available through 180 distributors in more
than 65 countries. More than 650 VARs participate in the DigiVAR Program,
introduced in July 1993.
The application markets where these products are most prominently used are
Point-of-Sales Systems (POS), industrial automation, remote access, network fax,
and data acquisition/data polling. In addition, the Company has expanded into
new applications such as console management and high-density internet point-of
presence (POP) testing.
The Company's primary product lines are its multi-port serial adapters, terminal
servers, multi-function communications adapters, USB, and LAN connectivity
products.
MULTI-PORT SERIAL ADAPTERS
The Company is the leader in this product category and offers the most
comprehensive multi-port serial adapter family of products. The Company's
products support a wide range of operating systems, port-density, bus type,
expansion options, and a wide range of applications.
As Ethernet connections extend beyond current applications, the internal
multi-port serial adapter products are expected to gradually transition to
network-attached terminal server devices. The Company
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ITEM 1. BUSINESS (CONTINUED)
MULTI-PORT SERIAL ADAPTERS (CONTINUED)
has strengthened its product offering to continue to successfully meet customer
needs and believes that multi-port serial adapters will continue to be an
important product category.
TERMINAL SERVER
The Company's terminal server family offers flexible and easy solutions for
providing access to serial devices over Ethernet networks. As Ethernet
connections extend beyond their current applications and into new market uses
such as console port management on servers, routers, switches, and other network
equipment, the Company believes that terminal servers will continue to be a
major growth area.
UNIVERSAL SERIAL BUS
The Company expanded its product lines with its acquisition of Inside Out
Networks, Inc. in October 2000. The acquisition creates the most comprehensive
and complete USB product line in the industry, expanding on the USB technology
acquired in the Central Data Corporation acquisition, and brings an extensive
list of satisfied corporate customers such as Agilent, Gateway, Hewlett-Packard,
IBM, Lucent Technologies, Microsoft, NCR Corporation, Sun Microsystems and
others into the Company's customer base. The Company will also benefit from
Inside Out Networks' pioneering EPIC software, which provides seamless
transition between legacy software/systems and next-generation USB-attached
devices, supporting feature-rich hardware and software flow control signaling.
This provides ease of use and integration while protecting technology
investments.
LAN CONNECTIVITY
The Company entered the LAN market with its acquisition of MiLAN Technology
Corporation (MiLAN) in November 1993. The Company's LAN business, MiLAN
Technology, provides cost-effective and power-efficient Ethernet, Fast and
Gigabit Ethernet networking connectivity products that are installed on a LAN to
increase its productivity. The Company has recently been awarded a multi-million
dollar contract to provide fiber-optic LAN connectivity for a major school
district in California. MiLAN specializes in fiber optic modular switches and
media converters. The product strengths range from switches (fiber and copper),
media converters and print servers extending to USB and wireless LAN solutions.
The products are engineered to increase network performance, flexibility and
productivity of small and medium size organizations.
SERVER-BASED COMMUNICATIONS
Server-based solutions benefit resellers and end users by presenting solutions
that are easy to build, configure, and manage. They are comprised of a computer
hardware platform and operating system (such as a PC running Windows NT), one or
more communications adapters (like Digi's DataFire and AccelePort products), and
specialized communications software, available from a wide range of companies.
Server-based communications solutions are ideal for applications such as remote
access, advanced fax, virtual private networking, Internet connectivity, unified
messaging, and Internet POP.
Several significant alliances and agreements were announced in fiscal 2000 for
Digi's multi-function communications adapters, including a marketing alliance
between the Company and Compaq to jointly develop and market a family of
server-based communications solutions. The solutions will incorporate
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ITEM 1. BUSINESS (CONTINUED)
SERVER-BASED COMMUNICATIONS (CONTINUED)
Compaq Proliant servers, Digi DataFire RAS or AccelePort RAS communications
adapters, Microsoft Windows NT and application software from Acotec, image LAN,
and Compaq.
DISTRIBUTION AND PARTNERSHIPS
Significant U.S. distributors include: Ingram Micro, Tech Data Corporation,
Gates/Arrow Distributing, Merisel, Avnet/Hallmark, Ameriquest/Robec, and Jones
Business Systems. Canadian distributors include Gates/Arrow Electronics, EMJ
Data Systems, Ingram Micro Canada, Merisel Canada and Tech Data Canada.
Significant European distributors include: Miel, Arecta, International Computer
Products, Connect Service Riedlbauer, Mitrol, Euroline and Data Solutions.
Significant Latin American and Asia Pacific distributors include: Tech Pacific,
Sumisho Datacom, Lantech, Sealcorp Computer Products, Ingram Dicom and Unisel.
Digi maintains strategic alliances with other industry leaders to develop and
market technology solutions. These include most major communications software
vendors, operating system suppliers, and computer hardware manufacturers. Key
partners include: Citrix Systems, Compaq, Hewlett-Packard, IBM, Intel, Lotus,
Micron, Motorola, Novell, Red Hat, Santa Cruz Operation, Sun Microsystems, and
Tobit.
CUSTOMERS
The Company's customer base includes many of the world's largest companies. Long
time customer IBM made the Company's adapter boards the first integrated
communications offering for the AS400 in 2000, in addition to the products
currently being sold into the RS6000 group. The Company is engaged in several
developmental alliances, including a relationship with Red Hat, among others.
The Company has OEM relationships with leading vendors, allowing them to ship
the Company's boards with their systems. These vendors include NCR, Sun
Microsystems, Silicon Graphics, Compaq and Bull. Many of the world's leading
telecommunications companies and Internet service providers also rely on the
Company's products, including Lucent, Nortel, AT&T and Siemens.
During the year ended September 30, 2000, two customers comprised more than 10%
of net sales each: Tech Data at 13.4% and Ingram Micro at 10.0%. During the year
ended September 30, 1999, two customers comprised more than 10% of net sales
each: Tech Data at 15.4% and Ingram Micro at 13.4%. During the year ended
September 30, 1998, two customers comprised more than 10% of net sales each:
Ingram Micro at 15.5% and Tech Data at 13.7%.
COMPETITIVE CONDITIONS
The computer industry is characterized by rapid technological advances and
evolving industry standards. The market can be significantly affected by new
product introductions and marketing activities of industry participants. The
Company competes for customers on the basis of product performance in relation
to compatibility, support, quality and reliability, product development
capabilities, price and availability.
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ITEM 1. BUSINESS (CONTINUED)
COMPETITIVE CONDITIONS (CONTINUED)
The Company believes that it is the global market leader in multi-port serial
adapters. As this market continues to mature, the Company will focus on key
applications, customers, and markets to drive additional growth and manage
applications as they transition to other technologies such as Ethernet, USB, and
wireless connectivity products. The Company also believes it is the leader in
connecting peripheral devices to Ethernet LANs with its terminal server product
line. With respect to the LAN business, the Company believes it commands less
than a 5% market share. The Company is currently establishing its position in
the remote access market for the Company's DSP-based RAS product lines.
Many of the Company's competitors and potential competitors have greater
financial, technological, manufacturing, marketing and personnel resources than
the Company. Present and future competitors may be able to identify new markets
and develop products more quickly which are superior to those developed by the
Company. They may also adapt new technologies faster, devote greater resources
to research and development, promote products more aggressively and price
products more competitively than the Company. There are no assurances that
competition will not intensify or that the Company will be able to compete
effectively in the markets in which the Company competes.
AETHERWORKS CORPORATION
In May 1998, the Company exchanged its previously purchased $13.8 million of
convertible notes from AetherWorks Corporation, a development stage company
engaged in the development of wireless and dial-up remote access technology, for
a non-interest bearing $8.0 million non-convertible note. As a part of the
exchange, the Company relinquished its rights to any future technology or claims
on any of AetherWorks' intellectual properties. In exchange, the Company has
been released from all of its guarantees of certain lease obligations of
AetherWorks. Due to significant uncertainty as to its collectibility, the $8.0
million note, was recorded by the Company as having no carrying value. In March
2000, the Company received payment of $8.0 million, representing payment on the
aforementioned non-convertible note of AetherWorks Corporation. The note was
paid as a result of AetherWorks being acquired by Nx Networks, Inc. (See Note 6
to the consolidated financial statements.)
OPERATIONS
The Company's manufacturing operations procure all parts and certain services
involved in the production of products and subcontracts most of its product
manufacturing to outside firms that specialize in such services. The Company
believes that this approach is beneficial because the Company can reduce its
fixed costs, maintain production flexibility and maximize its profit margins.
The Company's products are manufactured to its designs with standard and
semi-custom components. Most of these components are available from multiple
vendors. The Company has several single-sourced supplier relationships, either
because alternative sources are not available or because the relationship is
advantageous to the Company. If these suppliers are unable to provide a timely
and reliable supply of components, the Company could experience manufacturing
delays adversely affecting its results of operations.
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ITEM 1. BUSINESS (CONTINUED)
OPERATIONS (CONTINUED)
During fiscal years 1998, 1999 and 2000, the Company's research and development
expenditures were $15.9, $21.8, and $20.2 million, respectively.
Due to rapidly changing technology in the computer industry, the Company
believes that its success depends primarily upon the engineering, marketing,
manufacturing and support skills of its personnel, rather than upon patent
protection. Although the Company may seek patents where appropriate and has
certain patent applications pending for proprietary technology, the Company's
proprietary technology or products are generally not patented. The Company
relies primarily on the copyright, trademark and trade secret laws to protect
its proprietary rights in its products. The Company has established common law
and registered trademark rights on a family of marks for a number of its
products.
As of September 30, 2000, the Company had backlog orders which management
believed to be firm in the amount of $4.4 million. All of these orders are
expected to be filled in the current fiscal year. Backlog as of September 30,
1999 was $5.0 million.
The Company had 509 employees at September 30, 2000.
ITEM 2. PROPERTIES
The Company's headquarters and research facilities are located in a 130,000
square foot office building in Minnetonka, Minnesota which the Company acquired
in August 1995 and has occupied since March 1996. The Company's primary
manufacturing facility is located in a 58,000 square foot building in Eden
Prairie, Minnesota, which the Company purchased in May 1993 and has occupied
since August 1993. Additional office and research facilities include a 63,000
square foot facility in Dortmund, Germany, a 46,170 square foot facility in
Sunnyvale, California, the lease for which expires in April 2002, and a 5,000
square foot facility in Champaign, Illinois, the lease for which expires in
January 2002.
The Company intends to sell the facility in Dortmund, Germany by the end of the
second quarter of fiscal 2001.
Management believes that the Company's facilities are suitable and adequate for
current office, research and warehouse requirements, and that its manufacturing
facilities provide sufficient production capacity to meet the Company's
currently anticipated needs.
ITEM 3. 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
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ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
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, including all claims asserted against
defendant Gary L. Deaner, 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 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.
On August 17, 2000, the Court granted defendants' motions for summary judgment
and dismissed with prejudice the Consolidated Amended Complaint and the
Louisiana Amended Complaint. Although the 21 lead plaintiffs in the consolidated
putative class actions had previously moved for class certification, the Court
dismissed the actions before ruling on that motion.
On September 1, 2000, the Louisiana State Employees Retirement System filed an
appeal from the Court's August 17, 2000 decision. On September 14, 2000, the 21
lead plaintiffs in the consolidated putative class actions filed an appeal from
both the Court's May 22, 1998 and August 17, 2000 decisions. The two appeals
have been consolidated for briefing and argument, with briefing scheduled to be
completed in January 2001, and oral argument to be held thereafter.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders during the
quarter ended September 30, 2000.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $132,525 $193,506 $ 182,932 $165,598 $193,151
Percentage (decrease) increase (31.5)% 5.8% 10.5% (14.3)% 17.1%
Net (loss) income (16,825) 3,192 (71) (15,791) 9,300
Percentage (decrease) increase (627.1)% 4,589.5% 99.6% (269.8)% (51.9)%
Net (loss) income per share-basic (1.12) 0.22 (0.01) (1.18) 0.70
Percentage (decrease) increase (609.1)% 2,300.0% 99.2% (268.6)% (50.7)%
Net (loss) income per share --
assuming dilution (1.12) 0.22 (0.01) (1.18) 0.68
Percentage (decrease) increase (609.1)% 2,300.0% 99.2% (268.6)% (51.1)%
Total assets 142,922 176,330 191,521 118,311 129,939
Percentage (decrease) increase (18.9)% (7.9)% 61.9% (8.9)% 3.1%
Long-term debt 7,081 9,206 11,124
Percentage (decrease) (23.1)% (17.2)%
Stockholders' equity 113,459 127,164 121,251 95,471 109,943
Percentage (decrease) increase (10.8)% 4.9% 27.0% (13.2)% 3.9%
</TABLE>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report 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.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the highly competitive market in which the Company operates; (ii) the
Company's ability to respond to rapidly developing changes in its marketplace;
(iii) delays in the Company's product development efforts; (iv) the useful life
of products once developed; (v) the Company's ability to integrate its recent
acquisitions and to develop marketable products from the acquired in-process
research and development; (vi) the Company's reliance on distributors; (vii)
declining prices of networking products; (viii) uncertainty in consumer
acceptance of the Company's products; and (ix) changes in the Company's level of
revenue or profitability. These and other risks, uncertainties and assumptions
identified from time to time in the Company's filings with the Securities and
Exchange Commission, including without limitation, its annual report on Form
10-K and its quarterly report on Form 10-Q, could cause the Company's actual
future results to differ materially from those projected in the forward-looking
statements as a result of the factors set forth in the Company's various filings
with the Securities and Exchange Commission and of changes in general economic
conditions, changes in interest rates and/or exchange rates and changes in the
assumptions used in making such forward-looking statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The following table sets forth selected information from the Company's
Consolidated Statements of Operations, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
2000 over 1999 over
2000 1999 1998 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % (31.5) % 5.8 %
Cost of sales 47.4 49.3 48.4 (34.0) 7.7
----- ----- ----- ------- -------
Gross margin 52.6 50.7 51.6 (29.1) 4.0
Operating expenses:
Sales and marketing 26.0 22.7 21.0 (21.5) 14.4
Research and development 15.2 11.3 8.7 (7.7) 37.3
General and administrative 14.6 12.2 9.3 (18.2) 39.1
Acquired in-process research and development -- -- 8.8 -- (100.0)
Impairment loss 19.7 -- -- -- --
Restructuring 1.1 0.3 0.5 127.5 (40.5)
----- ----- ----- ------- -------
Total operating expenses 76.6 46.5 48.3 12.8 1.8
Operating (loss) income (24.0) 4.2 3.3 (486.5) 36.2
Other income (expense), net 2.0 (0.1) 1.0 1,140.8 (114.1)
AetherWorks Corporation gain -- -- 0.7 -- (100.0)
AetherWorks Corporation note recovery 6.0 -- -- -- --
(Loss) income before income taxes (16.0) 4.1 5.0 (365.2) (13.4)
Income tax (benefit) provision (3.3) 2.5 5.0 (190.6) (48.4)
----- ----- ----- ------- -------
Net (loss) income (12.7) % 1.6 % 0.0 % (627.1) % 4,589.5 %
----- ----- ----- ------- -------
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF (CONTINUED)
NET SALES
The $61.0 million or 31.5% decrease in net sales from 1999 to 2000 and the $10.6
million or 5.8% increase in net sales from 1998 to 1999 occurred within the
Company's principal product groups as follows:
<TABLE>
<CAPTION>
Annual Net Sales
Increase (Decrease)
Percent of Annual Net Sales Relative to Prior Year
------------------------------- ----------------------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Server Based 90.0% 89.8% 79.8% (31.3)% 18.9 %
Physical Layer 10.0% 10.2% 20.1% (33.0)% (46.2)%
</TABLE>
Sales of Integrated Services Digital Network (ISDN) and Voice Over Internet
Protocol (VoIP) products added in connection with the July 1998 acquisition of
ITK and USB and Etherlite products added in connection with the July 1998
acquisition of CDC generated $25.2 million of net sales for the 2000 fiscal
year, a decrease of $17.3 million relative to the net sales recognized during
the year ago period from these products. The decrease in net sales of these
products was primarily due to the elimination of the VoIP product line in the
second quarter of fiscal 2000 and the slowdown in sales of the ISDN product line
in Germany. The Company also experienced a decline in sales of its legacy
products resulting in reduced revenues of $40.9 million due to an erosion in the
asynchronous product market and the demand downturn associated with the post
Year 2000 period, as well as a decline in sales of the Company's physical layer
products of $6.5 million. Net sales of the Company's digital RAS products added
$3.7 million during fiscal 2000. Net sales in fiscal 1999 increased from fiscal
1998 largely due to the full year impact of the acquisitions of ITK and CDC, as
well as the ramp up in sales of new DSP RAS products in fiscal 1999. These
events accounted for sales increases of $40.9 million. The increases were
mitigated by a revenue decrease of $13.3 million in 1999 for legacy asynchronous
products due to shrinking of the overall market, as well as a decrease of $17.0
million in the Company's physical layer product sales due principally to
competitively lower prices.
Net sales to OEMs decreased 19.4% over 1999, but as a percentage of total net
sales, increased to 29.3% versus 24.9% in 1999. The OEM sales were less affected
by Year 2000 factors than the sales through other channel partners. Net sales to
OEMs for 1998 were 22.2% of total net sales.
Net sales into the distribution channel declined 37.3% over 1999 and as a
percentage of total net sales, declined 5.9% to 63.4% as compared to 69.3% in
1999. International distribution net sales decreased by 34.4% over fiscal 1999
primarily due to the decline in the overall asynchronous market and the post
year 2000 effects experienced domestically. Domestic distribution net sales
declined by 39.2% due to overall market conditions discussed previously. Net
sales to the distribution market for 1998 represented 69.3% of total net sales.
During fiscal years 2000, 1999 and 1998, the Company's net sales to customers
outside the United States, primarily in Europe, were approximately $46.1
million, $67.4 million and $46.7 million, respectively, comprising approximately
34.8%, 34.8% and 25.5% of total net sales, respectively.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN
Gross margin in 2000 improved to 52.6%, compared to 50.7% in 1999, primarily due
to fewer pricing and volume discount incentives offered to channel partners in
2000, an increase in sales of higher margin DSP RAS products, and an improved
mix of higher margin physical layer products compared to the previous year.
Gross margin in 1999 decreased to 50.7% compared to 51.6% in 1998 due to the
negative impact of lower gross margin ITK products, an increased percentage of
lower margin OEM sales, market-driven erosion of gross margin on physical layer
products and write-downs in the carrying value of certain inventories.
OPERATING EXPENSES
Operating expenses in 2000, excluding restructuring, reorganization and asset
impairment charges, decreased $15.4 million or 17.2% as compared to operating
expenses for 1999. Sales and marketing expenses declined by $9.4 million,
primarily in the areas of salaries, co-op advertising, commissions, and travel.
Salaries decreased by $3.6 million, largely related to 1999 restructuring
activities. Co-op advertising costs and commissions were lower than in 1999 by
$1.1 million and $0.7 million, respectively, resulting primarily from the lower
sales volumes in 2000. Travel expenses were lower by $0.6 million in response to
cost control measures implemented due to the lower sales volumes experienced in
2000. Marketing expenses were lower than in 1999 by $3.4 million due to fewer
new product introductions and less trade show activity. Research and development
expenses in 2000 decreased by $1.7 million relative to 1999, largely due to the
discontinuance of the NetBlazer technology and the elimination of the related
VoIP product line in Germany. General and administrative expenses in 2000
decreased by $4.3 million relative to 1999, of which $2.7 million resulted from
the decrease in amortization associated with the write-off of the VoIP
identifiable intangibles and goodwill, and prior year restructuring activities
which created cost reductions in 2000 of approximately $0.6 million. An
additional $1.0 million in savings was realized due to cost controls implemented
across the entire Company, at all locations.
Operating expenses in 1999, excluding acquired in-process research and
development charges of $16.1 million recorded in 1998, increased by 24.5% from
1998. Sales and marketing expenses increased by $5.5 million due to $6.2 million
of expenses added by ITK and CDC, $3.0 million expended to promote new DSP RAS
products, partially offset by a $3.7 million cost decline primarily due to
reduced North American channel marketing efforts. Research and development
expenses increased $5.9 million in 1999 as compared to 1998 due primarily to
$3.5 million of additional costs added by the acquisitions of ITK and CDC with
the remaining increase of $2.4 million primarily due to new product development
costs for the DSP RAS products. General and administrative expenses increased by
$6.6 million primarily due to increased amortization of acquisition-related
goodwill and other identifiable intangibles of $8.0 million partially offset by
$1.4 million of cost reductions related to reduced information systems
implementation costs and other cost saving initiatives.
The $1.5 million of restructuring charges recorded in fiscal 2000 were
associated with the board-approved plan to restructure the European
organization located in Dortmund, Germany and Bagshot, England, by transitioning
all product development, technical support and manufacturing functions to the
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
Company's corporate headquarters located in Minnetonka, Minnesota. The
restructuring charge consists principally of severance and termination costs for
the 75 positions affected by the restructuring.
Restructuring activities are expected to be completed by end of the second
quarter of fiscal 2001. The Company anticipates annual cost savings of
approximately $3.0 million from these restructurings. (See Note 4 to the
Company's consolidated financial statements.)
The $1.2 million of net restructuring charges recorded in fiscal 1999 were
associated with the board approved plan to reorganize the sales and marketing
functions in Germany, England and the United States, by consolidating worldwide
sales and marketing resources into strategic locations. The charges consist
principally of existing commitments for rent on facilities vacated by the
Company and termination payments associated with the elimination of 42
positions. These activities were completed by December 1999. The Company
realized cost savings of approximately $2.2 million in fiscal year 2000 from
these restructurings. (See Note 4 to the Company's consolidated financial
statements.)
The $1.0 million restructuring charge recorded in fiscal 1998 was associated
with a board-approved plan to consolidate existing offices in Germany with those
acquired from ITK. The charge consists principally of rent, contractual payments
on office equipment, write-offs of leasehold improvements and termination costs
associated with the elimination of six positions. Activities were completed by
June 30, 1999. The Company realized cost savings of approximately $0.5 million
in fiscal year 2000 from these restructurings. (See Note 4 to the Company's
consolidated financial statements.)
OTHER DEVELOPMENTS
On October 2, 2000, the Company acquired Inside Out Networks, a leading
developer of data connection products based in Austin, Texas. The acquisition
provides a comprehensive suite of local connectivity solutions to the market.
(See Note 17 to the Company's consolidated financial statements.)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
ACQUISITION OF ITK INTERNATIONAL, INC.
In July 1998, the Company acquired all of the outstanding common stock of ITK.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed, including estimated restructuring and
integration costs of $3.5 million. (See Note 4 to the Company's consolidated
financial statements.)
At the time of the Company's acquisition, ITK described itself as a Remote
Access Server (RAS) product company. Although ITK did offer its own line of ISDN
cards and networking boards, the Company's acquisition was made principally to
acquire the VoIP technology under development by ITK. This VoIP technology, if
successfully developed, would allow users to send packetized voice signals
through the Internet. The Company believed that the VoIP technology under
development at the time of the acquisition could provide for the development of
products which would be a natural
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
ACQUISITION OF ITK INTERNATIONAL, INC. (CONTINUED)
extension of the Company's current product offerings and could position the
Company to address substantially larger markets than the markets served by the
Company's current products.
At the time of the acquisition, ITK had developed a proof of concept prototype
product (NetBlazer 8500) which demonstrated that the method of voice and data
compression under development by ITK and the method of combining VoIP and remote
access functionality under development by ITK had the potential to be further
developed into a product marketable to "Carrier Class" telephone companies.
However, the NetBlazer 8500 required further development before it could meet
the technical and functional requirements of such customers. Accordingly, the
Company was uncertain whether the VoIP technology being developed would
ultimately meet the technical requirements of Carrier Class telephony customers
or whether it would be commercially viable.
As of the date of the acquisition, the nature of the development efforts related
to the purchased, in-process research and development projects, as well as the
efforts required to complete development of those projects into commercially
viable products, included development projects to address the following: (a)
development of enhanced technical attributes, including enhanced port density,
redundancy, network management capabilities, a higher fault tolerance,
compliance with telephone industry standards such as "SS7" and "NEBS"
compliancy; (b) development of significant hardware and software functions
considered integral to a product with broad appeal to end users and the
telephone companies, including computer-to-phone capabilities, interoperability
with other vendor's gateways, one-stage dialing , local tone simulation and
announcements, end-to-end transparent disconnect cause delivery and real-time
FAX-over capabilities, among others; and (c) re-engineering of the prototype
design to permit cost effective manufacture and commercial use, including
migration from a UNIX operating system to a Windows NT operating system.
Management estimated that $11.3 million of the purchase price represented the
fair value of purchased in-process research and development related to the VoIP
projects referred to above, that had not yet reached technological feasibility
and had no alternative future uses. These amounts were expensed as a
non-recurring, non-tax-deductible charge upon consummation of the acquisition.
The identifiable intangible assets of $21.1 million included in the purchase
price allocation were comprised of proven technology with an estimated fair
value of $19.7 million and an assembled workforce with an estimated fair value
of $1.4 million, which had estimated useful lives of five years and six years,
respectively. The remaining unallocated purchase price represented goodwill of
$17.7 million, which was being amortized over seven years. With regard to the
proven technology, the Company intended to further enhance the strengths of this
product range and implement a plan to gain leadership in the ISDN market. The
Company's core asset was the comprehensive set of common application programming
interface (CAPI) and CAPI-enhancing features combined with highly intelligent
ISDN protocol implementation which provided for integration into server-based
communication solutions for the media communication market.
In the second quarter of fiscal 2000, the Company recorded an $18.1 million
charge reflecting the write-down of the carrying value of all of the intangible
assets associated with the NetBlazer technology and
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
ACQUISITION OF ITK INTERNATIONAL, INC. (CONTINUED)
some of the goodwill acquired in the Company's July 1998 purchase of ITK. The
write-down resulted from the Company's March 2000 decision to discontinue
development of the NetBlazer technology when the key technical members of the
NetBlazer technology team elected to leave the Company and the Company concluded
that it would not be able to successfully develop a competitive product from the
technology. Accordingly, the Company determined that future undiscounted cash
flows from the acquired ITK assets would be substantially reduced, and
therefore, the carrying value of the acquired ITK assets would be impaired. (See
Note 3 to the Company's consolidated financial statements.)
In September 2000, the Company recorded a charge of $5.8 million reflecting a
write-down of the remaining carrying value of identifiable intangible assets and
goodwill associated with the Integrated Services Digital Network (ISDN)
technology and some of the other long-lived assets acquired in the Company's
July 1998 purchase of ITK. The write-down resulted from the Company's September
2000 decision to discontinue all business activities in the ISDN market. The
Company determined that it did not have the capability to invest at the levels
necessary to achieve significant market share in the ISDN market and, therefore,
has discontinued development activities associated with the ISDN product lines.
Accordingly, the Company determined that future undiscounted cash flows from the
remaining acquired ITK intangible assets would be reduced and, therefore, the
carrying value of the remaining acquired ITK intangible assets would be
impaired.
ACQUISITION OF CENTRAL DATA CORPORATION
In July 1998, the Company acquired all of the outstanding common stock of CDC.
The transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed, including estimated restructuring and
integration costs of $0.8 million. (See Note 4 to the Company's consolidated
financial statements.)
Although CDC did offer its own line of traditional serial port connectivity
products, the Company's acquisition was made principally to acquire the USB
technology under development by CDC. This USB technology, if successfully
developed, would broaden the Company's product offerings to include this new,
emerging industry-standard port technology. Management considers such a product
offering integral to its future market share because the marketplace is
migrating from the traditional serial I/O (input/output) technology (in which
the Company has significant market share) to USB technology.
At the time of acquisition, CDC had developed a prototype of both the 2-port and
4-port USB connectivity technologies that demonstrated the validity of CDC's
product development plan. However, the USB technology development was still in
process, and required significant development work and field testing before it
could meet the technical and functional requirements of customers and achieve
commercial viability. Accordingly, the Company was uncertain whether the
technology being developed could ultimately meet the technical and economic
requirements of the marketplace and become commercially viable.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
ACQUISITION OF CENTRAL DATA CORPORATION (CONTINUED)
As of the date of the acquisition, the nature of the development efforts related
to the purchased, in-process research and development projects, as well as the
efforts required to complete development of those projects into commercially
viable products included: (a) development of new hardware designs and software
engineering relating to a complete reengineering of the in-process USB
technology; (b) development of new hardware designs for 8-port USB products; and
(c) development of a new "hub" architecture to support the CDC USB technology.
Management estimated that $4.7 million of the purchase price represented the
fair value of purchased in-process research and development related to the USB
projects referred to above, that had not yet reached technological feasibility
and had no alternative future uses. These amounts were expensed as a
non-recurring, non-tax-deductible charge upon consummation of the acquisition.
The identifiable intangible assets of $9.8 million included in the purchase
price allocation were comprised of proven technology with an estimated fair
value of $9.4 million, and an assembled workforce with an estimated fair value
of $0.4 million, which had estimated useful lives of five years and six years,
respectively. The remaining unallocated purchase price represented goodwill in
the amount of $9.7 million, which was being amortized over seven years.
The Company has developed the acquired in-process USB research and development
and released USB products, with initial product revenues generated during
November 1998. USB revenues of approximately $0.5 million and $0.3 million, for
fiscal years 2000 and 1999, respectively, are included in revenues from the
first release of certain USB products.
Actual revenues are below original projections due to delays in the release and
marketing of certain USB products. The Company's efforts have been more heavily
focused on the terminal server technologies, which had already been developed
and were generating most of the post-acquisition CDC revenues, and accordingly,
the original revenue projections for USB have not been realized. On October 2,
2000, the Company acquired Inside Out Networks, a leading developer of data
connection products. The acquisition will allow the Company to offer the most
competitive and complete USB product line in the industry. As Inside Out
Networks is the market leader in USB, the Company expects that the USB products
currently being sold will eventually be superceded by the Inside Out Networks
USB product lines. However, the Company expects to continue to utilize the USB
technology purchased in the CDC acquisition.
OTHER INCOME (EXPENSE)
Other income of $10.7 million in 2000 consisted primarily of an $8.0 million
gain recognized when Nx Networks, which acquired AetherWorks Corporation, paid
the note the Company had previously written off. (See Note 6 to the Company's
consolidated financial statements.) In addition, the Company recognized $2.7
million from interest income on short-term investments and $0.6 million of
miscellaneous other income. These items were partially offset by $0.7 million of
interest expense on the Company's borrowings.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE) (CONTINUED)
Other expense of $0.3 million in 1999 consisted primarily of $1.0 million of
interest expense on lines of credit and long-term debt partially offset by $0.9
million of interest income on short-term investments. Other income for 1998
included primarily interest income on cash equivalents and a fiscal 1998 third-
quarter reversal of a $1.4 million previously accrued obligation related to
lease guarantees for AetherWorks Corporation. As discussed in the next item
below, the obligation was reversed because the Company is no longer the primary
guarantor for these leases.
AETHERWORKS CORPORATION
WRITE-OFF AND NOTE RECOVERY
In connection with the Company's previously purchased $13.8 million of
convertible notes from AetherWorks Corporation, in May 1998 the Company
exchanged such notes for a non-interest bearing $8.0 million non-convertible
note and was released from all of its guarantees of certain lease obligations of
AetherWorks. Due to significant uncertainty as to its collectibility, the $8.0
million note was recorded by the Company as having no carrying value. In March
2000, the Company received payment of $8.0 million, representing payment on the
aforementioned non-convertible note of AetherWorks Corporation. The note was
paid as a result of AetherWorks Corporation being acquired by Nx Networks, Inc.
INCOME TAXES
The Company recorded a $4.3 million tax benefit for 2000, and tax provisions of
$4.8 million and $9.3 million for fiscal years 1999 and 1998, respectively. The
tax benefit in 2000 is recorded at a rate less than the U.S. statutory rate
primarily due to non-deductible charges and amortization, partially offset by
the non-taxable gain recognized upon recovery of the AetherWorks Corporation
note. For fiscal 1999, the Company recorded taxes at a rate in excess of the
U.S. statutory rate primarily due to the amortization of the identifiable assets
and goodwill acquired in the purchase of ITK and CDC which were not deductible
for income tax reporting purposes. For fiscal 1998, the Company recorded a tax
provision despite incurring a loss primarily due to the write-off of acquired
in-process research and development which was not deductible for income tax
reporting purposes.
INFLATION
The Company believes inflation has not had a material effect on its operations
or its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations, and, in prior years, with proceeds from earlier public offerings.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's working capital increased from $59.9 million at September 30,
1999, to $78.1 million at September 30, 2000, as compared to an increase of
$22.0 million, from $37.9 million to $59.9 million, at September 30, 1999 versus
September 30, 1998, respectively. The Company maintains lines of credit with
various financial institutions providing for borrowings of up to $14.5 million,
depending upon levels of eligible accounts receivable and inventories. As of
September 30, 2000, $3.1 million had been borrowed under these line of credit
agreements.
Net cash provided by operating activities totaled $27.4 million during fiscal
2000 as compared to $33.3 million during fiscal 1999. The decrease in net cash
provided by operations during fiscal 2000 was primarily due to less favorable
operating results as compared to fiscal 1999. Net cash provided by operating
activities totaled $33.3 million during fiscal 1999 as compared to $10.4 million
during fiscal 1998. The increase in net cash provided by operations during
fiscal 1999 was due primarily to improved collections on accounts receivables
balances.
Investing activities in 2000 consisted of net investments of $6.4 million in
marketable securities and purchases of $2.5 million of equipment, capital
improvements and other intangible assets. In 1999 investing activities included
net investments of $13.6 million in marketable securities and purchases of $4.8
million of equipment and capital improvements, and expansion of the Company's
enterprise-wide Enterprise Resource Planning (ERP) software system. Investing
activities in fiscal 1998 consisted of purchases of equipment, capital
improvements and other intangible assets of $5.8 million, business acquisitions
of $27.4 million and a $2.0 million investment in AetherWorks Corporation.
Financing activities consisted of payments on line of credit and debt
obligations totaling $1.4 million, $5.9 million and $0.1 million for 2000, 1999
and 1998, respectively. These payments were partially offset by $1.5 million,
$3.0 million and $2.8 million in 2000, 1999 and 1998, respectively, received
from the exercise of employee stock options and employee stock purchase plan
transactions. In 1999 and 1998, the Company also repurchased $0.8 million and
$0.2 million, respectively, to repurchase shares of its common stock.
The Company's management believes that current financial resources, cash
generated from operations and the Company's potential capacity for debt and/or
equity financing will be sufficient to fund current and future business
operations.
Effective October 2, 2000, the Company acquired Inside Out Networks, a leading
developer of data connection products based in Austin, Texas. The purchase price
included an initial cash payment of $6.4 million, subject to possible
post-closing adjustment, and additional contingent payments of up to $8.5
million over three years, depending upon whether Inside Out Networks achieves
specific revenue and operating income targets during the next three years. The
initial payment as well as any future additional contingent payments are
expected to be paid using cash generated from operations. (See Note 17 to the
Company's consolidated financial statements.)
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Effective January 1, 1999, eleven countries of the European Union converted to a
common currency called the "Euro." This action caused 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.
During 2000, the Company had approximately $46.1 million of net sales related to
foreign customers, of which $41.0 million was denominated in U.S. dollars, $5.0
million was in Deutschemark- denominated sales, and $0.1 million was in
Euro-denominated sales. During 2000, the average monthly exchange rate for the
U.S. dollar to the Deutschemark dropped by approximately 17.0% from .5370 to
.4455.
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 DISCLOSURE
The Company experienced no adverse systems effects of the Year 2000 issue. While
market stabilization has occurred in the last half of fiscal 2000, the Company
experienced some adverse operational effects from the Year 2000 issue as a
result of the industry wide slowdown in sales in the first and second quarters
of fiscal 2000. While the Company has not been able to quantify the effects of
the Year 2000 sales impact versus other market factors, management believes that
there will be no further material adverse effects on sales from the Year 2000
issue.
RECENT ACCOUNTING DEVELOPMENTS
See Note 1 to the Company's consolidated financial statements.
ITEM 7A. 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.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the fiscal years ended September 30 2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 132,524,630 $ 193,506,059 $ 182,931,670
Cost of sales 62,871,689 95,313,636 88,539,156
------------- ------------- -------------
Gross margin 69,652,941 98,192,423 94,392,514
Operating expenses:
Sales and marketing 34,423,150 43,844,557 38,334,312
Research and development 20,174,918 21,847,230 15,917,125
General and administrative 19,357,867 23,657,586 17,011,504
Acquired in-process research and development 16,064,933
Impairment loss 26,146,300
Restructuring 1,381,642 607,398 1,020,000
------------- ------------- -------------
Total operating expenses 101,483,877 89,956,771 88,347,874
------------- ------------- -------------
Operating (loss) income (31,830,936) 8,235,652 6,044,640
Other income (expense), net 2,667,816 (256,320) 1,818,286
AetherWorks Corporation gain 1,350,000
AetherWorks Corporation note recovery 8,000,000
------------- ------------- -------------
(Loss) income before income taxes (21,163,120) 7,979,332 9,212,926
Income tax (benefit) provision (4,338,440) 4,787,599 9,284,020
------------- ------------- -------------
Net (loss) income $ (16,824,680) $ 3,191,733 $ (71,094)
============= ============= =============
Net (loss) income per common share,
basic $ (1.12) $ 0.22 $ (0.01)
============= ============= =============
Net (loss) income per common share,
assuming dilution $ (1.12) $ 0.22 $ (0.01)
============= ============= =============
Weighted average common shares, basic 15,061,774 14,696,057 13,729,765
============= ============= =============
Weighted average common shares,
assuming dilution 15,061,774 14,831,242 13,729,765
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At September 30,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,785,936 $ 20,963,607
Marketable securities 20,150,132 13,714,422
Accounts receivable, net 18,175,226 33,955,669
Inventories, net 19,700,010 22,446,667
Other 3,655,511 5,394,346
------------- --------------
Total current assets 100,466,815 96,474,711
Property, equipment and improvements, net 24,408,384 30,242,877
Intangible assets, net 16,397,744 47,804,611
Other 1,649,252 1,807,829
------------- --------------
Total assets $ 142,922,195 $ 176,330,028
============= ==============
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 3,147,900 $ 4,759,095
Current portion of long-term debt 330,305 330,028
Accounts payable 6,275,995 10,779,998
Income taxes payable 1,328,481 5,274,181
Accrued expenses:
Advertising 1,143,565 2,461,437
Compensation 1,862,517 6,078,230
Other 6,760,841 6,357,348
Restructuring reserves 1,531,992 488,298
------------- --------------
Total current liabilities 22,381,596 36,528,615
------------- --------------
Long-term debt 7,081,396 9,205,918
Net deferred income taxes -- 3,431,133
------------- --------------
Total liabilities 29,462,992 49,165,666
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value: 2,000,000 shares authorized; none
outstanding
Common stock, $.01 par value; 60,000,000 shares authorized;
16,322,949 and 16,192,997 shares issued 163,229 161,930
Additional paid-in capital 71,851,928 71,460,612
Retained earnings 61,409,861 78,234,541
Accumulated other comprehensive income (loss) 166,750 (1,027,533)
------------- --------------
133,591,768 148,829,550
Unearned stock compensation (89,618) (339,686)
Treasury stock, at cost, 1,196,463 and 1,271,612 shares (20,042,947) (21,325,502)
------------- --------------
Total stockholders' equity 113,459,203 127,164,362
------------- --------------
Total liabilities and stockholders' equity $ 142,922,195 $ 176,330,028
============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended September 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------- --------------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $(16,824,680) $ 3,191,733 $ (71,094)
Adjustments to reconcile net (loss) income to
cash provided by operating activities:
Impairment loss 26,146,300
Acquired in-process research and development 16,064,933
Restructuring 1,381,642 (672,167) 1,020,000
Depreciation of property and equipment 4,296,143 5,988,640 5,174,725
Amortization of intangibles 8,463,573 12,807,568 3,665,879
AetherWorks Corporation gain (1,350,000)
Loss on sale of fixed assets 85,809 243,524 159,498
Provision for losses on accounts receivable 1,150,068 179,366 708,992
Provision for inventory obsolescence 1,632,685 6,218,261 3,414,270
Deferred income taxes (5,234,720) (2,119,056) (1,251,611)
Stock compensation 164,909 582,981 895,401
Changes in operating assets and liabilities:
Accounts receivable 12,792,380 12,359,264 (17,687,833)
Inventories 898,344 (1,618,415) (569,839)
Income taxes payable (3,943,276) 1,761,296 883,900
Other assets 3,546,641 2,228,897 (3,227,695)
Accounts payable (2,829,261) (3,822,046) 279,236
Accrued expenses (4,362,890) (4,025,827) 2,280,156
------------ ------------- --------------
Total adjustments 44,188,347 30,112,286 10,460,012
------------ ------------- --------------
Net cash provided by operating activities 27,363,667 33,304,019 10,388,918
------------ ------------- --------------
Investing activities:
Purchase of property and equipment and certain other intangible assets (2,544,171) (4,759,893) (5,816,163)
Proceeds from sale of fixed assets 843,995
Proceeds from sale of held-to-maturity marketable securities 76,531,426 7,000,000
Purchase of held-to-maturity marketable securities (82,967,136) (20,633,113)
Business acquisitions, net of cash acquired (27,356,560)
Investment in AetherWorks Corporation (2,000,000)
------------ ------------- --------------
Net cash used in investing activities (8,979,881) (17,549,011) (35,172,723)
------------ ------------- --------------
Financing activities:
Payments on long-term debt (859,264) (1,072,747) (73,000)
Payments on line of credit (508,317) (4,843,096)
Proceeds from the issuance of long-term debt 2,064,865
Purchase of treasury stock (815,000) (153,750)
Stock option transactions 937,723 2,381,422 2,310,572
Employee stock purchase plan transactions 580,855 586,324 471,629
------------ ------------- --------------
Net cash provided by (used in) financing activities 150,997 (3,763,097) 4,620,316
------------ ------------- --------------
Effect of exchange rates changes on cash and cash equivalents (712,454) (1,383,672) (810,809)
Net increase (decrease) in cash and cash equivalents 17,822,329 10,608,239 (20,974,298)
Cash and cash equivalents, beginning of period 20,963,607 10,355,368 31,329,666
============ ============= ==============
Cash and cash equivalents, end of period $ 38,785,936 $ 20,963,607 $ 10,355,368
============ ============= ==============
Supplemental Cash Flows Information:
Interest paid $ 699,228 $ 937,306 $ 224,730
Income taxes paid $ 4,358,892 $ 3,742,898 $ 7,463,578
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Treasury Stock Total
------------------------ -------------------------- Additional Stockholders'
Shares Par Value Shares Value Paid-in-Capital Equity
---------- ---------- --------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997 14,727,256 $ 147,273 1,269,492 $ (22,405,588) $ 44,403,102 $ 95,471,031
Issuance of stock for acquisitions 775,837 7,758 21,829,797 21,837,555
Purchase of treasury stock, at cost 15,000 (153,750) (153,750)
Employee stock purchase issuances (37,398) 664,526 (192,897) 471,629
Issuance of stock options at below
market prices 977,697 895,401
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 287,882 2,879 2,307,742 2,310,621
Tax benefit realized upon exercise of
stock options 1,305,001 1,305,001
Forfeiture of stock options (169,319) (815,809)
Foreign currency translation adjustment
Net loss (71,095)
---------- ---------- --------- ------------- --------------- -------------
Balances, September 30, 1998 15,790,975 157,910 1,247,094 (21,894,812) 70,461,123 121,250,585
Purchase of treasury stock, at cost 105,000 (815,000) (153,750)
Employee stock purchase issuances (80,482) 1,384,310 (797,986) 471,629
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 402,022 4,020 2,377,402 2,310,621
Tax benefit realized upon exercise
of stock options 198,041 1,305,001
Forfeiture of stock options (777,968)
Foreign currency translation adjustment 815,809)
Net income (71,096)
---------- ---------- --------- ------------- --------------- -------------
Balances, September 30, 1999 16,192,997 161,930 1,271,612 (21,325,502) 71,460,612
Employee stock purchase issuances (75,149) 1,282,555 (701,700) 580,855
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 129,952 1,299 936,424 937,723
Tax benefit realized upon exercise
of stock options 241,751 241,751
Forfeiture of stock options (85,159)
Foreign currency translation adjustment 1,194,285
Net loss (17,008,589)
---------- ---------- --------- ------------- --------------- -------------
Balances, September 30, 2000 16,322,949 $ 163,229 1,196,463 $ (20,042,947) $ 71,851,928 $ 113,275,248
========== ========== ========= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Continued Next Page
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(CONTINUED)
For the years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Unearned Other Total
Retained Stock Comprehensive Stockholders' Comprehensive
Earnings Compensation Income (Loss) Equity (Loss) Income
-------- ------------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1997 $ 75,113,902 $ (1,787,658) $ 95,471,031
Issuance of stock for acquisitions 21,837,555
Purchase of treasury stock, at cost (153,750)
Employee stock purchase issuances 471,629
Issuance of stock options at below
market prices (977,697)
Stock compensation 895,401 895,401
Issuance of stock upon exercise of
stock options, net of withholding 2,310,621
Tax benefit realized upon exercise
of stock options 1,305,001
Forfeiture of stock options 169,319
Foreign currency translation adjustment $ (815,809) (815,809) (815,809)
Net loss (71,094) (71,094) (71,094)
------------- ------------ ------------ ------------- -------------
Balances, September 30, 1998 75,042,808 (1,700,635) (815,809) 121,250,585 $ (886,903)
=============
Purchase of treasury stock, at cost (815,000)
Employee stock purchase issuances 586,324
Stock compensation 582,981 582,981
Issuance of stock upon exercise of
stock options, net of withholding 2,381,422
Tax benefit realized upon exercise
of stock options 198,041
Forfeiture of stock options 777,968
Foreign currency translation adjustment (211,724) (211,724) (211,724)
Net income 3,191,733 3,191,733 3,191,733
------------- ------------ ------------ ------------- -------------
Balances, September 30, 1999 78,234,541 (339,686) (1,027,533) 127,164,362 $ 2,980,009
=============
Employee stock purchase issuances 580,855
Stock compensation 164,909 164,909
Issuance of stock upon exercise of
stock options, net of withholding 937,723
Tax benefit realized upon exercise
of stock options 241,751
Forfeiture of stock options 85,159
Foreign currency translation adjustment 1,194,283 1,194,283 1,194,283
Net loss (16,824,680) (16,824,680) (16,824,680)
------------- ------------ ------------ ------------- -------------
Balances, September 30, 2000 $ 61,409,861 $ (89,618) $ 166,750 $ 113,459,203 $ (15,630,397)
============= ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi International is a worldwide provider of data communications products
delivering seamless connectivity solutions for peripheral server-based remote
access and LAN markets. Digi's communications products support a broad range of
server platforms and network operating systems that enable people to access
information.
Digi's products are marketed through a global network of distributors, system
integrators, original equipment manufacturers (OEMs), and value-added resellers
(VARs).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Those having original
maturities in excess of three months are classified as marketable securities.
Marketable securities consist of high-grade commercial paper and have maturities
of less than one year. Marketable securities classified as held to maturity are
carried at amortized cost. Gross unrealized holding gains and losses were $0 and
$70,833, respectively, as of September 30, 2000, and were $10,561 and $5,383,
respectively, as of September 30, 1999.
RESTRICTIONS ON MARKETABLE SECURITIES
The Company is required to maintain $5,000,000 deposited in a financial
institution as a collateral pledge related to certain short-term borrowings at
September 30, 2000. The collateral pledge is for a period of six months ending
March 31, 2001.
REVENUE RECOGNITION
The Company recognizes revenue at the date that products are shipped to
distributors or original equipment manufacturers. Sales to authorized domestic
distributors and original equipment manufacturers are made with certain rights
of return. Estimated reserves for future returns are established by the Company
based on historical experience and current business factors and are charged
against revenues in the same period as the corresponding sales are recorded.
Estimated warranty costs are accrued based on historical experience and current
business factors, and are recorded in the same period as the corresponding
sales.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company offers rebates to authorized domestic and international distributors
and authorized resellers. The rebates are incurred based on the level of sales
to the respective distributors and resellers, and are charged to operations in
the same period as the corresponding sales.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost
determined on the first-in, first-out method. Fair market value for raw
materials is based on replacement cost and for other inventory classifications
based on net realizable value. Appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
provided by charges to operations using the straight-line method based on
estimated useful lives.
Furniture and fixtures and other equipment are depreciated over a period of
three to five years. Building improvements and buildings are depreciated over 10
and 39 years, respectively.
Expenditures for maintenance and repairs are charged to operations as incurred,
while major renewals and betterments are capitalized. The assets and related
accumulated depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.
The Company's cost of business process reengineering activities, whether done
internally or by third parties, is expensed as incurred.
INTANGIBLE ASSETS
Purchased proven technology, license agreements, covenants not to compete and
other intangible assets are recorded at cost. Goodwill represents the excess of
cost over the fair value of identifiable assets acquired and is being amortized
on a straight-line basis over estimated useful life periods ranging from five to
15 years. Purchased in-process research and development costs (IPR&D) are
expensed upon consummation of the purchase. All other intangible assets are
amortized on a straight-line basis over their estimated useful lives of one to
seven years.
The Company periodically, at least quarterly, analyzes intangible assets for
potential impairment, assessing the appropriateness of lives and recoverability
of unamortized balances through measurement of undiscounted operating cash flows
on a basis consistent with generally accepted accounting principles.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Software development
costs are expensed as incurred. Such costs are required to be expensed until the
point that technological feasibility and proven marketability of the product are
established. Costs otherwise capitalized after such point also are expensed
because they are insignificant.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Tax credits are accounted for under the flow-through method, which recognizes
the benefit in the year in which the credit is utilized.
(LOSS) INCOME PER COMMON SHARE
Basic net (loss) income per share is calculated based on the weighted average of
common shares outstanding during the period. Net (loss) income per share,
assuming dilution, is computed by dividing net (loss) income by the weighted
average number of common and common equivalent shares outstanding. The Company's
only common equivalent shares are those that result from dilutive common stock
options.
The following table is a reconciliation of the numerators and denominators in
the (loss) income per share calculations:
<TABLE>
<CAPTION>
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the year ended September 30, 2000
BASIC LOSS PER SHARE
Income available to common stockholders $ (16,824,680) 15,061,774 $ (1.12)
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares
------------- ---------- --------
DILUTED LOSS PER SHARE
Income available to common stockholders $ (16,824,680) 15,061,774 $ (1.12)
</TABLE>
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(LOSS) INCOME PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Income (Loss) Shares Per Share
Numerator (Denominator) Amount
--------- ------------- ------
<S> <C> <C> <C>
For the year ended September 30, 1999
BASIC INCOME PER SHARE
Income available to common stockholders $ 3,191,733 14,696,057 $ 0.22
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares 135,185
------------ ---------- --------
DILUTED INCOME PER SHARE
Income available to common stockholders $ 3,191,733 14,831,242 $ 0.22
For the year ended September 30, 1998
BASIC LOSS PER SHARE
Income available to common stockholders $ (71,094) 13,729,765 $ (0.01)
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares
------------ ---------- --------
DILUTED LOSS PER SHARE
Income available to common stockholders $ (71,094) 13,729,765 $ (0.01)
</TABLE>
Common equivalent shares of 160,853 and 835,670 at September 30, 2000 and 1998,
respectively, were not included in the computation of diluted earnings per share
because their effect is antidilutive.
Options to purchase 1,230,224, 811,753, and 451,725 shares at September 30,
2000, 1999, and 1998, respectively, were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of common shares.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the Company's international
subsidiaries are measured using local currencies as the functional currency.
Assets and liabilities of these operations are translated at the exchange rates
in effect at each fiscal year-end. Statements of operations accounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation account in
stockholders' equity.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
For the Company, comprehensive income (loss) includes net income (loss) and
foreign currency translation adjustments. Foreign currency translation
adjustments are charged or credited to the accumulated other comprehensive
income (loss) account in stockholders' equity.
SEGMENT REPORTING
Operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally, makes operating
decisions, and assesses performance. The Company operates in one reportable
segment.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FASB 133). In July 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which defers the effective date of FASB 133 to the Company's
fiscal year ending September 30, 2001.
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
No. 133" (FASB 138). FASB 138 addresses a limited number of FASB 133
implementation issues. The adoption of FASB 133, as amended by FASB 138, is not
expected to have a significant impact on the Company's consolidated financial
position or results of operations.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A replacement of FASB Statement No. 125" (FASB
140). FASB 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of FASB Statement 125's provisions without
reconsideration. FASB 140 is effective for the Company's fiscal year ending
September 30, 2001. The adoption of FASB 140 is not expected to have a
significant impact on the Company's consolidated financial position or results
of operations.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101) -- Revenue Recognition in Financial
Statements. This SAB summarizes certain of the SEC's views regarding revenue
recognition. The provisions of SAB 101, as amended by SAB 101A and SAB 101B,
must be adopted by the fourth quarter of the Company's fiscal year ending
September 30, 2001. However, any effects of the SAB must be reflected
retroactively to October 1, 2000 (the first day of fiscal year 2001). The
Company has considered the effect of the guidance outlined in SAB 101 and does
not believe that it will impact the Company's revenue recognition practices or
consolidated financial statements.
2. ACQUISITIONS
In July 1998, the Company acquired all of the outstanding common stock of ITK
International, Inc. (ITK). The transaction was accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed.
In July 1998, the Company acquired all of the outstanding common stock of
Central Data Corporation (CDC). The transaction was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed.
The following unaudited pro forma condensed consolidated results of operations
have been prepared as if the acquisitions of ITK and CDC had occurred as of the
beginning of fiscal 1998:
<TABLE>
<CAPTION>
1998
-----------------------------------------
<S> <C>
Net sales $220,271,670
Net loss ($20,206,426)
Net loss per share ($1.36)
</TABLE>
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The unaudited pro forma condensed consolidated results of operations are not
necessarily indicative of results that would have occurred had the acquisitions
been in effect for the year presented, nor are they necessarily indicative of
results that will be obtained in the future.
3. IMPAIRMENT LOSS
In March 2000, the Company recorded a charge of $18,068,249 reflecting the
write-down of the carrying value of all of the intangible assets associated with
the NetBlazer technology and some of the goodwill acquired in the Company's July
1998 purchase of ITK. The write-down resulted from the Company's March 2000
decision to discontinue development of the NetBlazer technology when the key
technical members of the NetBlazer technology team elected to leave the Company
and the Company concluded that it would not be able to successfully develop a
competitive product from the technology. Accordingly, the Company determined
that future undiscounted cash flows from the acquired ITK assets would be
substantially reduced and, therefore, the carrying value of the acquired ITK
assets would be impaired.
The Company utilized a discounted cash flows valuation method as described in
Statement of Financial Accounting Standards Board No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FASB 121), to measure the March 2000 adjustment to the carrying value of the
acquired ITK intangible assets.
In September 2000, the Company recorded a charge of $8,078,051 reflecting a
write-down of the remaining carrying value of identifiable intangible assets and
goodwill associated with the Integrated Services Digital Network (ISDN)
technology and some of the other long-lived assets acquired in the Company's
July 1998 purchase of ITK. The write-down resulted from the Company's September
2000 decision to discontinue all business activities in the ISDN market. The
Company determined that it did not have the capability to invest at the levels
necessary to achieve significant market share in the ISDN market and, therefore,
has discontinued development activities associated with the ISDN product lines.
Accordingly, the Company determined that future undiscounted cash flows from the
remaining acquired ITK intangible assets would be reduced and, therefore, the
carrying value of the remaining acquired ITK intangible assets would be
impaired. As a result of discontinuing business activities in the ISDN market,
as well as the decision to restructure the European operations to a sales and
marketing organization, the Company determined that its Dortmund, Germany
facility (the Dortmund Facility), including certain furniture and fixture items,
would no longer be needed to support operations. During September 2000, the
Company began efforts to sell the Dortmund Facility. As a result of placing the
Dortmund Facility on the commercial real estate market, the Company determined
that the Dortmund Facility's fair market value was less than its carrying value.
An independent appraisal of the Dortmund Facility was completed. Based on the
results of this appraisal, the Company wrote-down the carrying value of the
Dortmund Facility to its estimated fair market value as of September 30, 2000.
The Company expects that the Dortmund Facility will be sold by the end of the
second quarter of fiscal year 2001. Certain furniture and fixtures amounts at
the Dortmund Facility have been written down to estimated fair value, given the
actions taken by the Company as described above. The estimated fair value of the
Dortmund Facility, including the furniture and fixtures, is $5.3 million and is
classified as part of property, equipment and improvements on the Company's
balance sheet at September 30, 2000.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. IMPAIRMENT LOSS (CONTINUED)
The Company utilized a discounted cash flows valuation method as described in
FASB 121 to measure the September 2000 adjustment to the carrying value of the
remaining acquired ITK intangible assets. The Company utilized an independent
appraisal to measure the September 2000 adjustment to the carrying value of the
acquired ITK manufacturing facility. The September 2000 adjustment to carrying
value of the acquired ITK furniture and fixtures was based on the Company's
estimate of selling prices for the furniture and fixtures.
The write-down of the carrying value of the long-lived assets, as described in
the previous paragraphs, consists of the following:
<TABLE>
<CAPTION>
Identifiable Identifiable
Intangible Assets Intangible Assets
and Goodwill and Goodwill
Associated with Associated with
Asset the NetBlazer the ISDN Other Long Lived Total
Description Technology Technology Assets Impairment Loss
----------- ----------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Current technology $ 10,491,837 $ 2,241,167 $ 12,733,004
Assembled workforce 252,646 670,484 923,130
Goodwill 7,323,766 2,852,737 10,176,503
Building -- Dortmund facility $ 1,955,366 1,955,366
Furniture and fixtures 358,297 358,297
------------ ----------- ----------- ------------
Totals $ 18,068,249 $ 5,764,388 $ 2,313,663 $ 26,146,300
============ =========== =========== ============
</TABLE>
The Company realized $5,327,981 of tax benefits as a result of the elimination
of the deferred tax liabilities associated with the identifiable intangible
assets of ITK's NetBlazer and ISDN technologies, which were written off as
described above.
4. RESTRUCTURING
In September 2000, the Company's Board of Directors approved a restructuring
plan related to its European operations headquartered in Dortmund, Germany,
which provided for the transition of all product development, technical support
and manufacturing functions to the Company's corporate headquarters located in
Minnetonka, Minnesota. The plan also included the closure of the Company's
office in Bagshot, England. The charge of $1,531,992 consisted of $1,252,531 for
severance and termination costs related to the elimination of 73 positions in
Dortmund, Germany and 2 positions in Bagshot, England; $134,227 related to the
closure of the Bagshot office for lease cancellation; $100,684
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING (CONTINUED)
of cancellation fees related to automobile leases, and maintenance contracts,
and office equipment leases, and $44,550 for severance-related legal expenses.
As of September 30, 2000, there had been no expenses paid relating to these
restructuring accruals. Restructuring activities are expected to be completed by
the end of the second quarter of fiscal 2001.
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 Minnetonka, Minnesota.
As of December 31, 1999, the Company had paid $906,299 of termination costs
relating to the elimination of 33 positions. Restructuring activities were
completed as of December 1999. During the second quarter of fiscal 2000, the
final severance and termination expenses were paid, and the Company adjusted the
remaining restructuring accrual to zero. In fiscal 2000, severance and
termination costs of $146,767 and rent commitment payments of $7,312 were
charged to the restructuring accrual. Changes in estimate for severance and
termination costs of $124,937 and rent commitments of $13,160 were recorded as a
reduction of the restructuring accrual with a corresponding increase to
operating income during the year ended September 30, 2000.
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. Restructuring activities were completed as of June
1999. In the third quarter of fiscal 2000, the Company adjusted the remaining
restructuring accrual to zero, as all obligations had been satisfied. In fiscal
year 2000, rent commitment payments of $12,636 and payments of $27,646 for
write-off of leasehold improvements were charged to the restructuring accrual.
Changes in estimate for rent commitments of $2,573 and write-off of leasehold
improvements of $9,680 were recorded as a reduction of the restructuring accrual
with a corresponding increase to operating income during the year ended
September 30, 2000.
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
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING (CONTINUED)
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. Restructuring activities were
completed as of June 1999. During the second quarter of fiscal 2000, the final
severance, termination and facility closure costs were paid. In fiscal 2000,
severance and termination costs of $5,217 and facility closure costs of $1,928
were charged against the restructuring accrual. Changes in estimate relating to
severance and termination costs of $17,652 and facilities closures of $33,469
were recorded as a reduction in the restructuring accrual with corresponding
offsets to goodwill during the year ended September 30, 2000.
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. Restructuring
activities were completed as of June 1999. During the second quarter of fiscal
2000, the Company paid the final severance costs of $7,128 associated with this
restructuring and the accrual was adjusted to zero. Total payments against the
restructuring accrual in fiscal year 2000 included severance and termination
costs of $88,661. An additional expense of $3,340 was also recorded related to a
change in estimate in the original restructuring accrual. Adjustments to the
restructuring accrual were reflected as changes to the restructuring accrual
with corresponding offsets to goodwill.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING (CONTINUED)
The Company's restructuring activities are summarized as follows:
<TABLE>
<CAPTION>
BALANCE AT CHANGE IN BALANCE AT
SEPTEMBER 30, ESTIMATE SEPTEMBER 30,
DESCRIPTION 1999 PROVISION PAYMENTS ADJUSTMENTS 2000
----------- ------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
September 2000 European Restructuring Plan:
- Severance and termination costs $1,252,531 $ 1,252,531
- Office lease cancellation fees 134,227 134,227
- Other lease cancellation fees and contractual payments 100,684 100,684
- Legal costs 44,550 44,550
------------- ---------- ---------- ----------- -------------
Subtotal 1,531,992 1,531,992
------------- ---------- ---------- ----------- -------------
March 1999 Sales and Marketing Restructuring Plan:
- Severance and termination costs $ 271,704 $ (146,767) $ (124,937) -
- Rent commitments 20,472 (7,312) (13,160) -
------------- ---------- ---------- ----------- -------------
Subtotal 292,176 (154,079) (138,097) -
------------- ---------- ---------- ----------- -------------
July 1998 European Restructuring Plan:
- Rent commitments 15,209 (12,636) (2,573) -
- Write-offs of leasehold improvements 37,326 (27,646) (9,680) -
------------- ---------- ---------- ----------- -------------
Subtotal 52,535 (40,282) (12,253) -
------------- ---------- ---------- ----------- -------------
July 1998 ITK Acquisition Restructuring Plan:
- Severance and termination costs 22,869 (5,217) (17,652) -
- Facility closures 35,397 (1,928) (33,469) -
------------- ---------- ---------- ----------- -------------
Subtotal 58,266 (7,145) (51,121) -
------------- ---------- ---------- ----------- -------------
July 1998 CDC Acquisition Restructuring Plan:
- Severance and termination costs 85,321 (88,661) 3,340 -
------------- ---------- ---------- ----------- -------------
Subtotal 85,321 (88,661) 3,340 -
------------- ---------- ---------- ----------- -------------
Totals $ 488,298 $1,531,992 $ (290,167) $ (198,131) $ 1,531,992
------------- ---------- ---------- ----------- -------------
</TABLE>
5. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in one reportable segment. The operations of the Company
are primarily conducted in the Unites States, the Company's country of domicile.
Geographic data, determined by reference to the location of the Company's
operations for the years ended September 30, are as follows:
Revenue by geographic area:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
United States $111,740,818 $164,329,109 $171,385,998
Europe 18,458,398 26,948,248 9,573,107
Asia 1,187,683 1,249,157 1,205,606
Australia 1,137,731 979,545 766,959
------------ ------------ ------------
$132,524,630 $193,506,059 $182,931,670
============ ============ ============
</TABLE>
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
Net long-lived assets by geographic area:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
United States $35,232,754 $40,921,789 $48,218,876
Foreign 5,573,374 37,125,699 49,374,482
----------- ----------- -----------
Total net long-lived
assets $40,806,128 $78,047,488 $97,593,358
=========== =========== ===========
</TABLE>
The Company's foreign export sales, primarily to Europe, comprised 34.8%, 34.8%,
and 25.5% of net sales for the years ended September 30, 2000, 1999 and 1998,
respectively.
During 2000, one customer accounted for 13.4% of net sales and 14.7% of the
trade accounts receivable as of September 30, 2000, while another accounted for
10.0% of net sales and 25.4% of the trade accounts receivable as of September
30, 2000.
During 1999, one customer accounted for 15.4% of net sales and 8.7% of the trade
accounts receivable as of September 30, 1999, while another accounted for 13.4%
of net sales and 22.5% of the trade accounts receivable as of September 30,
1999.
During 1998, one customer accounted for 15.5% of net sales and 26.0% of the
trade accounts receivable as of September 30, 1998, while another accounted for
13.7% of net sales and 10.0% of the trade accounts receivable as of September
30, 1998.
6. INVESTMENT IN AETHERWORKS CORPORATION
In May 1998, the Company exchanged its previously purchased $13,796,525 of
convertible notes from AetherWorks Corporation, a development stage company
engaged in the development of wireless and dial-up remote access technology, for
a non-interest bearing $8,000,000 non-convertible note. As a part of the
exchange, the Company relinquished its rights to any future technology or claims
on any of AetherWorks' intellectual properties. In exchange, the Company was
released from all of its guarantees of certain lease obligations of AetherWorks.
As a result, the Company reversed its $1,350,000 accrual established in the
fourth quarter of 1997, for the estimated cost related to its guarantee of such
lease obligations and included such amount in AetherWorks Corporation gain for
the year ended September 30, 1998.
Due to the significant uncertainty as to its collectibility, the $8,000,000 note
was recorded by the Company as having no carrying value.
In March 2000, the Company received a payment of $8,000,000 from AetherWorks,
representing payment on the aforementioned non-convertible note. The note was
paid as a result of AetherWorks Corporation being acquired by Nx Networks, Inc.
As a result of this payment, the Company recorded $8,000,000 of other income
during the year ended September 30, 2000.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT IN AETHERWORKS CORPORATION (CONTINUED)
The Company leased to AetherWorks $1,325,000 of computer equipment under a
three-year direct financing lease, expiring in August 2000. The lease contained
an option for AetherWorks to acquire the equipment for $132,598 upon termination
of the lease, and with 30 days' prior written notice. AetherWorks did not
exercise its option to acquire the equipment, and the equipment was returned to
the Company in September 2000.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable $ 24,361,734 $ 40,716,380
Less reserve for product returns
and doubtful accounts 6,186,508 6,760,711
-------------- -------------
$ 18,175,226 $ 33,955,669
============== =============
Inventories, net:
Raw materials $ 16,569,851 $ 17,487,552
Work in process 1,092,654 2,162,626
Finished goods 6,111,130 7,335,755
-------------- -------------
23,773,635 26,985,933
Less reserve for obsolescence 4,073,625 4,539,266
-------------- -------------
$ 19,700,010 $ 22,446,667
============== =============
Property, equipment and improvements, net:
Land $ 2,202,241 $ 2,533,666
Buildings 17,641,451 19,338,618
Improvements 1,254,023 580,286
Equipment 22,218,933 22,991,088
Purchased software 9,504,099 8,872,121
Furniture and fixtures 1,505,238 1,462,338
------------- -------------
54,325,985 55,778,117
Less accumulated depreciation 29,917,601 25,535,240
------------- -------------
$ 24,408,384 $ 30,242,877
============= =============
Intangible assets, net:
Purchased technology $ 9,400,000 $ 30,010,858
License agreements 2,915,600 2,559,067
Assembled workforce 400,000 1,800,000
Other 698,369 1,228,225
Goodwill 16,216,257 29,826,194
------------- -------------
29,630,226 65,424,344
Less accumulated amortization 13,232,482 17,619,733
------------- -------------
$ 16,397,744 $ 47,804,611
============= =============
</TABLE>
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BORROWINGS UNDER LINE OF CREDIT AGREEMENTS
The Company maintains lines of credit with various financial institutions which
provide for borrowings of up to $14,497,000, depending upon levels of eligible
accounts receivable and inventories. As of September 30, 2000 and 1999,
$3,147,900 and $4,759,095 was borrowed under these line of credit agreements.
These lines of credit agreements provide for interest rates ranging from 5.75%
to 15.75% as of September 30, 2000 and 1999. In addition, the Company maintains
$5,000,000 deposited in a financial institution as a collateral pledge related
to certain short-term debt balances outstanding at September 30, 2000. This
collateral is included in marketable securities at September 30, 2000. The
collateral pledge is for a period of six months ending March 31, 2001.
9. LONG-TERM DEBT
Long-term debt consists of the following at September 30,
<TABLE>
<CAPTION>
2000 1999
------------- -----------
<S> <C> <C>
5.5% fixed rate long-term collateralized note $ 1,353,068 $ 1,688,260
5.2% fixed rate long-term collateralized note 944,370 1,143,660
6.3% fixed rate long-term collateralized note 3,194,044 4,356,800
6.0% fixed rate long-term uncollateralized notes 1,618,920 1,960,560
5.0% to 10.6% subsidized long-term notes 301,299 386,666
------------- ------------
7,411,701 9,535,946
Less current portion 330,305 330,028
------------- ------------
$ 7,081,396 $9,205,918
============= ==========
</TABLE>
Debt Maturity Schedule
Maturities as of September 30,
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
------ -----------
<C> <C>
2001 $ 330,305
2002 1,518,187
2003 827,448
2004 348,967
2005 410,126
Thereafter 3,976,668
-----------
Total $7,411,701
==========
</TABLE>
The 5.5% fixed rate long-term note is due on September 30, 2017, and is payable
in semi-annual installments beginning September 2000. The 5.2% fixed rate
long-term note is due on December 30, 2017, and is payable in semi-annual
installments beginning June 2001. The 6.3% fixed rate long-term note is due on
September 30, 2016, and is payable in semi-annual installments beginning March
2000. Interest on the notes is payable on a quarterly basis. These notes are
collateralized by land, buildings and equipment with a carrying value of
$5,074,872 of September 30, 2000. The 6.0% fixed rate long-term uncollateralized
notes are due on November 5, 2001 ($1,169,220) and on September 15, 2003
($449,700). Interest is payable annually on the 2001 note, and payable on a
quarterly basis for the 2003 notes.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
The subsidized long-term notes bear interest rates ranging from 5% to 10.6% and
are due at various dates through 2006. All borrowings under these notes are
uncollateralized.
The Company expects to pay all long-term debt associated with the facility in
Dortmund, Germany upon the sale of the facility (see Note 3), which is expected
to take place by the end of the second quarter of fiscal 2001. Total long-term
debt related to the facility in Dortmund, Germany is $7,411,701 at September 30,
2000.
10. INCOME TAXES
The components of the (benefit) provision for income taxes for the years ended
September 30, 2000, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Currently payable:
Federal $ 667,992 $ 6,201,277 $9,768,927
State 228,288 705,378 766,704
Deferred (5,234,720) (2,119,056) (1,251,611)
----------- ----------- ----------
$(4,338,440) $ 4,787,599 $9,284,020
=========== =========== ==========
</TABLE>
The net deferred tax asset at September 30, 2000 and 1999 consists of the
following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Valuation reserves $ 2,016,254 $ 3,059,266
Inventories 168,128 228,442
Compensation costs 589,685 600,991
Net operating loss carryforwards 2,582,194 5,772,000
Intangible assets (2,113,800) (9,203,133)
----------- -----------
Net deferred tax asset $ 3,242,461 $ 457,566
=========== ===========
</TABLE>
The net deferred tax asset consists of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current deferred tax asset $ 2,774,067 $ 3,888,699
Net non-current deferred tax asset 468,394
Net non-current deferred tax liability (3,431,133)
----------- -----------
$ 3,242,461 $ 457,566
=========== ===========
</TABLE>
As of September 30, 2000 and 1999, the Company's consolidated financial
statements include $2,113,801 and $9,203,133, respectively, of deferred tax
liabilities related to the identifiable intangible assets that were acquired as
part of the ITK and CDC acquisitions.
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred tax liabilities of $5,327,981 were eliminated as a result of the
write-off of the identifiable intangible assets of ITK during fiscal year 2000.
(See Note 3.)
As of September 30, 2000 and 1999, the Company had federal net operating loss
carryforwards of approximately $7.6 million and $14.8 million, respectively,
which expire at various dates through 2011.
The reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the years ended September 30, 2000, 1999, and 1998
is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate (34.0)% 35.0 % 35.0 %
Increase (reduction) resulting from:
State taxes, net of federal benefits (0.7) 5.7 5.4
Utilization of low income housing credits (1.9) (5.0) (3.9)
AetherWorks Corporation recovery (12.9)
Acquired in-process research and development 61.0
Impairment loss, net of deferred taxes 13.1
Non-deductible intangible amortization 3.8 15.3 2.7
Foreign operations 6.8 2.9 5.4
Other 5.3 6.1 (4.8)
---- ---- -----
(20.5)% 60.0 % 100.8 %
====== ==== =====
</TABLE>
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
The Company's stock option plan (the Stock Option Plan) provides for the
issuance of nonstatutory stock options and incentive stock options (ISOs) to key
employees and nonemployee board members holding less than 5% of the outstanding
shares of the Company's common stock. The Company's Non-Officer Stock Option
Plan (the Non-Officer Plan and, together with the Stock Option Plan, the Plans),
provides for the issuance of nonstatutory stock options to key employees who are
not officers or directors of the Company. Options granted under the plans will
expire if unexercised after ten years from the date of grant.
The option price for ISOs and non-employee directors options granted under the
Stock Option Plan is set at the fair market value of the Company's common stock
on the date of grant. The option price for nonstatutory options granted under
the Plans is set by the Compensation Committee of the Board of Directors. The
authority to grant options under the Plans and set other terms and conditions
rests with the Compensation Committee. The Stock Option Plan terminates in 2006.
The Non-Officer Plan does not have a designated termination date.
During the years ended September 30, 2000, 1999, and 1998, 129,952, 402,022, and
287,882 shares of the Company's common stock, respectively, were issued upon the
exercise of options for 129,952, 402,022, and 289,353 shares, respectively. The
difference between shares issued and options exercised results from the
provision in the Plans allowing employees to elect to pay their withholding
obligation
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
through share reduction. No employees elected to pay tax withholding obligations
through share reduction during fiscal 2000 or 1999. Withholding taxes paid by
the Company as a result of the share withholding provision amounted to $28,871
during the year ended September 30, 1998.
During the year ended September 30, 1998 the Board of Directors authorized the
issuance of incentive stock options for the purchase of 486,631 shares. In
addition, during the year ended September 30, 1998 the Board of Directors
authorized the issuance of nonstatutory stock options for the purchase of
543,461 shares, at prices below the market value of the stock on the grant
dates.
The difference between the option price and market value at the date of grant
for the above option arrangements has been recorded as additional paid-in
capital with an offsetting debit within stockholders' equity to unearned stock
compensation. The compensation expense related to these option grants is
amortized to operations over the contractual vesting period in which employees
perform services and amounted to $164,909 in 2000, $582,981 in 1999, and
$895,401 in 1998.
Stock options and common shares reserved for grant under the Plans are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Available For Options Price Per
Grant Outstanding Share
------------- ----------- ---------
<S> <C> <C> <C>
Balances, September 30, 1997 1,224,449 1,916,108 $ 10.01
Additional shares approved for grant 750,000
Granted (1,254,525) 1,254,525 15.96
Exercised (289,353) 8.56
Cancelled 150,013 (150,013) 12.79
---------- ----------
Balances, September 30, 1998 869,937 2,731,267 $ 12.75
Granted (1,019,100) 1,019,100 9.32
Exercised (402,022) 5.95
Cancelled 1,244,635 (1,244,635) 14.26
---------- ----------
Balances, September 30, 1999 1,095,472 2,103,710 $ 11.50
Additional shares approved for grant 500,000
Granted (1,158,450) 1,158,450 9.42
Exercised (129,952) 7.44
Cancelled 525,995 (529,498) 10.16
---------- ----------
Balances, September 30, 2000 963,017 2,602,710 $ 11.05
========== ==========
</TABLE>
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
Commencing April 1996, the Company has sponsored an Employee Stock Purchase Plan
(the Purchase Plan) which covers all domestic employees with at least 90 days of
service. The Purchase Plan allows eligible participants the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at the
beginning or end of each three-month offering period. Employee contributions to
the plan were $580,855 in 2000, $586,324 in 1999, and $658,118 in 1998. Pursuant
to the Purchase Plan, 75,149, 80,482, and 37,398 shares were issued to employees
during the fiscal years ended 2000, 1999 and 1998, respectively. As of September
30, 2000, 228,734 shares are available for future issuances under the Purchase
Plan.
12. STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation costs for stock options granted to employees are measured as the
excess, if any, of the fair value of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. Such
compensation costs, if any, are amortized on a straight-line basis over the
option vesting schedule.
Had the Company used the fair-value-based method of accounting for its stock
options granted in 2000, 1999 and 1998, and charged operations over the option
vesting periods based on the fair value of options at the date of grant, net
(loss) income and net (loss) income per common share would have been changed to
the following pro forma amounts:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net (loss) income:
As reported $(16,824,680) $ 3,191,733 $ (71,094)
Pro forma $(20,981,166) $ 281,852 $(3,244,655)
Net (loss) income per share - basic:
As reported $ (1.12) $ 0.22 $ (0.01)
Pro forma $ (1.39) $ 0.02 $ (0.24)
Net (loss) income per share - assuming dilution:
As reported $ (1.12) $ 0.22 $ (0.01)
Pro forma $ (1.39) $ 0.02 $ (0.24)
</TABLE>
The weighted average fair value of options granted in fiscal years 2000, 1999
and 1998 was $11.05 $11.50, and $12.29, respectively. The weighted average fair
value was determined based upon the fair
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION (CONTINUED)
value of each option on the grant date, utilizing the Black-Scholes
option-pricing model and the following assumptions:
<TABLE>
<CAPTION>
Assumptions: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 5.88% 5.75% 5.49%
Expected option holding period 4 years 4 years 4 years
Expected volatility 50% 50% 60%
Expected dividend yield 0 0 0
</TABLE>
At September 30, 2000, the weighted average exercise price and remaining life of
the stock options are as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES $2.36 $5.75-8.00 $8.875-13.125 $13.625-20.3438 $20.50-29.25 Total
------ ---------- ------------- --------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Total options outstanding 13,135 1,322,351 707,050 263,445 296,729 2,602,710
Weighted average remaining contractual life
(years) 7.09 8.25 8.32 6.18 5.83 7.78
Weighted average exercise price $ 2.36 $ 7.31 $ 11.61 $ 14.77 $ 23.48 $ 11.05
Options exercisable 8,722 463,755 195,122 166,096 232,884 1,066,579
Weighted average price of
exercisable options $ 2.36 $ 7.77 $ 10.65 $ 15.10 $ 23.46 $ 12.82
</TABLE>
13. SHARE RIGHTS PLAN
The Company has adopted a share rights plan. Under the plan, the Company
distributed as a dividend one right for each share of the Company's common stock
outstanding on June 30, 1998. Each right entitles its holder to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $115, subject to adjustment. The rights are exercisable
only if certain ownership considerations are met. The Company will be entitled
to redeem the rights prior to the rights becoming exercisable.
14. COMMITMENTS
The Company has entered into various operating lease agreements, the last of
which expires in fiscal 2013. Below is a schedule of future minimum commitments
under noncancellable operating leases:
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
------- ------
<S> <C>
2001 $1,072,294
2002 620,713
2003 156,834
2004 70,433
2005 59,760
Thereafter 488,038
----------
Total $2,468,072
==========
</TABLE>
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS (CONTINUED)
Total rental expense for all operating leases for the years ended September 30,
2000, 1999 and 1998 was $1,966,579, $1,838,242, and $1,786,715, respectively.
15. EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section 401(k) of
the Internal Revenue Code ("the Code"), whereby eligible employees may
contribute up to 15% of their pre-tax earnings, not to exceed amounts allowed
under the Code. In addition, the Company may make contributions to the plan at
the discretion of the Board of Directors.
The Company provided matching contributions of $508,000, $325,000, and $240,000
for the fiscal years ending September 30, 2000, 1999, and 1998, respectively.
16. CONTINGENCIES
During fiscal 1997, the Company and certain of its previous officers were named
as defendants in a series of putative securities class action lawsuits in the
United States District Court for the District of Minnesota on behalf of an
alleged class of purchasers of its common stock during the period January 25,
1996 through December 23, 1996, inclusive, which were consolidated, through a
Consolidated Amended Complaint filed in May 1997. Also in 1997, a similar but
separate action was filed by the Louisiana State Employees Retirement System.
The Consolidated Amended Complaint and the Louisiana Amended Complaint allege
the Company and certain of its previous officers violated federal securities
laws by, among other things, misrepresenting and/or omitting material
information concerning the Company's operations and financial results. The
Louisiana Amended Complaint also alleges misrepresentations in violation of
state common law.
In a decision issued on May 22, 1998, the District Court granted in part and
denied in part the motions of the Company and its three former officers 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.
On August 17, 2000, the Court granted defendants' motions for summary judgement
and dismissed with prejudice the Consolidated Amended Complaint and the
Louisiana Amended Complaint. Although the 21 lead plaintiffs in the consolidated
putative class actions had previously moved for class certification, the Court
dismissed the actions before ruling on that motion.
On September 1, 2000, the Louisiana State Employees Retirement System filed an
appeal from the Court's August 17, 2000 decision. On September 14, 2000, the 21
lead plaintiffs in the consolidated putative class actions filed an appeal from
both the Court's May 22, 1998 and August 17, 2000 decisions. The two appeals
have been consolidated for briefing and argument, with briefing scheduled to be
completed in January 2001, and oral argument to be held thereafter.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES (CONTINUED)
The ultimate outcomes of these actions cannot be determined at this time, and no
potential assessment of the probable or possible effects of such litigation if
any, on the Company's financial position, liquidity or future operations can be
made.
In the normal course of business, the Company is subject to various claims and
litigation. Management of the Company expects that these various litigation
items will not have a material adverse effect on the results of operations or
financial condition of the Company.
17. SUBSEQUENT EVENT
On October 2, 2000, the Company acquired Inside Out Networks (ION), a leading
developer of data connections products based in Austin, Texas. The transaction
is being accounted for using the purchase method of accounting. Accordingly, the
purchase price will be allocated to the estimated fair value of assets acquired
and liabilities assumed.
Components of the purchase consideration consist of $6,410,000 in cash, a
purchase price adjustment based on the values of liabilities and net worth
contained on the closing balance sheet of ION as of September 30, 2000, and
contingent consideration of up to $8,500,000 over the subsequent three year
period, subject to ION achieving specific revenue and operating income targets
during this period. in exchange for all of the outstanding common and preferred
stock of ION, including all shares underlying outstanding options and warrants.
18. FOURTH QUARTER FISCAL 1998 INFORMATION (UNAUDITED)
During the third quarter of fiscal year 1998, management of the Company
established $3,000,000 of inventory valuation reserves including $1,000,000
which related to an estimated overstatement of inventories resulting from
certain system difficulties encountered in connection with the implementation of
a new enterprise-wide computer system during the third quarter, and $2,000,000
which related to estimated adjustments to the value of certain remote access
server products which the Company believed were approaching technological
obsolescence, primarily due to the expected introduction of the Company's new
remote access server products in the fourth quarter of fiscal year 1998.
During the fourth quarter of 1998 the Company was advised by a third-party
vendor that it would delay delivery of a new modem which was integral to the
Company's planned introduction of its new remote access server products. When
the Company became aware of this delay, management reassessed the estimated
timing and effect of technological obsolescence on the value of its old remote
access product inventories, which resulted in a $900,000 reduction in
management's estimate of the required obsolescence provision in the fourth
quarter.
In addition, in connection with its normal year-end closing procedures, the
Company conducted a physical inventory count of its inventories as of September
30, 1998. This physical inventory count indicated that any previous inventory
record discrepancies that had resulted from the system implementation were no
longer impacting the Company's reported inventory balances as of September 30,
1998. Accordingly, the Company determined, during the fourth quarter of 1998,
that the
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FOURTH QUARTER FISCAL 1998 INFORMATION (UNAUDITED) (CONTINUED)
system difficulties encountered in the third quarter had been corrected and,
therefore eliminated the related $1,000,000 provision during the fourth quarter.
49
<PAGE> 50
REPORT OF MANAGEMENT
TO THE STOCKHOLDERS OF DIGI INTERNATIONAL INC.
The Company's management is responsible for the integrity, objectivity and
consistency of the financial information presented in this Annual Report on Form
10-K and the Company's 2000 Annual Report to Shareholders. The consolidated
financial statements contained herein were prepared in accordance with generally
accepted accounting principles and were based on informed judgments and
management's best estimates as required. Financial information elsewhere in this
annual report is consistent with that contained in the consolidated financial
statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are properly
executed in accordance with management's authorization, and accounting records
may be relied upon for the preparation of financial statements and other
financial information. The system is monitored by direct management review.
Limitations exist in any system of internal control, based upon the recognition
that the cost of the system should not exceed the benefits derived.
The Company's consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. Their
audit was conducted in accordance with auditing standards generally accepted in
the United States of America. As part of their audits of the Company's
consolidated financial statements, these independent accountants considered the
Company's internal controls to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests.
The Audit Committee of the Board of Directors is composed entirely of
non-employee directors and is responsible for monitoring and overseeing the
quality of the Company's accounting and reporting policies, internal controls
and other matters deemed appropriate. The independent certified public
accountants have free access to the Audit Committee without management present.
/s/ Joseph T. Dunsmore
Joseph T. Dunsmore
Chairman, President and
Chief Executive Officer
/s/ Subramanian Krishnan
Subramanian Krishnan
Senior Vice President, Chief Financial Officer and Treasurer
December 21, 2000
50
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF DIGI INTERNATIONAL INC.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 55 present fairly, in all material
respects, the financial position of Digi International Inc. and its subsidiaries
(the Company) at September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 55
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 8, 2000
51
<PAGE> 52
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
In thousands except per share amounts Quarter ended
-----------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
2000
Net sales $ 40,140 $ 25,800 $ 32,354 $ 34,231
Gross margin 22,175 12,273 17,175 18,030
Impairment loss 18,068 8,078
Restructuring (138) (12) 1,532
Net income (loss) 1,018 (13,282) 2,513 (7,074)
Net income (loss) per share - basic 0.07 (0.88) 0.17 (0.47)
Net income (loss) per share - assuming dilution 0.07 (0.88) 0.17 (0.47)
1999
Net sales $ 51,395 $ 42,631 $ 51,145 $ 48,335
Gross margin 26,491 18,478 27,147 26,076
Restructuring 1,453 (685) (161)
Net income (loss) 475 (2,251) 2,253 2,715
Net income (loss) per share - basic 0.03 (0.15) 0.15 0.18
Net income (loss) per share - assuming dilution 0.03 (0.15) 0.15 0.18
1998
Net sales $ 42,590 $ 45,059 $ 46,449 $ 48,833
Gross margin 21,369 23,066 24,559 (a) 25,399 (a)
Acquired in-process research and development 16,065
Restructuring 1,020
AetherWorks Corporation gain 1,350
Net income (loss) 3,842 4,665 6,411 (14,989)
Net income (loss) per share - basic 0.28 0.35 0.47 (1.05)
Net income (loss) per share - assuming dilution 0.27 0.33 0.45 (1.05)
</TABLE>
The summation of quarterly net income per share may not equate to the year-end
calculation as quarterly calculations are performed on a discrete basis.
(a) see Note 18 to the Company's consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
52
<PAGE> 53
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of filing this Form 10-K, the following individuals were
executive officers of the Registrant:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph T. Dunsmore 42 Chairman, President and
Chief Executive Officer
Douglas J. Glader 57 Executive Vice President and
General Manager of MiLAN Technology
Subramanian Krishnan 46 Senior Vice President, Chief Financial Officer
and Treasurer
Bruce Berger 40 Vice President and
Managing Director of European Operations
</TABLE>
Mr. Dunsmore joined the Company on October 24, 1999, as President and Chief
Executive Officer and as a member of the Board of Directors. Prior to joining
Digi, Mr. Dunsmore had been Vice President of Access for Lucent
Microelectronics, a telecommunications company, since July 1999. From October
1998 to June 1999, he acted as an independent consultant to various high
technology companies. From February 1998 to October 1998, Mr. Dunsmore was Chief
Executive Officer of NetFax, Inc., a telecommunications company. From October
1995 to February 1998, he held executive management positions at US Robotics and
then at 3COM after 3COM acquired US Robotics in June 1997. Prior to that, Mr.
Dunsmore held various marketing management positions at AT&T Paradyne
Corporation since May 1983.
Mr. Glader was named Executive Vice President and General Manager of MiLAN
Technology on May 8, 2000, Executive Vice President and Chief Operating Officer
on April 19, 1999, Senior Vice President, Manufacturing Operations on April 23,
1997 and Vice President of Operations in February 1995. Before that, he was
Director of Manufacturing and Operations for MiLAN Technology Corporation, which
the Company acquired in November 1993. He began his career with Memorex
Corporation and also worked for Measurex Corporation, Altus Corporation and
Direct Incorporated. He founded and was Vice President of Operations for
Greyhawk Systems, Inc., a manufacturer of electronic imaging hardware and
software.
Mr. Krishnan was named Senior Vice President, Chief Financial Officer and
Treasurer on February 1, 1999, prior to which he served as the Company's
Controller since January 11, 1999. Prior to joining the Company, he served as a
principal with LAWCO Financial, an investment banking firm in Minneapolis, MN
from January 1997 to January 1999. Prior to LAWCO, he served for 13 years with
the Valspar Corporation as the Director of Corporate Financial Planning and
Reporting and Taxes and was primarily responsible for mergers, acquisitions and
joint ventures.
Mr. Berger was named Vice President and Managing Director of European Operations
in May 2000. Prior to joining the Company he served as Vice President and
General Manager, Business Development at TeCom Incorporated where he was
responsible for development of TeCom's original business plan,
53
<PAGE> 54
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
development and implementation of the strategic plan and management of aspects
of the business. Prior to TeCom his tenure included 11 years with AT&T Paradyne
Corporation in a variety of product management positions, international sales
and marketing and business development experience. At AT&T Paradyne, Mr. Berger
was responsible for international sales channel development in Europe, Canada,
Latin America, the Far East and Australia.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Consolidated Financial Statements and Schedules of the Company
1. Consolidated Statements of Operations for the fiscal years
ended September 30, 2000, 1999 and 1998
Consolidated Balance Sheets as of September 30, 2000 and
1999
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
fiscal years ended September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Schedule of Valuation and Qualifying Accounts.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended
September 30, 2000.
55
<PAGE> 56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ------------
<S> <C>
3(a) Restated Certificate of Incorporation of the Company (1)
3(b) Amended and Restated By-Laws of the Company (2)
4(a) Form of Rights Agreement, dated as of June 10, 1998 between Digi International Inc.
and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest Bank
Minnesota, National Association), as Rights Agent(3)
4(b) Amendment dated January 26, 1999, to Share Rights Agreement, dated as of June 10, 1998
between Digi International Inc. and Wells Fargo Bank Minnesota, National Association
(formerly known as Norwest Bank Minnesota, National Association), as Rights Agent (4)
10(a) Stock Option Plan of the Company (5)
10(b) Form of indemnification agreement with directors and
officers of the Company (6)
10(c) Amended and Restated Employment Agreement between the Company and John P. Schinas (7)
10(d) Employment Arrangement between the Company and Douglas Glader *(8)
10(d)(i) Amendment to Employment Agreement between the Company and Douglas Glader, dated as of
December 13, 2000*
10(e) Agreement between the Company and Subramanian Krishnan dated March 26, 1999*(9)
10(e)(i) Amendment to Agreement between the Company and Subramanian Krishnan dated November 20,
2000*
10(f) Employment Agreement between the Company and Joseph T. Dunsmore dated October 24,
1999*(10)
10(g) Agreement between the Company and Bruce Berger dated March 29, 2000*
10(h) Employee Stock Purchase Plan of the Company (11)
</TABLE>
[FN]
-----------------
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K.
</FN>
56
<PAGE> 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(c) Exhibits (continued)
Exhibit
Number Description
------- -----------
13 2000 Annual Report to Stockholders (only those portions
specifically incorporated by reference herein shall be
deemed filed with the Securities and Exchange Commission)
21 Subsidiaries of the Company
22 Valuation and Qualifying Accounts Schedule
23 Consent of Independent Accountants
24 Powers of Attorney
27 Financial Data Schedule
57
<PAGE> 58
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(1) Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for
the year ended September 30, 1993 (File no. 0-17972).
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form S-1 (File no. 33-42384).
(3) Incorporated by reference of 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).
(5) Incorporated by reference to the corresponding exhibit number to the
Company's Form 10-K for the year ended September 30, 1998 (File no.
0-17972).
(6) Incorporated by reference to Exhibit 10(b) to the Company's Registration
Statement on Form S-1 (File no. 33-30725).
(7) Incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for
the year ended September 30, 1994 (File no. 0-17972).
(8) Incorporated by reference to Exhibit 10(q) to the Company's Form 10-K for
the year ended September 30, 1995 (File no. 0-17972).
(9) Incorporated by reference to Exhibit 10(k) to the Company's Form 10-Q for
the quarter ended March 31, 1999 (File no. 0-17972).
(10) Incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for
the year ended September 30, 1999 (File no. 0-17972).
(11) Incorporated by reference to Exhibit B to the Company's Proxy Statement for
its Annual Meeting of Stockholders held on January 31, 1996.
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 21, 2000 By: /s/ Joseph T. Dunsmore
-----------------------
Joseph T. Dunsmore
President, Chief Executive Officer, and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
December 21, 2000 /s/ Joseph T. Dunsmore
-----------------------
Joseph T. Dunsmore
President, Chief Executive Officer, and Chairman
(Principal Executive Officer)
December 21, 2000 /s/ Subramanian Krishnan
-----------------------
Subramanian Krishnan
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
JOSEPH T. DUNSMORE
RICHARD E. EICHHORN
KENNETH E. MILLARD
ROBERT S. MOE
MYKOLA MOROZ A majority of the Board of Directors*
MICHAEL SEEDMAN
DAVID STANLEY
JAMES TUCKER
*Subramanian Krishnan, by signing his name hereto, does hereby sign this
document on behalf of each of the above named directors of the Registrant
pursuant to Powers of Attorney duly executed by such persons.
December 21, 2000 /s/ Subramanian Krishnan
-----------------------
Subramanian Krishnan
Attorney-in-fact
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
3(a) Restated Certificate of Incorporation of the Incorporated by
Registrant, as amended Reference
3(b) Amended and Restated By-Laws of the Registrant Incorporated by
Reference
4(a) Form of Rights Agreement, dated as of June 10, 1998 Incorporated by
between Digi International Inc. and Wells Fargo Bank Reference
Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as
Rights Agent
4(b) Amendment dated January 26, 1999, to Shares Rights Incorporated by
agreement, dated as of June 10, 1998 between Digi Reference
International Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent
10(a) Stock Option Plan of the Registrant Incorporated by
Reference
10(b) Form of indemnification agreement with directors Incorporated by
and officers of the Registrant Reference
10(c) Amended and Restated Employment Agreement between Incorporated by
the Registrant and John P. Schinas Reference
10(d) Employment Arrangement between the Registrant and Incorporated by
Douglas Glader Reference
10(d)(i) Amendment to Employment Agreement between the Filed
Registrant and Douglas Glader, dated as of December 13, 2000 Electronically
10(e) Agreement between the Registrant and Subramanian Incorporated by
Krishnan dated March 26, 1999 Reference
10(e)(i) Amendment to the Agreement between the Registrant and Filed
Subramanian Krishnan dated November 20, 2000 Electronically
10(f) Employment Agreement between the Registrant and Incorporated by
Joseph T. Dunsmore, dated October 24, 1999 Reference
10(g) Agreement between the Registrant and Bruce Filed
Berger dated March 29, 2000 Electronically
10(h) Employee Stock Purchase Plan of the Registrant Incorporated by
Reference
13 2000 Annual Report to Stockholders Filed
Electronically
21 Subsidiaries of the Registrant Filed
Electronically
22 Valuation and Qualifying Accounts Schedule Filed
Electronically
23 Consent of Independent Accountants Filed
Electronically
24 Powers of Attorney Filed
Electronically
27 Financial Data Schedule Filed
Electronically
</TABLE>
60
