UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
/ X / EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1995.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
/ / SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6400 Flying Cloud Drive
Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
612) 943-9020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
On July 31, 1995, there were 13,494,461 shares of the registrant's $.01 par
value Common Stock outstanding.
This document contains 12 pages.
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INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Statements of Operations
for the three months and nine months ended
June 30, 1995 and 1994. 3
Consolidated Condensed Balance Sheets as of
June 30, 1995 and September 30, 1994. 4
Consolidated Condensed Statements of Cash
Flows for the nine months ended
June 30, 1995 and 1994. 5
Notes to Consolidated Condensed Financial
Statements. 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Securities Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ------------ -----------
Net sales $41,179,259 $35,185,366 $119,134,170 $92,821,753
Cost of sales 19,048,547 17,489,066 56,089,539 43,717,949
----------- ----------- ------------ -----------
Gross margin 22,130,712 17,696,300 63,044,631 49,103,804
Operating expenses:
Sales & marketing 8,422,648 5,849,545 23,320,218 16,436,600
Research & development 3,838,933 2,688,098 10,289,890 7,007,056
General & administrative 2,983,629 2,922,270 9,266,713 7,722,436
----------- ----------- ------------ -----------
Total operating expenses 15,245,210 11,459,913 42,876,821 31,166,092
----------- ----------- ------------ -----------
Operating income 6,885,502 6,236,387 20,167,810 17,937,712
Other income, principally interest 610,450 235,173 1,428,656 749,766
----------- ----------- ------------ -----------
Income before income taxes 7,495,952 6,471,560 21,596,466 18,687,478
Provision for income taxes 2,648,560 2,255,453 7,664,014 6,312,684
----------- ----------- ------------ -----------
Net income $4,847,392 $4,216,107 $13,932,452 $12,374,794
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Income per common and common
equivalent share $0.35 $0.29 $0.99 $0.85
Weighted average common and common
equivalent shares outstanding 14,035,180 14,607,204 14,035,939 14,644,358
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
See accompanying notes to unaudited consolidated condensed financial statements.
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30 SEPTEMBER 30
1995 1994
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $11,351,672 $13,849,017
Marketable securities 29,905,131 23,412,434
Accounts receivable, net 23,976,182 21,559,115
Inventories, net 25,826,968 23,359,489
Other 2,289,972 2,136,113
------------ ------------
Total current assets 93,349,925 84,316,168
Property, equipment and improvements, net 11,482,808 9,844,801
Intangible assets, net 8,125,876 7,682,910
Other 1,400,362 914,248
------------ ------------
Total assets $114,358,971 $102,758,127
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,558,055 $3,929,146
Income taxes payable 600,336 1,027,658
Accrued expenses 7,380,776 6,688,148
------------ ------------
Total current liabilities 14,539,167 11,644,952
Commitments
Stockholders' equity:
Preferred stock, $.01 par value;
2,000,000 shares authorized;
none outstanding
Common stock, $.01 par value;
60,000,000 shares authorized;
14,527,190 and 14,474,663 shares
outstanding 145,272 144,747
Additional paid-in capital 40,351,141 39,788,556
Retained earnings 76,205,885 62,273,433
------------ ------------
116,702,298 102,206,736
Unearned stock compensation (250,952) (392,332)
Treasury stock, at cost, 1,032,729 and
755,229 shares (16,631,542) (10,701,229)
------------ ------------
Total stockholders' equity 99,819,804 91,113,175
------------ ------------
Total liabilities and stockholders' equity $114,358,971 $102,758,127
------------ ------------
------------ ------------
See accompanying notes to unaudited condensed financial statements.
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DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
for the nine months ended June 30
(UNAUDITED)
1995 1994
----------- -----------
Operating activities:
Net Income $13,932,452 $12,374,794
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 2,617,146 1,823,734
Provision for losses on accounts receivable 113,927 420,845
Provision for inventory obsolescence 192,000 425,217
Stock compensation 106,461 154,373
Changes in operating assets and liabilities (2,936,231) (17,634,878)
----------- -----------
Total adjustments 93,303 (14,810,709)
----------- -----------
Net cash provided by (used in) operating
activities 14,025,755 (2,435,915)
----------- -----------
Investing activities:
Purchase of property, equipment and improvements
and other (4,698,119) (2,984,485)
Net proceeds from maturity (purchases) of
marketable securities (6,492,697) 12,365,031
Business acquisition (2,536,766)
----------- -----------
Net cash (used in) provided by investing
activities (11,190,816) 6,843,780
----------- -----------
Financing activities:
Purchase of treasury stock (5,930,313) (4,387,500)
Stock option transactions 598,029 681,094
----------- -----------
Net cash used in financing activities (5,332,284) (3,706,406)
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,497,345) 701,459
Cash and cash equivalents, beginning of period 13,849,017 17,831,258
----------- -----------
Cash and cash equivalents, end of period $11,351,672 $18,532,717
----------- -----------
----------- -----------
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DIGI INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The financial statements included in this Form 10-Q have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the consolidated financial statements and related
notes thereto included in the Company's 1994 Annual Report and Form 10-K.
The financial statements presented herein as of June 30, 1995 and for the
three months and nine months then ended reflect, in the opinion of
management, all adjustments (which only consist of normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations for the periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at June 30, 1995 and
September 30, 1994 consisted of the following:
JUNE 30 SEPTEMBER 30
----------- ------------
Raw materials $13,635,588 $13,647,651
Work in progress 5,263,174 5,231,662
Finished goods 6,928,206 4,480,176
----------- -----------
$25,826,968 $23,359,489
----------- -----------
----------- -----------
3. INCOME PER SHARE
Income per common share is computed by dividing net income by the weighted
average number of common shares and common equivalent shares outstanding
during the period. Common stock equivalents result from dilutive stock
options.
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NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Cont.)
4. COMMON STOCK
During the nine months ended June 30, 1995, 52,527 shares of the Company's
common stock were issued upon the exercise of outstanding stock options for
58,694 shares. The difference between the shares issued and options
exercised results from the stock option plan's provision allowing the
employees to elect to pay their withholding obligations through share
reduction. Withholding taxes paid by the Company, as a result of the share
reduction option, amounted to $144,071.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES
Sales for the quarter and nine months ended June 30, 1995, exceeded sales for
the corresponding periods of 1994 by $5,993,893 and $26,312,417,
respectively, which represent percentage increases of 17.0% and 28.3%,
respectively. Sales in all product markets increased over prior year figures
as follows:
1995
PRODUCT QUARTERLY NINE MONTH PERCENT OF NINE
MARKET INCREASE INCREASE MONTH REVENUE
------- --------- ---------- ---------------
Multi-user 10.3% 19.3% 65.5%
Remote Access 37.0% 69.6% 13.5%
Lan Connect 29.4% 57.6% 17.9%
Sales to original equipment manufactures (OEMs) increased from 22.8% of net
sales in the quarter ended June 30, 1994 to 23.6% in 1995 and 20.2% for the
nine months ended June 30, 1994 to 23.4% for the corresponding nine month
period of 1995. Sales of the Company's products in international markets
increased by 30.3% on a quarterly basis and 20.3% for the first nine months
of 1995.
The Company believes that the revenue from its Remote Access and Lan Connect
markets will continue to show rapid growth, while the Multi-user market
growth will stabilize or perhaps decline slightly.
GROSS MARGINS
Gross margins increased from $17,696,300 or 50.3% of net sales for the
quarter ended June 30, 1994 to $22,130,712 or 53.7% of net sales for the
quarter ended June 30, 1995. For the nine months ended June 30, 1994 gross
margins of $49,103,804 or 52.9% of net sales, increased to $63,044,631 or
52.9% of net sales for the same period of 1995. The increase in gross margin
for the quarter is primarily related to the increase in higher margin sales
to the distribution market.
OPERATING EXPENSES
Operating expenses increased from $11,459,913 for the quarter ended June 30,
1994 to $15,245,210 for the quarter ended June 30, 1995, an increase of
33.0%. Operating expenses were $31,166,092 for the nine months ended June
30, 1994 and increased to $42,876,821 for the nine months ended June 30,
1995, an increase of 37.6%. The quarterly and year-to-date increases can by
attributed primarily to increased R&D and market development spending for new
products and markets, principally in the Remote Access and Lan Connect
markets, plus increased staffing levels.
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NON OPERATING INCOME
Interest income increased from $235,173 for the quarter ended June 30, 1994
to $610,450 the quarter ended June 30, 1995. For the nine months ended June
30, 1994 interest income was $749,766 compared to $1,428,656 for the same
period of 1995. These increases result from an increase in invested balances
coupled with an increase in investment yield.
INCOME TAXES
The Company's effective income tax rate was 35.3% in the current quarter
compared to 34.9% in the corresponding quarter of last year. The effective
rate for the nine month period ended June 30, 1995 was 35.5% compared to
33.8% for the same period of 1994. These increases result from a decrease in
the federal R&D credit and increased state taxes resulting from the MiLAN
acquisition, which was completed in November 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds from public stock offerings.
Cash flows from operations for the nine months ended June 30, 1994 were
negatively impacted by increased levels of inventories and accounts
receivable primarily from growth in operations including MiLAN. Cash flows
from operations for the nine months ended June 30, 1995 have returned to
historical levels, which the Company expects to continue.
Investing activities for the period ended June 30, 1995, primarily include
new investments of excess cash and reinvestment of maturing investments.
On March 27, 1995, the Company's board of directors authorized a one million
share repurchase program, which will be funded by available cash balances
over an unspecified period of time.
The Company expects to expend, from current funds, up to $5.5 million for
plant acquisition during the next six to nine months. This plant will
consolidate three different Minnesota locations into one facility, providing
for improved operating efficiencies and control. In addition, the Company
recently announced its intention to acquire Lan Access Corporation. The
purchase will be funded from current cash and/or investment balances.
At June 30, 1995, the Company had working capital of $78.8 million, no debt
and no established lines of credit. Management believes current financial
resources, cash generated by operations and the Company's potential capacity
for debt and/or equity financing will be sufficient to fund current business
operations and any anticipated business expansion.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3(a) Restated Certificate of Incorporation of
the Registrant*
3(b) Amended and Restated By-Laws of the
Registrant**
10(l) Employment arrangement between the
Company and Gary L. Deaner for
fiscal 1995.
10(m) Employment arrangement between the
Company and Gerald A. Wall for
fiscal 1995.
10(n)(1) Employment arrangement with Ray D. Wymer.
27 Financial Data Schedule
* Incorporated by reference to the corresponding exhibit
number of the Company's Form 10-K for the year ended
September 30, 1992 (File No. 0-17972).
** Incorporated by reference to the corresponding exhibit
number of the Company's Registration Statement on Form
S-1 (File No. 33-42384).
(b) Reports on Form 8-K:
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: August 14, 1995 By: /s/ Gerald A. Wall
--------------------------------
Gerald A. Wall
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)