UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
/X/ EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 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 January 31, 1996, there were 13,228,442 shares of the registrant's $.01 par
value Common Stock outstanding.
-1-
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Condensed Statements of Operations
for the three months ended December 31, 1995
and 1994. 3
Consolidated Condensed Balance Sheets as of
December 31, 1995 and September 30, 1995. 4
Consolidated Condensed Statements of Cash
Flows for the three months ended
December 31, 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 10
Securities Holders
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
-2-
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31
(UNAUDITED)
1995 1994
------------ ------------
Net sales $43,866,263 $37,878,928
Cost of sales 19,987,202 17,898,419
------------ ------------
Gross margin 23,879,061 19,980,509
Operating expenses:
Sales & marketing 8,820,102 6,735,572
Research & development 4,144,836 2,643,255
General & administrative 3,898,356 3,961,352
------------ ------------
Total operating expenses 16,863,294 13,340,179
------------ ------------
Operating income 7,015,767 6,640,330
Other income, principally interest 393,360 339,510
------------ ------------
Income before income taxes 7,409,127 6,979,840
Provision for income taxes 2,607,899 2,488,515
------------ ------------
Net income $4,801,228 $4,491,325
------------ ------------
------------ ------------
Income per common and common
equivalent share: $0.35 $0.32
------------ ------------
------------ ------------
Weighted average common and common
equivalent shares outstanding 13,902,733 13,961,227
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated condensed financial statements
-3-
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31 September 30
1995 1995
(UNAUDITED)
ASSETS -------------- --------------
Current assets:
Cash and cash equivalents $1,049,727 $5,103,731
Marketable securities 14,711,797 27,968,775
Accounts receivable, net 33,499,504 31,960,936
Inventories, net 29,579,975 27,019,085
Other 4,532,589 2,225,058
-------------- --------------
Total current assets 83,373,592 94,277,585
Property, equipment and improvements, net 18,724,922 17,716,819
Intangible assets, net 11,518,420 11,633,305
Note receivable and other 5,641,326 2,415,755
-------------- --------------
Total assets $119,258,260 $126,043,464
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,749,080 $ 12,106,515
Income taxes payable 1,596,895
Accrued expenses:
Advertising 3,353,570 2,235,946
Compensation 1,095,714 4,932,987
Other 789,891 941,469
-------------- --------------
Total current liabilities 15,585,150 20,216,917
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;
14,576,171 and 14,562,958 shares
outstanding 145,762 145,630
Additional paid-in capital 41,522,421 41,306,320
Retained earnings 86,405,754 81,604,526
-------------- --------------
128,073,937 123,056,476
Less unearned stock compensation (519,946) (598,387)
Treasury stock, at cost, 1,347,729 and 1,032,729 shares (23,880,881) (16,631,542)
-------------- --------------
Total stockholders' equity 103,673,110 105,826,547
-------------- --------------
Total liabilities and stockholders' equity $119,258,260 $126,043,464
-------------- --------------
-------------- --------------
See accompanying notes to unaudited consolidated condensed financial statements.
-4-
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31
(UNAUDITED)
1995 1994
--------------- --------------
Operating activities:
Net Income $ 4,801,228 $ 4,491,325
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation and amortization 1,251,733 842,297
Provision for losses on accounts receivable 39,280 68,670
Provision for inventory obsolescence 179,012 45,000
Stock compensation 78,441 37,620
Changes in operating assets and liabilities (11,107,061) (1,008,785)
--------------- --------------
Total adjustments (9,558,595) (15,198)
--------------- --------------
Net cash (used in) provided by operating activities (4,757,367) 4,476,127
--------------- --------------
Investing activities:
Purchase of property, equipment and improvements (2,144,951) (717,559)
Sale/(purchase) of marketable securities, net 13,256,978 (715,835)
Increase in note receivable (3,375,558) --
--------------- --------------
Net cash ( used in) provided by investing activities 7,736,469 (1,433,394)
--------------- --------------
Financing activities:
Purchase of treasury stock (7,249,339)
Stock option transactions, net 216,233 13,433
--------------- --------------
Net cash (used in) provided by financing activities (7,033,106) 13,433
--------------- --------------
Net (decrease) increase in cash and cash equivalents (4,054,004) 3,056,166
Cash and cash equivalents, beginning of period 5,103,731 13,849,017
--------------- --------------
Cash and cash equivalents, end of period $ 1,049,727 $ 16,905,183
--------------- --------------
--------------- --------------
See accompanying notes to unaudited consolidated condensed financial statements.
-5-
DIGI INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated condensed 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 consolidated
condensed financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company's 1995 Annual
Report and Form 10-K.
The consolidated condensed financial statements presented herein, as of December
31, 1995 and for the three months then ended, reflect, in the opinion of
management, all adjustments (which consist only 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 December 31, 1995 and September
30, 1995 consisted of the following:
DECEMBER 31 SEPTEMBER 30
----------- ------------
Raw materials $16,779,571 $12,476,953
Work in process 7,861,301 7,645,002
Finished goods 4,939,103 6,897,130
----------- ------------
$29,579,975 $27,019,085
----------- ------------
----------- ------------
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.
-6-
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONT.)
4. COMMON STOCK
During the three months ended December 31, 1995, 13,213 shares of the Company's
common stock were issued upon the exercise of outstanding stock options for
13,900 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
$19,775.
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. During the quarter ended December 31, 1995,
$7,249,339 was used for treasury stock purchases. On January 31, 1996, the
Company's Board of Directors authorized a separate 500,000 share repurchase
program for the purpose of purchasing Common Stock for the Company's Employee
Stock Purchase Plan.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Sales for the quarter ended December 31, 1995 exceeded sales for the
corresponding quarter ended December 31, 1994 by $5,987,335, which represents a
percentage increase of 15.8%. Sales in all product markets increased over prior
year amounts as follows:
PRODUCT MARKET QUARTERLY INCREASE PERCENT OF REVENUE
- -------------- ------------------ ------------------
Multi-user 15.6% 66.2%
Remote Access 36.0% 16.6%
LAN Connect 1.9% 17.2%
Sales to original equipment manufacturers (OEM's) across product markets
decreased from 24.2% of net sales in the quarter ended December 31, 1994 to
14.1% in 1995. The decrease in OEM business was due primarily to component
allocation issues impacting the Company's OEM customers and the industry as a
whole. The Company's management expects the OEM portion of the
Company's business to increase in the second quarter based on current firm
orders and increased availability of components. Sales of the Company's
products in international markets increased by 31.4% for the quarter ended
December 31, 1995 over the corresponding quarter ended December 31, 1994.
The Company believes that the revenues from its Remote Access and LAN Connect
markets will continue to grow, while the Multiuser market growth may decline.
GROSS MARGINS
Gross margins increased from $19,980,509 or 52.8% of net sales for the
quarter ended December 31, 1994 to $23,879,061 or 54.4% for the quarter ended
December 31, 1995. The increase in gross margin for the quarter is primarily
related to the decreased volume in OEM sales and to the smaller contribution
made by sales of the Company's LAN Connect products to the Company's sales.
Both OEM sales and sales of LAN Connect products have traditionally resulted
in lower margins than have non-OEM sales of the Company's Multiuser and Remote
Access products.
OPERATING EXPENSES
Operating expenses increased from $13,340,179 for the quarter ended December
31, 1994 to $16,863,294 for the quarter ended December 31, 1995, an increase
of 26.4%. As a percentage of sales, expenses were 38.4% for the quarter
ended December 31, 1995 compared to 35.2% for the quarter ended December 31,
1994. The quarterly increase can be attributed primarily to increased
research and development and marketing expenditures for new products and
markets, principally in the Remote Access and LAN Connect markets, plus
increased staffing levels resulting from the Company's increased product
development and marketing efforts.
OTHER INCOME
Interest income increased from $339,510 for the quarter ended December 31, 1994
to $393,360 the quarter ended December 31, 1995.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT.)
This increase resulted from a slight increase in investment yields.
INCOME TAXES
The Company's effective income tax rate was 35.2% in the current quarter
compared to 35.7% in the corresponding quarter of last year. This decrease is
due primarily to an increase in the foreign sales corporation benefit due to
increased foreign sales.
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 three months ended December 31, 1995 was
negatively impacted by changes in operating assets and liabilities, primarily
related to increases in accounts receivable and inventories and to reductions in
accounts payable and accrued expenses.
Investing activities for the period ended December 31, 1995, primarily
include redemption of maturing investments offset by purchases of property,
equipment and improvements and an increase in note receivable. The increase
in note receivable arose from the Company's purchase of a secured convertible
note from a company engaged in the development of remote access technology.
If the company developing such technology attains certain development and
financial performance milestones, the Company will be obligated to purchase
one additional secured convertible note in the principal amount of
approximately $1.4 million in the second quarter.
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. During the quarter ended December 31, 1995,
$7,249,339 was used for treasury stock purchases. On January 31, 1996, the
Company's Board of Directors authorized a separate 500,000 share repurchase
program for the purpose of purchasing Common Stock for the Company's Employee
Stock Purchase Plan.
At December 31, 1995, the Company had working capital of $71.2 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.
The Financial Accounting Standards Board (FASB) has issued Statement No. 123,
"Accounting for Stock-Based Compensation." The Company plans to adopt this
Statement in fiscal year 1997. Although it has not made a definite
determination of its impact, the Company does not expect the adoption of
Statement No. 123 to have a materially adverse effect on its financial position
of results of operations.
-9-
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
At the annual meeting of stockholders held on
January 31, 1996, the stockholders approved the
following:
(a) Proposal to elect three directors, each to a three year term.
Mr. John P. Schinas was elected on a vote of 10,024,028 in favor,
with 74,367 shares withholding authority to vote. Mr. Richard E.
Offerdahl was elected on a vote of 9,960,828 in favor, with
137,967 shares withholding authority to vote. Dr. Jagdish N.
Sheth was elected on a vote of 10,018,455 in favor, with 79,940
shares withholding authority to vote.
(b) Proposal to amend provisions of the Digi International Inc. Stock
Option Plan that provide for the granting of stock options to
non-employee directors. The proposal passed on a vote of
7,511,152 in favor, 2,227,119 against, 113,440 abstentions, and
246,684 broker non-votes.
(c) Proposal to approve the Digi International Inc. Employee Stock
Purchase Plan, which provides eligible employees of the Company
the opportunity to purchase Common Stock. The proposal passed
on a vote of 9,405,966 in favor, 268,046 against, 121,032
abstentions, and 303,351 broker non-votes.
(d) Proposal to ratify the appointment of Coopers & Lybrand L.L.P.
as independent public accountants of the Company for fiscal
year 1996. The proposal passed on a vote of 10,005,952 in
favor, 43,945 against, 48,498 abstentions, and no broker
non-votes.
-10-
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(a) STOCK OPTION PLAN OF THE REGISTRANT****
10(c) AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN THE
COMPANY AND JOHN P. SCHINAS***
10(h) CONSULTING AGREEMENT BETWEEN THE COMPANY AND
MYKOLA MOROZ***
10(r) EMPLOYMENT ARRANGEMENT BETWEEN THE
COMPANY AND JAMES R. BAKER FOR FISCAL 1996
10(s) EMPLOYEE STOCK PURCHASE PLAN OF THE REGISTRANT*****
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).
*** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT NUMBER OF THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1994
(FILE NO.0-17972).
**** INCORPORATED BY REFERENCE TO EXHIBIT A TO THE REGISTRANT'S PROXY STATEMENT
FOR ITS ANNUAL MEETING OF STOCKHOLDERS HELD ON JANUARY 31, 1996
(FILE NO.0-17972).
***** INCORPORATED BY REFERENCE TO EXHIBIT B TO THE REGISTRANT'S PROXY
STATEMENT FOR ITS ANNUAL MEETING OF STOCKHOLDERS HELD ON
JANUARY 31, 1996 (File No. 0-17972).
(b) Reports on Form 8-K:
There were no reports filed on form 8-K during the quarter ended
December 31, 1995.
-11-
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: March 1, 1996 By: /s/Gerald A. Wall
-----------------------
Gerald A. Wall
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
-12-