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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996.
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)
(612) 912-3444
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(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 April 30, 1996, there were 13,274,862 shares of the registrant's $.01 par
value Common Stock outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements PAGE
----
Consolidated Condensed Statements of Operations
for the three months and six months ended March 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheets as of
March 31, 1996 and September 30, 1995 . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash
Flows for the six months ended March 31, 1996 and 1995. . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 12
ITEM 4. Submission of Matters to a Vote of
Securities Holders . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 12
2
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
--------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $48,498,275 $40,075,983 $92,364,538 $77,954,911
Cost of sales 22,582,177 18,906,695 42,569,379 37,040,992
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Gross margin 25,916,098 21,169,288 49,795,159 40,913,919
Operating expenses:
Sales & marketing 9,350,532 7,888,237 18,170,634 14,897,568
Research & development 4,428,193 3,398,490 8,573,029 6,450,956
General & administrative 4,206,294 3,220,926 8,104,650 6,288,597
----------- ----------- ----------- -----------
Total operating expenses 17,985,019 14,507,653 34,848,313 27,637,121
----------- ----------- ----------- -----------
Operating income 7,931,079 6,661,635 14,946,846 13,276,798
Other income, principally
interest 151,275 461,897 544,635 826,574
AetherWorks Corporation
net loss (655,990) (935,297)
----------- ----------- ----------- -----------
Income before income
taxes 7,426,364 7,123,532 14,556,184 14,103,372
Provision for income
taxes 2,806,750 2,526,941 5,414,649 5,015,456
----------- ----------- ----------- -----------
Net income $4,619,614 $4,596,591 $9,141,535 $9,087,916
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common and
common equivalent share $.34 $.33 $.66 $.65
---- ---- ---- ----
---- ---- ---- ----
Weighted average common
and common equivalent
shares outstanding 13,693,597 14,117,274 13,787,075 14,036,061
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated condensed
financial statements.
3
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31 September 30
1996 1995
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,670,992 $ 5,103,731
Marketable securities 235,994 27,968,775
Accounts receivable, net 46,237,820 31,960,936
Inventories, net 32,805,710 27,019,085
Other 5,713,511 2,225,058
----------- -----------
Total current assets 86,664,027 94,277,585
Property, equipment and
improvements, net 24,498,811 17,716,819
Intangible assets, net 11,411,468 11,633,305
Investment in AetherWorks
Corporation 2,427,938
Other 2,391,183 2,415,755
----------- -----------
Total assets $127,393,427 $126,043,464
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $13,009,270 $ 12,106,515
Income taxes payable 823,997
Accrued expenses 4,787,008 8,110,402
----------- -----------
Total current liabilities 18,620,275 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; 14,618,800
and 14,562,958 shares
outstanding 146,188 145,630
Additional paid-in capital 42,240,857 41,306,320
Retained earnings 90,746,061 81,604,526
----------- -----------
133,133,106 123,056,476
Unearned stock compensation (479,073) (598,387)
Treasury stock, at cost,
1,347,729 and 1,032,729
shares (23,880,881) (16,631,542)
----------- -----------
Total stockholders' equity 108,773,152 $105,826,547
----------- -----------
Total liabilities and
stockholders' equity $127,393,427 $126,043,464
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated condensed
financial statements.
4
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
SIX MONTHS ENDED
----------------
1996 1995
------ ------
Operating activities:
Net Income $ 9,141,535 $ 9,087,916
------------ ------------
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation and amortization 2,830,774 1,751,958
AetherWorks Corporation net loss 935,297
Provision for losses on accounts receivable 124,709 108,321
Stock compensation 104,967 73,664
Changes in operating assets and liabilities (25,248,741) (1,352,783)
------------ ------------
Total adjustments (21,252,994) 581,160
------------ ------------
Net cash (used in) provided by
operating activities (12,111,459) 9,669,076
------------ ------------
Investing activities:
Purchase of property, equipment and improvements (9,390,929) (2,089,444)
Sale (purchase) of marketable securities, net 27,732,781 (11,069,155)
Investment in AetherWorks Corporation (3,363,235)
Net cash provided by (used in)
investing activities 14,978,617 (13,158,599)
------------ ------------
Financing activities:
Purchase of treasury stock (7,249,339)
Stock option transactions, net 949,442 384,172
------------ ------------
Net cash (used in) provided by (6,299,897) 384,172
financing activities ------------ ------------
Net decrease in cash and cash equivalents (3,432,739) (3,105,351)
Cash and cash equivalents, beginning of period 5,103,731 13,849,017
------------ ------------
Cash and cash equivalents, end of period $ 1,670,992 $ 10,743,666
------------ ------------
------------ ------------
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/A
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 March
31, 1996 and for the three and six 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 and cash flows for the periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. INVESTMENT IN AETHERWORKS CORPORATION
Through March 31, 1996, the Company purchased $3.4 million in secured
convertible notes from AetherWorks Corporation, a development stage company
engaged in the development of wireless and dial-up remote access technology.
The Company is obligated to purchase up to an additional $1.4 million secured
convertible notes from time to time at the request of AetherWorks, based on
certain events. The Company has reported its investments in AetherWorks on the
equity method and has recorded a $655,990 loss for the quarter ended March 31,
1996 and a $935,297 loss for the six months ended March 31, 1996, which
represents 100% of the AetherWorks' net loss for such periods. The percentage
of AetherWorks' net loss included in the Company's financial statements is based
upon the percentage of financial support provided by the Company (versus other
investors) to AetherWorks during such periods.
3. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out method. Inventories at March 31, 1996 and September 30,
1995 consisted of the following:
MARCH 31 SEPTEMBER 30
-------- ------------
Raw materials $17,100,896 $12,476,953
Work in process 9,692,650 7,645,002
Finished goods 6,012,164 6,897,130
----------- -----------
$32,805,710 $27,019,085
----------- -----------
----------- -----------
6
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
4. 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.
5. COMMON STOCK
During the six month period ended March 31, 1996, 58,073 shares of the Company's
common stock were issued upon the exercise of outstanding stock options for
61,825 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
$92,780.
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 six month period ended March 31, 1996,
$7,249,339 were 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.
6. RESTATEMENT
The consolidated condensed financial statements for the three months and six
months ended March 31, 1996 have been restated to reflect the accounting for the
Company's investment in AetherWorks Corporation on the equity method. (See Note
2.)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Sales for the three month and six month period ended March 31, 1996 increased
by $8,422,292 and $14,409,627, or 21.0% and 18.5%, respectively, over the
corresponding periods ended March 31, 1995. Sales in all product markets
increased over prior year periods, as set forth in the following table:
PRODUCT MARKET QUARTERLY SIX MONTH PERIOD PERCENT OF SIX
- -------------- --------- ---------------- --------------
INCREASE INCREASE MONTH REVENUE
-------- -------- -------------
Multiuser 13.5% 14.5% 66.6%
Remote Access 46.0% 40.9% 16.0%
LAN Connect 34.7% 17.0% 17.4%
The Company believes that the revenues from sales of its Remote Access and LAN
Connect products will continue to grow as a result of the Company's efforts to
increase market awareness for products introduced earlier in the fiscal year,
the introduction of new products, and growth in the market for Remote Access and
LAN Connect products generally. The Company believes that sales of its
Multiuser products may grow at a reduced rate or even decline as the market for
such products continues to mature.
For the three month period ended March 31, 1996, sales to original equipment
manufacturer (""OEM'') customers across all product markets increased to
$10,047,500, representing a 11.7% increase over sales for the three month period
ended March 31, 1995, but decreased to 20.7% from 22.4% as a percent of total
sales for the respective quarters, due to increased sales to distributors. For
the six month period ended March 31, 1996, OEM sales decreased by 10.6% from
sales for the corresponding period in 1995, and decreased to 17.6% from 23.3%,
respectively, as a percent to total sales for the period. The decrease in OEM
business for the six month period was due primarily to industry-wide allocation
of components during the Company's first fiscal quarter. The Company expects
the increase in OEM sales experienced in its most recent quarter to continue,
based on firm orders and increased component availability.
International sales of the Company's products for the three month period ended
March 31, 1996 increased by 17.6% over the three month period ended March 31,
1995. International sales for the six month period ended March 31, 1996
increased by 24.2% over the corresponding period in 1995. International sales
for the three month period ended March 31, 1996 accounted for almost 20.7% of
total sales.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
GROSS MARGIN
Gross margin as a percent of net sales increased to 53.4% for the three month
period ended March 31, 1996 from 52.8% for the three month period ended March
31, 1995. For the six month period, gross margins as a percent of net sales
increased to 53.9% for the period ended March 31, 1996 from 52.5% for the period
ended March 31, 1995. The increase in gross margin for the three month period
and six month period was primarily due to reduction in the cost of sales for the
Company's Multi-user products and to a slight decrease, as a percent of total
sales, in sales to OEM customers. Sales to OEM customers have traditionally
resulted in lower gross margins than have non-OEM sales.
OPERATING EXPENSES
Operating expenses for the three month period ended March 31, 1996 increased
24.0% over operating expenses for the corresponding period ended March 31, 1995,
and increased as a percent of sales to 37.1% for the three month period ended
March 31, 1996 from 36.2% for the three month period ended March 31, 1995.
Operating expenses for the six month period ended March 31, 1996, increased by
26.1% over the corresponding period ended March 31, 1995, and increased as a
percent of sales to 37.7% for the six months ended March 31, 1996, from 35.5%
for the corresponding period in 1995. The period increases primarily were due
to increased research and development for new products, to marketing in
connection with new product introductions, the establishment of the Company in
the Remote Access and LAN Connect markets, the consolidation, under the "Digi"
brand, of products formerly sold under the identities of subsidiaries of the
Company, and to the expansion of and upgrades to the Company's infrastructure.
A significant portion of the expenditures in connection with each of the
foregoing was due to increases in personnel required to support such efforts.
The Company expects total operating expenses to continue to increase as these
efforts continue, but to decrease as a percent of revenue as past efforts
continue to generate increased sales.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest for the three month period ended March 31,
1996 decreased to $151,275 from $461,897 for the three month period ended March
31, 1995. For the six month period ended March 31, 1996, interest and other
income decreased to $544,635 from $826,574 for the corresponding period in 1995.
The period decreases are the result of a decrease in funds invested.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
AETHERWORKS CORPORATION NET LOSS
In connection with the purchase of a secured convertible note from AetherWorks
Corporation, a development stage company engaged in the development of wireless
and dial-up remote access technology, the Company has the ability, under certain
conditions, to convert its investment into a majority of AetherWorks' common
stock. The Company has reported its investment in AetherWorks on the equity
method and has recorded a $655,990 loss for the three months ended March 31,
1996 and a $935,297 loss for the six months ended March 31, 1996, which
represents 100% of AetherWorks' net loss for such periods. The percentage of
AetherWorks' net loss included in the Company's financial statements is based
upon the percentage of financial support provided by the Company (versus other
investors) during such periods.
INCOME TAXES
The Company's effective income tax rate for the three month and six month
periods ended March 31, 1996 was 37.8% and 37.2%, respectively, compared to
35.5% and 35.6%, respectively, in the corresponding periods in 1995. The period
increases are due to the non-deductibility of the AetherWorks losses, offset
slightly by an increase in the foreign sales corporation benefit. Excluding the
AetherWorks losses, the Company's effective tax rate would have been 34.7% and
35.0% for the three and six month periods ended March 31, 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company traditionally has financed its operations principally with funds
generated from operations and proceeds from public stock offerings. From the
time of its last public offering in 1991, the Company has financed its
operations almost exclusively through funds generated from operations. The
Company customarily holds excess funds generated from operations in the form of
cash and cash equivalents and marketable securities.
In the six months ended March 31, 1996, the Company sold in excess of $27.7
million in marketable securities to finance growth in the Company's accounts
receivable and inventories, as well as the acquisition of new product
technology. The increase in accounts receivable was due primarily to increased
sales volume, particularly late in the quarter ended March 31, 1996, and to
favorable credit terms extended to distributors to facilitate acceptance of the
Company's new products. The Company increased inventories in anticipation of
additional sales. The Company expects its cash and cash equivalent and
marketable securities balances, as well as its accounts receivable, to return to
historic levels as current promotional credit terms mature. The Company further
expects to manage its current inventory level to return closer to historic
levels.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Investing activities for the six month period ended March 31, 1996, consisted
primarily of redemption of maturing investments offset by purchases of property,
equipment and improvements and an increase in notes receivable. The Company's
investment in AetherWorks Corporation arose from the Company's purchase of a
secured convertible note from AetherWorks Corporation, which is engaged in the
development of remote access technology. If AetherWorks 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 third quarter. Secured convertible notes held
by the Company are presently convertible into 51% of AetherWorks common stock.
The Company has reported its investment in AetherWorks on the equity method and
has recorded a $655,990 loss for the three months ended March 31, 1996 and a
$935,297 loss for the six months ended March 31, 1996, which represents 100% of
AetherWorks' net loss for such periods. The percentage of AetherWorks net loss
included in the Company's financial statements is based upon the percentage of
financial support provided by the Company (versus other investors) to
AetherWorks during such periods. The Company anticipates that the AetherWorks'
losses will continue for the remainder of fiscal 1996 and into fiscal 1997. The
Company is currently negotiating with AetherWorks to provide additional
financing for the development of additional new technologies.
During the six month period ended March 31, 1996, the Company made open market
purchases of the Company's common stock aggregating $7,249,339, pursuant to a
one million share repurchase program authorized by the Company's board of
directors on March 27, 1995. Due to current market conditions and the Company's
current cash position, the Company expects the level of repurchases to decrease
significantly. 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 to be utilized for the Company's Employee Stock Purchase Plan, which
purchase will be funded through employee withholding.
At March 31, 1996, the Company had working capital of $68,043,752 and no debt.
The Company has no established line of credit. The Company is currently
negotiating an unsecured line of credit with its bank, which it expects to have
in place in the third quarter. However, the Company's management does not
anticipate having to draw on the line of credit in the near future. The
Company's management believes that 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 and anticipated business
operations.
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
or results of operations.
11
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**
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).
12
(b) Reports on Form 8-K:
There were no reports filed on form 8-K during the quarter ended
March 31, 1996.
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: December 23, 1996 By: /s/JONATHON E. KILLMER
----------------------
Jonathon E. Killmer
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
13