Corporate Headquarters
11001 Bren Road East
Minnetonka, MN 55343
(612) 912-3444 Tel
(612) 912-4991 Fax
(800) 344-4273 Sales/Technical Support
Manufacturing Operations
10000 West 76th Street
Eden Prairie, MN 55344
(612) 912-4700 Tel
(612) 912-4905 Fax
Digi International Amsterdam
Keizersgracht 62-64
1015 CS Amsterdam
The Netherlands
+31 20 5207 566 Tel
+31 20 5207 972 Fax
Digi International GmbH
Domkloster 1
50667 Cologne (Kn)
Germany
+49 0 221 920 52-0 Tel
+49 0 221 920 52-10 Fax
Digi International Asia Pte. Ltd.
13-06 Tower A
391A Orchard Road
Ngee Ann City
Singapore, 238837
+65 732 1318 Tel
+65 732 1312 Fax
Digi International GmbH Denmark
Hejreskovvej 18c, 1.9.8
DK-3490 Kvistgaard
Denmark
+45-4917-7090 Tel
+45-4917-7091 Fax
Digi International Australia
121 Walker Street
Ste. 201 Level 2
North Sydney
NSW 2060
Australia
+61-2-99-29-0299 Tel
+61-2-99-29-0445 Fax
Digi International Japan
No. 404 Crest Court Sadohara
2-1-4 Ichigaya-Sadohara
Shinjyuku-ku
162 Tokyo, Japan
+81 3 3266 1092 Tel
+81 3 3266 8273 Fax
Digi International (HK) Limited
Unit 1002, 10 Floor
Sino Plaza, 256-257 Gloucester Road
Causeway Bay, Hong Kong
(852) 2833-1008 Tel
(852) 2572-9989 Fax
Digi International Federal Systems
2231 Crystal Drive, Suite 500
Arlington, VA 22202
(703) 553-2560 Tel
(703) 486-5763 Fax
Regional Offices
618 Grassmere Park Drive, Suite 6
Nashville, TN 37211
(615) 834-8000 Tel
(615) 834-5399 Fax
(800) 366-8844 Sales/Technical Support
2450 Edison Boulevard
Twinsburg, OH 44087
(216) 425-0723 Tel
(216) 425-2492 Fax
(800) 782-7428 Sales/Technical Support
2730 Monterey Street, Suite 105
Torrance, CA 90503
(310) 328-9700 Tel
(310) 328-9696 Fax
1299 Orleans Drive
Sunnyvale, CA 94089
(408) 744-2775 Tel
(408) 744-2793 Fax
6703 Odyssey Drive, Suite 303
Huntsville, AL 35806
(205) 922-9440 Tel
(205) 922-9437 Fax
Westpark, Building M, Second Floor
8440 154th Avenue NE
Redmond, WA 98052
(206) 867-3893 Tel
(206) 867-0954 Fax
GROSS MARGIN GRAPH
The first graph on page 4 shows gross margin in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Gross margin dollars for 1992 were $40.7, for
1993 were $52.4, for 1994 were $67.8, for 1995 were $86.0, and, for 1996 were
$102.7.
OPERATING INCOME GRAPH
The second graph on page 4 shows operating income in millions of dollars for
fiscal 1992, 1993, 1994, 1995 and 1996. Operating income dollars for 1992 were
$16.7, for 1993 were $20.8, for 1994 were $24.3, for 1995 were $27.4, and, for
1996 were $20.1.
WORKING CAPITAL GRAPH
The third graph on page 4 shows working capital in millions of dollars for
fiscal 1992, 1993, 1994, 1995 and 1996. Working capital dollars for 1992 were
$56.1, for 1993 were $69.6, for 1994 were $72.7, for 1995 were $74.1, and, for
1996 were $69.7.
NET SALES/EMPLOYEE GRAPH
The fourth graph on page 4 shows net sales per employee in thousands of
dollars for fiscal 1992, 1993, 1994, 1995 and 1996. Net sales per employee for
1992 were $290, for 1993 were $312, for 1994 were $343, for 1995 were $322,
and, for 1996 were $281.
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
Net sales $ 195,833 $ 164,978 $ 130,945 $ 93,385 $ 70,867
AetherWorks Corporation net loss (3,624) -- -- -- --
Income before taxes 16,805 29,366 25,351 22,510 18,256
Net income 9,300 19,331 16,701 14,905 12,555
Net income per share .69 1.38 1.15 1.03 .87
Average shares outstanding 13,523 14,048 14,511 14,564 14,443
Working capital $ 69,696 $ 74,061 $ 72,671 $ 69,648 $ 56,147
Total assets 129,939 126,043 102,758 88,859 69,788
Stockholders' equity 109,943 105,827 91,113 80,467 64,076
Book value per share 8.24 7.82 6.64 5.68 4.58
Return on sales 4.8% 11.7% 12.8% 16.0% 17.7%
Number of employees 698 605 430 333 266
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS, PERCENTAGES AND NUMBER OF EMPLOYEES.)
SELECTED FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
Net sales $ 195,833 $ 164,978 $ 130,945 $ 93,385 $ 70,867
% change 19% 26% 40% 32% 39%
Net income 9,300 19,331 16,701 14,905 12,555
% change (52) 16 12 19 54
Net income per share .69 1.38 1.15 1.03 .87
% change (50) 20 12 18 36
Total assets 129,939 126,043 102,758 88,859 69,788
% change 3 23 16 27 24
Stockholders' equity 109,943 105,827 91,113 80,467 64,076
% change 4 16 13 26 25
- -------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES. PERCENTAGE CHANGE
REPRESENTS PERCENT INCREASE (DECREASE) OVER PREVIOUS YEAR.)
NET SALES GRAPH
The first graph on page 5 shows net sales in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Net sales dollars for 1992 were $70.9, for
1993 were $93.4, for 1994 were $130.9, for 1995 were $165.0, and, for 1996
were $195.8.
NET INCOME GRAPH
The second graph on page 5 shows net income in millions of dollars for fiscal
1992, 1993, 1994, 1995 and 1996. Net income dollars for 1992 were $12.6, for
1993 were $14.9, for 1994 were $16.7, for 1995 were $19.3, and, for 1996 were
$9.3.
NET INCOME PER SHARE GRAPH
The third graph on page 5 shows net income per share in the following amounts
for fiscal 1992, 1993, 1994, 1995 and 1996: for 1992, $. 87; for 1993, $1.03;
for 1994, $1.15; for 1995 were $1.38; and, for 1996; $ .69.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following table sets forth selected information derived from the
Company's Consolidated Statements of Operations expressed as percentage of
net sales.
PERCENTAGE
YEAR ENDED INCREASE/
SEPTEMBER 30 (DECREASE)
- ------------------------------------------------------------------------------
1996 1995
over over
1996 1995 1994 1995 1994
- ------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 18.7% 26.0%
Cost of sales 47.5 47.8 48.2 18.0 25.1
- ------------------------------------------------------------------------------
Gross margin 52.5 52.2 51.8 19.4 26.8
Operating expenses:
Sales & marketing 22.5 19.1 17.2 39.9 39.9
Research & development 10.5 8.9 7.5 40.5 49.2
General & administrative 9.2 7.6 8.6 43.7 11.3
- ------------------------------------------------------------------------------
42.2 35.6 33.3 40.9 34.6
Operating income 10.3 16.6 18.5 (26.6) 12.8
Other income, principally interest .2 1.2 .9 (83.1) 84.4
AetherWorks Corporation net loss (1.9) 100.0
- ------------------------------------------------------------------------------
Income before income taxes 8.6 17.8 19.4 (42.8) 15.8
Provision for income taxes 3.8 6.1 6.6 (25.2) 16.0
- ------------------------------------------------------------------------------
Net income 4.8% 11.7% 12.8% (51.9%) 12.1%
- ------------------------------------------------------------------------------
NET SALES
- ------------------------------------------------------------------------------
The increase in net sales from 1995 to 1996 of $30.9 million and from 1994 to
1995 of $34.0 million spanned all product markets as follows:
PRODUCT MARKET PERCENT OF ANNUAL SALES ANNUAL SALES INCREASE
- ------------------------------------------------------------------------------
1996 1995 1994 1996 1995
- ------------------------------------------------------------------------------
Multiuser 64.4% 67.8% 74.2% 13% 17%
Remote Access 16.7% 13.8% 10.7% 43% 63%
LAN Connect 18.9% 18.4% 15.1% 22% 54%
- ------------------------------------------------------------------------------
16
Sales increases are primarily due to volume, not price increases.
Sales to original equipment manufacturers (OEMs) increased from 20.6% in 1994
to 22.9% in 1995 and decreased to 20.0% in 1996. Sales to the distribution
markets increased from 57.9% of net sales for 1994 to 61.2% and 65.9% for
1995 and 1996, respectively. The Company sees these markets continuing to
grow.
The Company believes that revenue from its Remote Access and LAN Connect
markets will continue to show rapid growth, while the multiuser market growth
will slow.
NET SALES GRAPH
The first graph on page 17 shows net sales in millions of dollars for fiscal
1994, 1995 and 1996. Net sales dollars for 1994 were $130.9, for 1995 were
$165.0, and, for 1996 were $195.8.
COST OF SALES GRAPH
The second graph on page 17 shows cost of sales in millions of dollars for
fiscal 1994, 1995 and 1996. Cost of sales dollars for 1994 were $63.1, for
1995 were $78.9, and, for 1996 were $93.1.
GROSS MARGIN
Gross margin increased slightly from 52.2% of net sales in 1995 to 52.5% in
1996. Gross margin increased from 51.8% to 52.2% from 1994 to 1995, due
primarily to purchasing efficiencies and product redesign.
GROSS MARGIN GRAPH
The third graph on page 17 shows gross margin as a percent of net sales for
fiscal 1994, 1995 and 1996. Gross margin for 1994 was 51.8%, for 1995 was
52.2%, and, for 1996 was 52.5%.
OPERATING EXPENSES
Operating expenses for 1996 increased 40.9% over such expenses for 1995 and
increased as a percent of sales to 42.2% for 1996 as compared to 35.6% for
1995. Operating expenses for 1995 had increased 34.6% over 1994, while such
expenses as a percent of sales, increased from 33.3% in 1994. The 1996
increases were primarily due to increases in research and development for new
products, including the effect of the acquisition of LAN Access Corporation
located in Torrance, Calif., late in fiscal 1995, the opening of two new
research and development facilities in Huntsville, Ala. and Redmond, Wash.,
as well as additional marketing costs in connection with new product
introductions, programs for the establishment of the Company in the Remote
Access and LAN Connect markets, and the consolidation, under the "Digi"
brand, of products previously sold under the identities of subsidiaries of
the Company. The 1996 general and administrative expenses increased due to
expansion of and upgrades to the Company's infrastructure, including a new
corporate headquarters, three new research and
17
development sites, three additional international sales offices and increased
systems capabilities. The 1995 increases in operating expenses were due
primarily to increased research and development spending for new products and
markets, principally for Remote Access and LAN Connect markets, plus
increased staffing levels. The Company expects to continue the funding levels
for new product development, but also expects the marketing costs to level
off after the first quarter of fiscal 1997.
SALES AND MARKETING GRAPH
This graph shows sales and marketing expenses in millions of
dollars for fiscal 1994, 1995 and 1996. Sales and marketing dollars for 1994
were $22.5, for 1995 were $31.5, and, for 1996 were $44.1.
GENERAL AND ADMINISTRATIVE GRAPH
This graph shows general and administrative expenses in millions of
dollars for fiscal 1994, 1995 and 1996. General and administrative dollars for
1994 were $11.2, for 1995 were $12.5, and, for 1996 were $17.9.
RESEARCH AND DEVELOPMENT GRAPH
This graph shows research and development expenses in millions of
dollars for fiscal 1994, 1995 and 1996. Research and development dollars for
1994 were $9.8, for 1995 were $14.7, and, for 1996 were $20.6.
TOTAL OPERATING EXPENSES GRAPH
This graph shows total operating expenses in millions of dollars
for fiscal 1994, 1995 and 1996. Total operating dollars for 1994 were $43.6,
for 1995 were $58.6, and, for 1996 were $82.6.
OTHER INCOME
Other income for 1996 declined by 83% from 1995 levels due primarily to lower
interest income resulting from a decrease in invested funds as well as the
loss on disposal of capital assets. The increase in other income from 1994 to
1995 resulted from an increase of available funds and an increase in interest
rates.
AETHERWORKS CORPORATION OPERATING LOSSES
During 1996, the Company purchased secured convertible notes from AetherWorks
Corporation, a development stage company engaged in the development of
wireless and dial-up remote access technology. The Company has reported its
investment in AetherWorks on the equity method and has recorded a $3.6
million loss representing 100% of the AetherWorks losses for 1996. The
percentage of the AetherWorks losses recorded by the Company is based upon
the percentage of financial support provided by the Company (versus other
investors) to AetherWorks during the year. The Company anticipates that
AetherWorks' losses for 1997 will be greater than 1996 levels.
INCOME TAXES
The Company's effective income tax rate increased from 34.2% in 1995 to 44.7%
in 1996 due primarily to the non-deductibility of the AetherWorks losses. The
effective tax rate in the fourth quarter of 1996, excluding Aetherworks was
36.7%. The increase in the effective rate from 1994 to the 1995 rate of 34.2%
resulted primarily from a decrease in the federal R&D credit.
INFLATION AND OTHER
Management believes inflation has not had a material effect on the Company's
operations or on its financial condition.
Due principally to anticipated OEM (original equipment manufacturer) revenue
shortfalls and delays in new product rollouts, the Company believes it will
likely report earnings in fiscal first quarter 1997 lower than analyst
expectations. The range of estimates for first quarter 1997 earnings per
share is $.23 - $.27 per share, according to First Call.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds remaining from earlier public stock offerings.
During 1996, the Company sold in excess of $27.9 million in marketable
securities to finance growth in accounts receivable and inventories, as well
as to fund new product technology. The increase in accounts receivable for
1996 was due primarily to increased sales volume, particularly late in the
1996 fiscal year. The 1996 inventory increase is reflective of expanded
product lines and anticipated increased sales levels.
Investing activities for 1996 consisted primarily of the redemption of
maturing investments offset by purchases of property and equipment, and the
purchase of $5.3 million in secured convertible notes from AetherWorks
Corporation. The Company is obligated to purchase up to an additional $8.5
million secured convertible notes from time
18
to time at the request of AetherWorks, based on certain conditions. Secured
convertible notes held by the Company are presently convertible into 52% of
AetherWorks' common stock, and the purchase of $8.5 million additional
principal amount of secured notes would increase the Company's ownership
portion upon conversion to 62.7% based on AetherWorks' present
capitalization. In connection with the financing arrangement, the Company
has also guaranteed $1.1 million in lease obligations incurred by
AetherWorks. Subsequent to September 30, 1996, the Company purchased $1.5
million in additional secured notes.
During 1996, the Company made open market purchases of the Company's common
stock aggregating $7.3 million pursuant to a 1-million-share repurchase
program authorized by the Company's Board of Directors on March 27, 1995. On
January 31, 1996, the 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. The Company's Board of Directors suspended all
existing stock purchase programs at its October 1996 board meeting.
Investing activities for 1995 included new investments of excess cash,
reinvestment of maturing investments, $4.5 million for purchase of a new
office and research facility plus the acquisition of LAN Access Corporation.
At September 30, 1996, the Company had working capital of $69.7 million and
no debt. The Company has negotiated a $5 million unsecured line of credit
with its bank, but has not utilized such line. 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 anticipated business operations.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.
FORWARD-LOOKING STATEMENTS
Certain statements made above, which are summarized below, are
forward-looking statements that involve risks and uncertainties, and actual
results may be materially different. Factors that could cause actual results
to differ include those identified below:
- - CONTINUED GROWTH IN SALES OF THE COMPANY'S REMOTE ACCESS AND LAN
CONNECT PRODUCTS - General market conditions and competitive conditions
within these markets, development and acceptance of new products offered by
the Company, and the introduction of products by competitors in these
markets.
- - THAT SALES OF THE COMPANY'S MULTIUSER PRODUCTS MAY GROW AT A
REDUCED RATE - Potential market penetration in emerging third world
countries and the development of new applications for these products
in existing markets.
- - CONTINUED INCREASE IN OEM SALES - OEM orders are subject to
cancellation at the option of the customer, and are subject to greater
quarterly fluctuations than sales through the Company's other channels,
as well as competitive conditions in markets served by the Company's OEM
customers. OEM sales could also be adversely impacted by component
shortages.
- - THE EXPECTATION THAT MARKETING EXPENSES WILL LEVEL OFF AFTER THE
FIRST QUARTER OF FISCAL 1997 - This expectation may be adversely impacted
by presently unanticipated expenses or opportunities.
- - THE EXPECTATION THAT THE AETHERWORKS CORPORATION LOSSES FOR 1997
WILL BE GREATER THAN 1996 LEVELS - This expectation may be impacted by
presently unanticipated revenue opportunities or by unanticipated
expenses.
- - THE EXPECTATION THAT EARNINGS WILL BE LOWER THAN ANALYST EXPECTATIONS FOR
FISCAL FIRST QUARTER 1997 - This expectation may be impacted by presently
unanticipated revenue opportunities or by unanticipated expenses.
19
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -------------------------------------------------------------------------------------------
FISCAL YEARS ENDED SEPTEMBER 30 1996 1995 1994
- -------------------------------------------------------------------------------------------
NET SALES $ 195,832,640 $ 164,978,018 $ 130,945,343
Cost of sales 93,108,624 78,933,221 63,100,733
- -------------------------------------------------------------------------------------------
GROSS MARGIN 102,724,016 86,044,797 67,844,610
- -------------------------------------------------------------------------------------------
Operating expenses:
Sales & marketing 44,079,859 31,497,005 22,518,353
Research & development 20,624,274 14,676,683 9,833,859
General & administrative 17,922,536 12,472,581 11,208,071
- -------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 82,626,669 58,646,269 43,560,283
- -------------------------------------------------------------------------------------------
OPERATING INCOME 20,097,347 27,398,528 24,284,327
Other income, principally interest 331,789 1,967,565 1,066,765
AetherWorks Corporation net loss (3,623,776)
- -------------------------------------------------------------------------------------------
Income before income taxes 16,805,360 29,366,093 25,351,092
Provision for income taxes 7,505,140 10,035,000 8,650,000
- -------------------------------------------------------------------------------------------
NET INCOME $ 9,300,220 $ 19,331,093 $ 16,701,092
- -------------------------------------------------------------------------------------------
Income per common and
common equivalent share: $ .69 $ 1.38 $ 1.15
- -------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 13,522,905 14,057,109 14,510,569
- -------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
20
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -----------------------------------------------------------------------------
AS OF SEPTEMBER 30 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 8,943,390 $ 5,103,731
Marketable securities, at cost 27,968,775
Accounts receivable, net 42,874,898 31,960,936
Inventories, net 33,372,164 27,019,085
Income tax refunds receivable 1,675,626 130,165
Other 2,825,828 2,094,893
- -----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 89,691,906 94,277,585
- -----------------------------------------------------------------------------
Property, equipment and improvements, net 24,230,101 17,716,819
Intangible assets, net 10,854,845 11,633,305
Investment in AetherWorks Corporation 1,672,749
Other 3,489,228 2,415,755
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 129,938,829 $ 126,043,464
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,549,738 $ 12,106,515
Accrued expenses
Advertising 3,761,619 2,235,946
Compensation 1,622,549 4,932,987
Other 2,061,782 941,469
- -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,995,688 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; 14,677,150 and
14,562,958 shares outstanding 146,772 145,630
Additional paid-in capital 42,866,758 41,306,320
Retained earnings 90,904,746 81,604,526
- -----------------------------------------------------------------------------
133,918,276 123,056,476
Unearned stock compensation (295,156) (598,387)
Treasury stock, at cost, 1,338,894
and 1,032,729 shares (23,679,979) (16,631,542)
- -----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 109,943,141 105,826,547
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,938,829 $ 126,043,464
- -----------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
DIGI INTERNATIONAL INC.
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 9,300,220 $ 19,331,093 $ 16,701,092
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation of property and equipment 5,017,735 2,289,554 1,491,964
AetherWorks Corporation net loss 3,623,776
Amortization of intangibles 1,320,457 1,132,006 1,139,076
Loss on sale of fixed assets 238,222
Provision for losses on accounts receivable 262,164 243,895 608,001
Provision for inventory obsolescence 1,455,895 716,300 1,071,741
Deferred income taxes (393,153) (84,750) (80,000)
Stock compensation 204,973 166,667 153,076
Changes in operating assets and liabilities:
Accounts receivable (11,176,126) (10,457,106) (7,452,502)
Inventories (7,808,974) (4,043,377) (9,785,911)
Income taxes payable/receivable (1,545,461) (1,157,823) 279,746
Other assets (1,953,252) (1,266,098) (345,891)
Accounts payable 443,223 7,420,550 (833,303)
Accrued expenses (664,452) 1,365,901 (363,231)
- ----------------------------------------------------------------------------------------------------------
Total adjustments (10,974,973) (3,674,281) (14,117,234)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,674,753) 15,656,812 2,583,858
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,902,436) (9,573,995) (3,944,632)
Proceeds from sale of fixed assets 1,133,197
Proceeds from held-to-maturity marketable securities 20,640,962 25,004,985 41,480,965
Proceeds from available-for-sale marketable securities 13,060,000
Purchases of held-to-maturity marketable securities (482,187) (21,751,326) (31,194,880)
Purchases of available-for-sale marketable securities (5,250,000) (7,810,000)
Business acquisitions, net of cash acquired (5,487,374) (2,536,766)
Investment in AetherWorks Corporation (5,296,525)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 10,903,011 (19,617,710) 3,804,687
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Purchase of treasury stock (7,048,437) (5,930,313) (11,152,498)
Stock option transactions 1,659,838 1,145,925 781,712
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,388,599) (4,784,388) (10,370,786)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,839,659 (8,745,286) (3,982,241)
Cash and cash equivalents, beginning of year 5,103,731 13,849,017 17,831,258
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 8,943,390 $ 5,103,731 $ 13,849,017
- ----------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosure: Income taxes paid $ 8,944,627 $ 10,815,846 $ 7,878,279
- ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
DIGI INTERNATIONAL INC. For the years ended September 30, 1996, 1995 and 1994
- ------------------------------------------------------------------------------
Common Stock Treasury Stock Additional Unearned Total
-------------------- -------------------- Paid-in Retained Stock Stockholders'
Shares Par Value Shares Value Capital Earnings Compensation Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1993 14,178,336 $141,783 229 ($4,981) $35,190,341 $45,572,341 ($432,626) $80,466,858
Treasury stock, at cost 780,000 (11,152,498) (11,152,498)
Issuance of stock options
at below market prices 182,554 (182,554)
Stock compensation 153,076 153,076
Issuance of stock for MiLAN
purchase 186,100 1,861 (25,000) 456,250 3,705,823 4,138,934
Issuance of stock upon exercise
of stock options, net of
withholding 110,227 1,103 207,635 208,738
Tax benefit realized upon
exercise of stock options 571,975 571,975
Forfeiture of stock options (69,772) 69,772
Net income 16,701,092 16,701,092
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1994 14,474,663 144,747 755,229 (10,701,229) 39,788,556 62,273,433 (392,332) 91,113,175
Treasury stock, at cost 277,500 (5,930,313) (5,930,313)
Issuance of stock options
at below market prices 448,750 (448,750)
Stock compensation 166,667 166,667
Issuance of stock upon
exercise of
stock options, net of
withholding 88,295 883 683,315 684,198
Tax benefit realized upon
exercise of stock options 461,727 461,727
Forfeiture of stock options (76,028) 76,028
Net income 19,331,093 19,331,093
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995 14,562,958 145,630 1,032,729 (16,631,542) 41,306,320 81,604,526 (598,387) 105,826,547
Treasury stock, at cost 306,165 (7,048,437) (7,048,437)
Issuance of stock options
at below market prices 12,500 (12,500)
Stock compensation 204,973 204,973
Issuance of stock upon
exercise of stock options,
net of withholding 114,192 1,142 1,159,569 1,160,711
Tax benefit realized upon
exercise of stock
options 499,127 499,127
Forfeiture of stock options (110,758) 110,758
Net income 9,300,220 9,300,220
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 14,677,150 $146,772 1,338,894 ($23,679,979) $42,866,758 $90,904,746 ($295,156) $109,943,141
- ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi International Inc. (the Company) is a leading ISO 9001-compliant
provider of data communications hardware and software that delivers seamless
connectivity solutions for multiuser environments, Remote Access and LAN
Connect markets. The Company markets its products through an international
network of distributors and resellers, system integrators and original
equipment manufacturers (OEMs).
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, while those
having original maturities in excess of three months are classified as
marketable securities and generally consist of U.S. Government or U.S.
Government-backed obligations. Marketable securities classified as
held-to-maturity are carried at amortized cost. Marketable securities
classified as available-for-sale are recorded at market value. (See Note 3)
REVENUE RECOGNITION
Sales are recognized at the date of shipment. Estimated warranty costs
and customer returns are recorded at the time of sale. Accounts receivable
are net of allowances for returns and doubtful accounts of $735,442 at
September 30, 1996 and $656,500 at September 30, 1995.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Market for raw materials is based on
replacement cost and for other inventory classifications 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.
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.
INTANGIBLE ASSETS
Purchased 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 assets acquired and is being amortized on a
straight-line basis over its estimated useful life of 10 to 15 years. All
other intangible assets are amortized on a straight-line basis over their
estimated useful lives of one to five 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 unit cash flows on a basis consistent with generally accepted
accounting principles.
24
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 bases 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.
INCOME PER COMMON SHARE
Income per common share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period. Common stock equivalents result from dilutive
stock options.
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. The most significant areas which require the use of management's
estimates relate to the determination of the allowance for obsolete inventory
and uncollectable accounts receivable, along with accrued warranty costs and
sales returns.
2. ACQUISITIONS
On November 15, 1993, the Company acquired MiLAN Technology Corporation, a
provider of networking products, for stock and cash valued at approximately
$6.8 million. On September 29, 1995, the Company acquired LAN Access
Corporation, a provider of remote access products, for cash of approximately
$5.5 million, substantially all of which was allocated to goodwill. These
acquisitions have been accounted for as purchases. Results of operations
since the effective dates of the transactions are included in the
Consolidated Statement of Operations.
Pro forma data (unaudited) as though the acquisitions had been effective at
the beginning of 1994 is as follows:
FOR THE YEARS ENDED SEPTEMBER 30
1995 1994
- -------------------------------------------------------
Net sales $166,784 $132,829
- -------------------------------------------------------
Net income 18,284 16,060
- -------------------------------------------------------
Net income per share 1.30 1.11
- -------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115),
as of September 30, 1994. The adoption of SFAS 115 did not impact net income
or stockholders' equity for fiscal 1994. In accordance with SFAS 115,
prior-period financial statements have not been restated to reflect the
change in accounting principle.
25
Held-to-maturity marketable securities, which consist of state and political
subdivision debt securities, will be held to their maturity of less than one
year. As of September 30, 1996, the Company had no held-to-maturity
marketable securities. At September 30, 1995, the amortized cost and
estimated fair value were $20,158,775 and $20,232,038, respectively.
Unrealized holding gains and losses were not significant.
Available-for-sale marketable securities, which consist of state and
political subdivision debt securities, will be sold within the next year. As
of September 30, 1996, the Company had no available-for-sale marketable
securities. At September 30, 1995, the estimated fair value approximated
amortized cost of $7,810,000. Unrealized and realized gains and losses were
not significant.
4. INVESTMENT IN AETHERWORKS CORPORATION
During 1996, under a financing arrangement, the Company purchased $5,296,525
of convertible notes from AetherWorks Corporation, a development stage
company engaged in the development of wireless and dial-up remote access
technology. At September 30, 1996, the Company is obligated to purchase up
to an additional $8.5 million of convertible notes from time to time at the
request of AetherWorks, based on certain conditions. The convertible notes
held by the Company at September 30, 1996 are convertible into 52% of
AetherWorks' common stock, and the purchase of $8.5 million additional
principal amount of convertible notes would increase the Company's ownership
interest upon conversion to 62.7%, based on AetherWorks' present
capitalization.
Subsequent to September 30, 1996, the Company purchased $1.5 million of
AetherWorks convertible notes. In connection with the financing arrangement,
the Company has also guaranteed $1.1 million of lease obligations incurred by
AetherWorks.
The Company has reported its investment in AetherWorks on the equity method
and has recorded a $3.6 million loss. Such loss represents 100% of the
AetherWorks net loss for the year ended September 30, 1996. 100% of
AetherWorks losses have been recorded due to the Company providing 100% of
the financial support for AetherWorks during the year.
Investment in AetherWorks Corporation consists of the following at September
30, 1996:
Convertible notes receivable $ 5,296,525
Net loss (3,623,776)
- -----------------------------------------------
$ 1,672,749
The following is condensed financial information related to AetherWorks
Corporation:
BALANCE SHEET DATA, AS OF SEPTEMBER 30, 1996:
- ---------------------------------------------
Current assets $ 72,974
Fixed assets, net 3,869,245
Total assets 4,264,200
Current liabilities 4,607,397
Notes payable 5,296,525
Shareholders' deficit (5,639,721)
OPERATING DATA FOR THE YEAR ENDED
SEPTEMBER 30, 1996:
- ---------------------------------------------
Operating expenses:
Research and development $ 2,531,046
General and administrative 922,570
Other 594,482
Eliminations (424,322)
- ---------------------------------------------
Net loss (3,623,776)
26
5. SELECTED BALANCE SHEET DATA
1996 1995
- --------------------------------------------------------------------------------
Inventories:
Raw materials $ 19,145,019 $ 13,288,953
Work in process 10,469,315 7,645,002
Finished goods 4,925,930 6,897,130
- --------------------------------------------------------------------------------
Less reserve for obsolescence 1,168,100 812,000
- --------------------------------------------------------------------------------
$ 33,372,164 $ 27,019,085
- --------------------------------------------------------------------------------
Property, equipment and improvements:
Land $ 1,800,000 $2,103,174
Buildings 10,519,731 7,209,840
Improvements 631,362 274,811
Equipment 18,629,353 11,922,087
Purchased software 1,968,127 1,778,712
Furniture & fixtures 1,899,928 1,855,639
- --------------------------------------------------------------------------------
35,448,501 25,144,263
Less accumulated depreciation 11,218,400 7,427,444
- --------------------------------------------------------------------------------
$ 24,230,101 $ 17,716,819
Intangible assets:
Purchased technology $ 1,672,850 $ 1,621,858
License agreements 1,174,908 1,472,000
Covenants not to compete 520,250 1,670,000
Goodwill 11,185,506 11,418,393
Other 20,449 44,193
- --------------------------------------------------------------------------------
14,573,963 16,226,444
Less accumulated amortization 3,719,118 4,593,139
- --------------------------------------------------------------------------------
$ 10,854,845 $ 11,633,305
- --------------------------------------------------------------------------------
6. STOCK OPTIONS
The Company has a stock option plan (the "Plan") that 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 option price for ISOs and board member options is set at fair market
value of the Company's common stock on the date of grant. The option price
for nonstatutory options is set by the Compensation Committee of the Board of
Directors. The authority to grant options and set other terms and conditions
rests with the Compensation Committee. The Plan terminates in 2004.
During the years ended September 30, 1996, 1995, and 1994, 114,192, 88,295,
and 110,227 shares of the Company's Common Stock, respectively, were issued
upon the exercise of options for 123,959, 95,367, and 122,200 shares,
respectively. The difference between shares issued and options exercised
results from the Plan's provision allowing employees to elect to pay their
withholding obligation through share reduction. Withholding taxes paid by
the Company as a result of the share withholding provision amounted to
$186,927 in 1996, $413,000 in 1995, and $223,000 in 1994.
During the years ended September 30, 1996, 1995, and 1994, the Board of
Directors authorized the issuance of nonstatutory stock options totaling
2,500, 50,000, and 17,338 shares respectively, at prices below the market
value of the stock. The difference between the option price and market value
at the date of grant has been recorded as additional paid in capital. The
compensation expense related to these shares is amortized over the five-year
period in which the employees perform services and amounted to $204,793 in
1996, $166,667 in 1995, and $153,076 in 1994.
STOCK OPTIONS AND COMMON SHARES RESERVED FOR
GRANT UNDER THE PLAN ARE AS FOLLOWS:
- -----------------------------------------------------------------------------------------------
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
- -----------------------------------------------------------------------------------------------
Balances,
September 30, 1993 283,400 739,300 $ .50 - 24.25
Granted (293,338) 293,338 11.50 - 23.75
Exercised (122,200) 11.50 - 24.25
Cancelled 17,100 (17,100) 11.83 - 23.75
---------- ---------
Balances,
September 30, 1994 7,162 893,338 $ .50 - 24.25
Additional shares
approved for grant 2,000,000
Granted (808,375) 808,375 15.25 - 29.25
Exercised (95,367) .50 - 21.25
Cancelled 119,251 (119,251) 3.33 - 23.13
---------- ---------
Balances,
September 30, 1995 1,318,038 1,487,095 $ .50 - 29.25
Granted (1,186,525) 1,186,525 14.25 - 28.50
Exercised (123,959) .50 - 21.25
Cancelled 223,001 (223,001) 9.40 - 28.50
---------- ---------
Balances,
September 30, 1996 354,514 2,326,660 $ .50 - 29.25
---------- ---------
- -----------------------------------------------------------------------------------------------
Of options outstanding at September 30, 1996, options for 535,422 shares were
exercisable, at prices ranging from $.50 to $29.25 per share.
7. LINE OF CREDIT
During April of 1996, the Company negotiated a $5,000,000 uncollateralized
line of credit with its bank, to be used to fund general corporate cash
needs, effective until February of 1997. The interest rate varies depending
on the "base" or "prime" rate established by the bank. During fiscal 1996,
the Company did not use this line of credit.
8. COMMITMENTS
The Company has entered into various operating lease agreements, the last of
which expires in fiscal year 2003. Below is a schedule of future minimum
commitments under noncancelable operating leases:
FISCAL YEAR AMOUNT
- --------------------------------------------------
1997 $ 1,296,359
1998 1,148,472
1999 961,489
2000 892,203
2001 483,280
Thereafter 245,980
- --------------------------------------------------
Total rental expense for all operating leases for the years ended September
30, 1996, 1995, and 1994 was $965,710, $946,000, and $627,000, respectively.
9. INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 1996, 1995, and 1994 are as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Currently payable:
Federal $6,977,337 $ 9,505,650 $8,364,428
State 920,956 614,100 365,572
Deferred (393,153) (84,750) (80,000)
- --------------------------------------------------------------------------------
$7,505,140 $10,035,000 $8,650,000
The net deferred tax asset at September 30, 1996 and 1995 consists of the
following:
1996 1995
- ------------------------------------------------------
Valuation reserves $ 615,631 $ 393,100
Inventory valuation 432,225 300,400
Vacation costs 311,250 178,700
Depreciation (164,850) (71,097)
- ------------------------------------------------------
Net deferred tax asset $ 1,194,256 $ 801,103
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for the years ended September 30, 1996, 1995, and
1994 is as follows:
1996 1995 1994
- -----------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
Utilization of research and
development tax credits (1.7) (1.7) (1.9)
State taxes, net of federal benefits 3.6 2.5 2.4
AetherWorks Corporation net loss 8.0
Foreign and other (.2) (1.6) (1.4)
- -----------------------------------------------------------------------
44.7% 34.2% 34.1%
10. FOREIGN SALES AND MAJOR CUSTOMERS
The Company maintains foreign sales offices, but does not otherwise have any
foreign operations.
Foreign export sales primarily in Europe, comprised approximately 20%, 20%,
and 21% of net sales for the years ended September 30, 1996, 1995, and 1994,
respectively.
During 1996, one customer (customer C) accounted for 13.9% of net sales while
another (customer A) accounted for 13.4%. During 1995, one customer (customer
A) accounted for 12.5% of net sales and another customer (customer B)
accounted for 11.7%. One customer (customer A) comprised 11.8% of net sales
in 1994.
11. 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 earnings, not to exceed amounts allowed under
the Code. In addition, the Company may make contributions at the discretion
of the Board of Directors. During 1995 and 1994, the Company provided for
matching contributions totaling $125,000, and $100,000 respectively. No
contribution was made in 1996.
12. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of," and
Statement No. 123, "Accounting for Stock-Based Compensation." The Company
plans to adopt these statements in fiscal 1997. With regards to Statement
No. 123, the Company intends to follow the option that permits entities to
continue to apply current accounting standards to stock-based employee
compensation arrangements. Effective with year-end 1997 reporting, the
Company will disclose pro forma net income and earnings per share amounts as
if Statement No. 123 accounting was applied. The Company does not expect the
adoption of Statement No. 121 to have a materially adverse effect on its
financial position or results of operations.
13. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT
ACCOUNTANTS REPORT
On January 3, 1997, the Company and certain of its previous officers were
named as defendants in a putative securities class action lawsuit in the
United States District Court for Minnesota on behalf of an alleged class of
purchasers of its common stock during the period January 25, 1996, through
December 23, 1996, inclusive. The complaint in the action alleges 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. This lawsuit is
in a preliminary stage and, accordingly, its ultimate outcome cannot be
determined at this time.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Digi International Inc.
We have audited the consolidated balance sheets of Digi International Inc.
and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and stockholders' equity
for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. As discussed in Note 4, the Company has recorded its
investment in AetherWorks Corporation (AetherWorks) on the equity method; the
1996 consolidated statement of operations includes the AetherWorks net loss
for the year ended September 30, 1996 of $3,623,776. We did not audit the
financial statements of AetherWorks, which statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for AetherWorks, is based solely on the
report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and, for the
year ended September 30, 1996, the report of other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audits and, for the year ended September 30,
1996, the report of the other auditors, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Digi International Inc. and subsidiaries as of
September 30, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
December 20, 1996
Quarterly Financial Data (UNAUDITED)
- ---------------------------------------------------------------------------------------
(in thousands except per share amounts) Quarter Ended
Dec. 31 Mar. 31 June 30 Sept. 30
- ---------------------------------------------------------------------------------------
1996
Net sales $ 43,866 $ 48,498 $ 50,317 $ 53,152
Gross margin 23,879 25,916 25,125 27,804
AetherWorks Corporation net loss (279) (656) (1,204) (1,485)
Net income (loss) 4,522 (a) 4,620 (a) (51) (a) 209
Net income per share .33 (a) .34 (a) (0) (a) .02
1995
Net sales 37,879 40,076 41,179 45,844
Gross margin 19,745 21,169 22,131 23,000
Net income 4,491 4,597 4,847 5,396
Net income per share .32 .33 .35 .38
1994
Net sales 25,989 31,647 35,185 38,124
Gross margin 14,736 16,672 17,696 18,741
Net income 4,036 4,123 4,216 4,326
Net income per share .28 .28 .29 .31
- ---------------------------------------------------------------------------------------
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) Restated for inclusion of AetherWorks Corporation net loss.
30
DIRECTORS AND OFFICERS
- -------------------------------------------------------------------------------
DIRECTORS
JOHN P. SCHINAS (3) Mr. Schinas is a founder of the Company and has been its
Chairman of the Board since July 1991. He has been a member of the Board of
Directors since the Company's inception in July 1985 and served as the
Company's CEO from July 1985 to January 1992.
WILLIS K. DRAKE (2) Mr. Drake has been a member of the Board of Directors
since 1987 and a private investor since 1983.
RICHARD E. EICHHORN (1) (2) Mr. Eichhorn has been a member of the Board of
Directors since 1987. Since April 1992, Mr. Eichorn has been a private
investor.
ERVIN F. KAMM, JR. Mr. Kamm has been a member of the Board of Directors
since December 1, 1994 and was named President and CEO November 30, 1994. Mr.
Kamm was President and Chief Operating Officer of Norstan, Inc., from 1988 to
1994. Prior to Norstan, Mr. Kamm held a variety of CEO/COO positions with
privately held companies.
ROBERT S. MOE Mr. Moe has been a member of the Board of Directors since
October 1996. From 1981 to his retirement in 1993, he was the Chief Financial
Officer of Polaris Industries, Minneapolis, a manufacturer of snowmobiles,
all-terrain vehicles and personal watercraft.
MYKOLA MOROZ Mr. Moroz has been a member of the Board of Directors since
July 1991. Mr. Moroz was a founder of the Company and CEO from January 1992
to September 1994. Mr. Moroz was Chief Operating Officer of the Company from
July 1991 to January 1992. From October 1985 to July 1991, he occupied
various management positions with the Company. He is now a private consultant.
DAVID STANLEY (1) (3) Mr. Stanley has been a member of the Board of
Directors of the Company since 1990. Mr. Stanley has been Chairman and CEO of
Payless Cashways, Inc., a building materials retailer, since 1984.
(1) AUDIT COMMITTEE
(2) COMPENSATION COMMITTEE
(3) CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
CORPORATE OFFICERS
ERVIN F. KAMM, JR.
President and Chief Executive Officer
DOUGLAS J. GLADER
Vice President
MICHAEL D. KELLEY
Vice President
JONATHON E. KILLMER
Vice President, Chief Financial Officer
and Treasurer
DAVID M. RZASA
Vice President
DANA R. NELSON
Vice President
RAY D. WYMER
Vice President
JAMES E. NICHOLSON
Partner, Faegre & Benson LLP
Secretary
CORPORATE GOVERNANCE
- - The majority of the board's membership is comprised of outside directors.
- - The compensation and audit committees are comprised of all outside
directors.
- - The positions of Chairman of the Board and Chief Executive Officer are
separate.
- - The corporate governance and nominating committee is comprised of the
Chairman and two outside directors.
31
STOCKHOLDER AND INVESTOR INFORMATION
- -------------------------------------------------------------------------------
STOCK LISTING
The Company's common stock has been publicly traded since its initial public
offering on October 5, 1989. The Company's common stock trades on the Nasdaq
National Market tier of The Nasdaq Stock Market-SM- under the symbol "DGII." At
December 13, 1996, the number of holders of the Company's Common Stock was
approximately 11,709 consisting of 415 record holders and approximately 11,294
stockholders whose stock is held by a bank, broker or other nominee.
High and low sale prices for each quarter during the years ended September 30,
1996 and 1995, as reported on The Nasdaq Stock Market were as follows:
1996 First Second Third Fourth
- -----------------------------------------------------------------
High $ 28.75 $ 30.00 $ 30.75 $ 27.375
Low 17.125 17.75 23.875 11.875
1995 First Second Third Fourth
- -----------------------------------------------------------------
High $ 19.25 $ 24.25 $ 26.00 $ 30.25
Low 13.25 18.00 18.25 22.00
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
The Company does not have a Dividend Reinvestment Plan or a Direct Stock
Purchase Plan.
STOCKHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Norwest Shareowners Services
P.O. Box 64854
St. Paul, MN 55164-0854
(612) 450-4064
(800) 468-9716
LEGAL COUNSEL
Faegre & Benson LLP
2200 Norwest Center
Minneapolis, MN 55402-3901
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P.
650 Third Avenue South
Minneapolis, MN 55402-4333
ANNUAL MEETING The Company's Annual Meeting of Stockholders will be held on
Thursday, January 30, 1997, at 3:30 pm, at Radisson Plaza Hotel, 35 South
Seventh Street, Minneapolis, Minn.
INVESTOR RELATIONS: A COPY OF THE COMPANY'S FORM 10-K, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, IS AVAILABLE FREE UPON WRITTEN REQUEST. CONTACT:
MAUREEN MCGARRIGLE
DIRECTOR, INVESTOR RELATIONS
DIGI INTERNATIONAL INC.
11001 BREN ROAD EAST
MINNETONKA, MN 55343
(612) 912-3444
EMAIL: IR@DGII.COM
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Digi International Inc.
Our report on the consolidated financial statements of Digi International
Inc. has been incorporated by reference in this Form 10-K from page 30 of the
1996 Annual Report to Stockholders of Digi International Inc. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedule listed in Item 14(a)2 on page 15 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basis financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
December 20, 1996
Report of Independent Auditors
Board of Directors and Shareholders
AetherWorks Corporation
We have audited the accompanying balance sheets of AetherWorks Corporation (a
development stage company) as of September 30, 1996 and 1995, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
the year ended September 30, 1996, the eighteen month period ended September
30, 1995 and the period from February 24, 1993 (inception) to September 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AetherWorks Corporation (a
development stage company) at September 30, 1996 and 1995, and the results of
its operations and its cash flows for the year ended September 30, 1996, the
eighteen month period ended September 30, 1995 and the period from February
24, 1993 (inception) to September 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 16 to the financial
statements, the Company's deficit accumulated during the development stage
raises substantial doubt about its ability to continue as a going concern.
The Company intends to obtain additional financing to permit it to continue
its operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Ernst & Young LLP
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 8, 1996
Digi International Inc.
Schedule II
Valuation and Qualifying Accounts
Balance at Charged Deductions
Beginning Charged to to Other from Balance at
of Year Expense Accounts Allowance End of Year
---------- ---------- -------- ---------- -----------
Deducted from Accounts Receivable-
Allowance for Doubtful Accounts:
Year ended September 30: 1994 $359,000 $ 608,001 $84,581(2) $ 410,082(1) $ 641,500
-------- ---------- ------- ---------- ----------
-------- ---------- ------- ---------- ----------
1995 $641,500 $ 243,895 $ 228,895(1) $ 656,500
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1996 $656,500 $ 262,164 $ 183,222(1) $ 735,442
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Deducted from Inventory-Allowance for
Inventory Obsolesence:
Year ended September 30: 1994 $355,000 $1,071,741 $72,441(2) $ 817,182(3) $ 682,000
-------- ---------- ------- ---------- ----------
-------- ---------- ------- ---------- ----------
1995 $682,000 $ 716,300 $ 586,300(3) $ 812,000
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1996 $812,000 $1,455,895 $1,099,735(3) $1,168,176
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-------- ---------- ---------- ----------
(1) Uncollectible accounts charged against allowance.
(2) Balance of Milan Technology Corporation at date of acquisition.
(3) Scrapped inventory charged against allowance.
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