1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2000.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
-----------------------
(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)
11001 Bren Road East
Minnetonka, Minnesota 55343
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(952) 912-3444
----------------------------------------------------
(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 February 12, 2001, there were 15,208,551 shares of the registrant's $.01 par
value Common Stock outstanding.
================================================================================
2
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statement of Operations for
the three months ended December 31, 2000 and 1999...................................... 3
Condensed Consolidated Balance Sheet as of
December 31, 2000 and September 30, 2000............................................... 4
Condensed Consolidated Statement of Cash Flows for
the three months ended December 31, 2000 and 1999...................................... 5
Notes to Condensed Consolidated Financial
Statements............................................................................. 6
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.......................................... 11
Forward-looking Statements............................................................. 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................................... 16
ITEM 2. Changes in Securities.................................................................. 17
ITEM 3. Defaults Upon Senior Securities........................................................ 17
ITEM 4. Submission of Matters to a Vote of Securities Holders.................................. 17
ITEM 5. Other Information...................................................................... 17
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 18
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ ------------
Net sales $ 34,443,149 $ 40,140,205
Cost of sales 16,282,069 17,965,228
------------ ------------
Gross margin 18,161,080 22,174,977
Operating expenses:
Sales and marketing 7,252,374 8,722,850
Research and development 4,558,023 5,766,262
General and administrative 4,792,359 6,190,939
Restructuring (182,038) --
------------ ------------
Total operating expenses 16,420,718 20,680,051
------------ ------------
Operating income 1,740,362 1,494,926
Other income, net 988,627 461,825
------------ ------------
Income before income taxes 2,728,989 1,956,751
Income tax provision 1,364,495 939,240
------------ ------------
Net income $ 1,364,494 $ 1,017,511
============ ============
Net income per common share, basic $ 0.09 $ 0.07
============ ============
Net income per common share, assuming dilution $ 0.09 $ 0.07
============ ============
Weighted average common shares, basic 15,166,642 14,967,793
============ ============
Weighted average common shares, assuming dilution 15,184,697 15,337,788
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
4
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000 AND SEPTEMBER 30, 2000
December 31 September 30
2000 2000
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,405,357 $ 38,785,936
Marketable securities 49,156,236 20,150,132
Accounts receivable, net 20,746,645 18,175,226
Inventories, net 20,534,208 19,700,010
Other 4,016,155 3,655,511
-------------- --------------
Total current assets 101,858,601 100,466,815
Property, equipment and improvements, net 24,075,301 24,408,384
Intangible assets, net 23,231,474 16,397,744
Other 1,342,237 1,649,252
-------------- --------------
Total assets $ 150,507,613 $ 142,922,195
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 2,377,000 $ 3,147,900
Current portion of long-term debt 378,418 330,305
Accounts payable 9,994,858 6,275,995
Income taxes payable 2,610,369 1,328,481
Accrued expenses:
Advertising 1,159,128 1,143,565
Compensation 3,221,208 1,862,517
Other 6,768,906 6,760,841
Restructuring reserves 412,141 1,531,992
-------------- --------------
Total current liabilities 26,922,028 22,381,596
Long-term debt 7,283,809 7,081,396
Net deferred income taxes 1,485,000 --
-------------- --------------
Total liabilities $ 35,690,837 $ 29,462,992
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value; 60,000,000 shares
authorized; 16,360,148 and 16,322,949 shares issued 163,601 163,229
Additional paid-in capital 71,860,145 71,851,928
Retained earnings 62,774,355 61,409,861
Accumulated other comprehensive (loss) income (300,692) 166,750
-------------- --------------
134,497,409 133,591,768
Unearned stock compensation (50,558) (89,618)
Treasury stock, at cost, 1,172,076 and 1,196,463 shares (19,630,075) (20,042,947)
-------------- --------------
Total stockholders' equity 114,816,776 113,459,203
-------------- --------------
Total liabilities and stockholders' equity $ 150,507,613 $ 142,922,195
============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
5
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------ ------------
Operating activities:
Net income $ 1,364,494 $ 1,017,511
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring (182,038) --
Depreciation and amortization 2,675,447 3,842,867
Provision for losses on accounts receivable 285,137 192,910
Provision for inventory obsolescence 180,000 615,409
(Gain) loss on sale of fixed assets (278,974) 8,084
Stock compensation 29,634 50,700
Changes in operating assets and liabilities 1,519,582 (1,391,592)
------------ ------------
Total adjustments 4,228,788 3,318,378
------------ ------------
Net cash provided by operating activities 5,593,282 4,335,889
------------ ------------
Investing activities:
Purchase of marketable securities, net (29,006,104) (12,062,992)
Business acquisition, net of cash acquired (6,980,821) --
Purchase of property, equipment,
intangibles, and improvements (210,466) (671,130)
------------ ------------
Net cash used in investing activities (36,197,391) (12,734,122)
------------ ------------
Financing activities:
(Payments) borrowings under line of credit agreements (903,000) 26,780
Principal payments on long-term debt (164,346) --
Stock benefit plan transactions, net 423,199 969,661
------------ ------------
Net cash (used in) provided by financing activities (644,147) 996,441
------------ ------------
Effect of exchange rate changes on cash and
cash equivalents (132,323) 314,164
------------ ------------
Net decrease in cash and cash equivalents (31,380,579) (7,715,956)
Cash and cash equivalents, beginning of period 38,785,936 20,963,607
------------ ------------
Cash and cash equivalents, end of period $ 7,405,357 $ 13,247,651
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
6
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated 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 (SEC). Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted, pursuant to such rules and regulations. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto included in the
Company's 2000 Annual Report on Form 10-K.
The condensed consolidated financial statements presented herein as of December
31, 2000, and for the three months ended December 31, 2000 and 1999, reflect, in
the opinion of management, all adjustments (which consist only of normal,
recurring adjustments) necessary for a fair presentation of the consolidated
financial position and the consolidated results of operations and cash flows for
the periods presented. The consolidated results of operations for any interim
period are not necessarily indicative of results for the full year.
2. ACQUISITIONS
On October 2, 2000, the Company acquired Inside Out Networks (ION), a developer
of data connections products based in Austin, Texas. The transaction was
accounted for using the purchase method of accounting. Accordingly, the purchase
price of $7,295,244 has been allocated to the estimated fair value of assets
acquired and liabilities assumed.
The Company may pay up to $8,500,000 of additional cash consideration for the
purchase, subject to ION achieving specific revenue and operating income targets
during the three years following the acquisition.
The following unaudited pro forma condensed consolidated results of operations
have been prepared as if the acquisition of ION had occurred as of the beginning
of the fiscal year ended September 30, 2000:
2000
------------
Net sales $ 41,181,662
Net income $ 957,404
Net income per share $ 0.06
The unaudited pro-forma condensed consolidated results of operations are not
necessarily indicative of results that would have occurred had the acquisition
been in effect for the period presented, nor are they necessarily indicative of
results that will be obtained in the future.
6
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRUCTURING
In September 2000, the Company's Board of Directors approved a restructuring
plan related to its European operations headquartered in Dortmund, Germany,
which provided for the transition of all product development, technical support
and manufacturing functions to the Company's corporate headquarters located in
Minnetonka, Minnesota. The plan also included the closure of the Company's
office in Bagshot, England. The resulting charge of $1,531,992 consisted of
$1,252,531 for severance and termination costs related to the elimination of 73
positions in Dortmund, Germany and 2 positions in Bagshot, England; $134,227
related to the closure of the Bagshot office for lease cancellation; $100,684 of
cancellation fees related to automobile leases, maintenance contracts, and
office equipment leases, and $44,550 for severance-related legal expenses.
Restructuring activities are expected to be completed by the end of the second
quarter of fiscal 2001.
As of December 31, 2000, the Company had paid $782,279 of termination costs
relating to the elimination of 46 positions in Dortmund, Germany, and $61,377
relating to the elimination of 2 positions in Bagshot, England. An additional
$22,163 was paid for cancellation fees in Dortmund, Germany, and $71,994 of
expenses related to the closure of the Bagshot office were paid in the first
quarter of fiscal 2001. Adjustments to the restructuring accrual relating to
severance costs, due to unanticipated employee retention, were $153,885 for
Dortmund, Germany, and were reflected as a reduction in the restructuring
accrual and a corresponding increase to operating income. Other changes in
estimated restructuring expenses of $4,383 for cancellation fees and $23,770 for
severance-related legal expenses were also shown as adjustments to the
restructuring accrual, reducing the restructuring accrual and increasing
operating income. A summary of payments and adjustments as of December 31, 2000
is included in the table below.
Balance at Change in Balance at
September 30, Estimate December 31,
Description 2000 Payments Adjustments 2000
----------- ------------- -------- ----------- ------------
Severance and termination costs $1,252,531 $ (843,656) $ (153,885) $ 254,990
Closure of Bagshot Office 134,227 (71,994) -- 62,233
Cancellation fees 100,684 (22,163) (4,383) 74,138
Severance-related Legal Expenses 44,550 -- (23,770) 20,780
---------- ---------- ---------- ---------
TOTAL $1,531,992 $ (937,813) $ (182,038) $ 412,141
7
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories, net are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at December 31, 2000 and
September 30, 2000 consisted of the following:
December 31, 2000 September 30, 2000
----------------- ------------------
Raw materials $ 12,111,038 $ 12,496,226
Work in process 1,539,632 1,092,654
Finished goods 6,883,538 6,111,130
------------ ------------
$ 20,534,208 $ 19,700,010
============ ============
5. COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) are shown below.
Comprehensive income (loss) includes net income (loss) and foreign currency
translation adjustments that are charged or credited to stockholders' equity.
Comprehensive income (loss) for the three months ended December 31, 2000 and
1999 was as follows:
Three months ended
December 31
-----------------------------------
2000 1999
------------ ------------
Net income $ 1,364,494 $ 1,017,511
Foreign currency
translation adjustments (467,442) (1,041,563)
------------ ------------
Comprehensive
income (loss) $ 897,052 $ (24,052)
============ ============
6. NET INCOME PER SHARE
Basic net income per share is calculated based on the weighted average of common
shares outstanding during the period. Net income per share, assuming dilution,
is computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. The Company's only common equivalent
shares are those that result from dilutive common stock options.
8
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NET INCOME PER SHARE (CONTINUED)
The following table is a reconciliation of the numerators and denominators in
the income per share calculations:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the quarter ended December 31, 2000
BASIC INCOME PER SHARE
Income available to common stockholders $ 1,364,494 15,166,642 $ 0.09
EFFECTIVE OF DILUTIVE SECURITIES
Common equivalent shares -- 18,055 --
----------- ---------- ------
DILUTED INCOME PER SHARE
Income available to common stockholders $ 1,364,494 15,184,697 $ 0.09
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the quarter ended December 31, 1999
BASIC INCOME PER SHARE
Income available to common stockholders $ 1,017,511 14,967,793 $ 0.07
EFFECTIVE OF DILUTIVE SECURITIES
Common equivalent shares -- 369,995 --
----------- ---------- ------
DILUTED INCOME PER SHARE
Income available to common stockholders $ 1,017,511 15,337,788 $ 0.07
Options to purchase 2,475,152 and 534,091 shares at December 31, 2000 and 1999,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
common shares.
7. RECENT ACCOUNTING DEVELOPMENTS
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101)-Revenue Recognition in Financial
Statements. This SAB summarizes certain of the SEC's views regarding revenue
recognition. The provisions of SAB 101, as amended by SAB 101A and SAB 101B,
must be adopted by the fourth quarter of the Company's fiscal year ending
9
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
September 30, 2001. However, any effects of the SAB must be reflected
retroactively to October 1, 2000 (the first day of fiscal year 2001). The
Company has considered the effect of the guidance outlined in SAB 101 and does
not believe that it will impact the Company's revenue recognition practices or
consolidated financial statements.
8. LEGAL PROCEEDINGS
Discussion of legal matters is incorporated by reference from Part II, Item I of
this Form 10-Q "Legal Proceedings" and should be considered an integral part of
these Condensed Consolidated Financial Statements.
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from the Company's
interim condensed consolidated statements of operations expressed as percentages
of sales:
Three months %
ended Increase
December 31 (decrease)
---------------------- ----------
2000 1999
-------- --------
Net sales 100.0 100.0 (14.2)%
Cost of sales 47.3 44.8 (9.4)
-------- -------- ------
Gross margin 52.7 55.2 (18.1)
-------- -------- ------
Operating expenses:
Sales and marketing 21.1 21.7 (16.9)
Research and development 13.2 14.4 (21.0)
General and administrative 13.9 15.4 (22.6)
Restructuring (0.5) -- --
-------- -------- ------
Total operating expenses 47.7 51.5 (20.6)
-------- -------- ------
Operating income 5.0 3.7 16.4
Other income, net 2.9 1.2 114.1
-------- -------- ------
Income before income taxes 7.9 4.9 39.5
Income tax provision 4.0 2.4 45.3
-------- -------- ------
Net income 3.9 2.5 34.1%
======== ======== ======
NET SALES
Net sales for the three months ended December 31, 2000, were lower than net
sales for the corresponding three months ended December 31, 1999, by $5.7
million or 14.2%. Net sales of the Company's legacy asynchronous products
generated revenues of $22.9 million for the three months ended December 31,
2000, versus $28.6 million for the three months ended December 31, 1999.
Physical layer products sales increased in the three months ended December 31,
2000, resulting in increased revenues of $3.7 million versus the comparable
quarter in 1999. Net sales of the Company's wide area network (WAN) products
declined $3.7 million during the three months ended December 31, 2000, versus
the comparable quarter last year. Digital remote access server (RAS) products
comprised $2.0 million of the WAN decline during the three months ended December
31, 2000. Net sales of digital RAS products were $2.8 million for the three
months ended December 31, 2000, compared to $4.8 million for the three months
ended December 31, 1999.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
The following table sets forth revenue by principal product group expressed as a
percentage of net sales:
Three months
Ended December 31
------------------------------
2000 1999
------------ ------------
Server Based 81.9% 93.7%
Physical Layer 18.1% 6.3%
------------ ------------
Total 100.0% 100.0%
GROSS MARGIN
Gross margin for the three months ended December 31, 2000 was 52.7%, compared to
55.2% for the three months ended December 31, 1999. The decline in margin is a
result of product mix which includes a decline in the relative volume of higher
margin asynchronous and RAS products to lower-margin physical layer products.
OPERATING EXPENSES
Operating expenses, excluding restructuring charges, for the three months ended
December 31, 2000, decreased $4.1 million, or 19.7%, as compared to operating
expenses for the three months ended December 31, 1999. Operating expenses for
European operations decreased by $2.9 million in the first quarter of fiscal
2001, which is primarily attributable to the restructuring which the Company
executed in the fourth quarter of fiscal 2000. Operating expenses decreased by
an additional $2.0 million, due to ongoing cost containment measures. The
Company incurred incremental operating expenses of $0.8 million as a result of
the Inside Out Networks acquisition in October, 2000.
Sales and marketing expenses for the three months ended December 31, 2000, were
$7.3 million, or 21.1% of sales, compared to $8.7 million, or 21.7% of sales,
for the three months ended December 31, 1999. A decrease in compensation and
related employee expenses, as well as lower levels of marketing activity in the
first quarter of fiscal 2001, accounted for $1.6 million of the decrease in
expense as compared to the first quarter of fiscal 2000. This decrease is due to
reductions in the European workforce as a result of the restructuring in the
fourth quarter of fiscal 2000, as well as an increase in unfilled positions
versus the prior year. Incremental sales and marketing expenses related to
Inside Out Networks were $0.2 million.
Research and development expenses were $4.6 million, or 13.2% of sales, compared
with $5.8 million, or 14.4% of sales, for the three months ended December 31,
2000 and 1999, respectively. The Company has focused its research and
development activities on the asynchronous, terminal server and RAS product
lines. The elimination of research and development activities at the European
operations resulted in a $0.6 million decrease. An additional $0.8 million
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
decrease resulted from open engineering positions. Incremental research and
development expenses related to Inside Out Networks were $0.2 million.
General and administrative expenses for the three months ended December 31, 2000
were $4.8 million, or 13.9% of sales, compared to $6.2 million, or 15.4% of
sales, for the three months ended December 31, 1999. In addition, general and
administrative expense savings of approximately $0.5 million resulted from cost
containment measures. General and administrative expenses declined by $1.4
million, primarily due to decreased amortization expense as a result of the
fourth quarter of fiscal 2000 write-off of the acquired ITK International, Inc.
(ITK) intangible assets. General and administrative expenses related to Inside
Out Networks were $0.5 million, which primarily consists of acquired intangible
asset amortization.
OTHER INCOME
Other income was $1.0 million and $0.5 million for the three months ended
December 31, 2000 and 1999, respectively. The Company realized interest income
on short-term marketable securities and cash and cash equivalents of $0.9
million and $0.8 million, respectively, for the first quarter ended December 31,
2000 and 1999. Interest expense on lines of credit and long term debt was $0.2
million and $0.5 million for the periods ended December 31, 2000 and 1999,
respectively. Other income of $0.3 million and $0.2 million was realized in the
first quarter of fiscal 2001 and fiscal 2000, respectively.
INCOME TAXES
Income taxes have been provided for at an estimated annual effective rate of 50%
for the three months ended December 31, 2000, versus 48% for the three months
ended December 31, 1999. The effective rates exceed the U.S. statutory income
tax rate primarily due to the annual amortization expense relating to the
intangible assets acquired in the ITK, Central Data Corporation (CDC) and Inside
Out Networks acquisitions which is not deductible for income tax reporting
purposes.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations. The Company's working capital decreased from $78.1 million at
September 30, 2000, to $74.9 million at December 31, 2000.
Net cash provided by operating activities for the three months ended December
31, 2000, was $5.6 million, compared to net cash provided by operations of $4.3
million for the three months ended December 31, 1999. The increase in net cash
provided by operations during the first quarter of fiscal 2001 was primarily due
to changes in operating assets and liabilities resulting from improved
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
collections on accounts receivable balances, as well as increased balances
related to accounts payable and accrued expense.
Net cash used in investing activities for the three months ended December 31,
2000 was $36.2 million versus $12.7 million during the comparable quarter a year
ago. Net purchases of marketable securities were $29.0 million in the first
quarter of fiscal 2001, compared to $12.0 million during the first quarter of
fiscal 2000. In October 2000, the Company acquired Inside Out Networks,
resulting in a net cash outflow of approximately $7.0 million. Purchases of
equipment and capital improvements were $0.2 million and $0.7 million for the
quarters ended December 31, 2000 and 1999, respectively.
Net cash used in financing activities for the three month period ended December
31, 2000, was $0.6 million, compared to $1.0 million of net cash provided by
financing activities for the three month period ended December 31, 1999.
Principal payments on line of credit and long-term debt obligations were $1.1
million during the first quarter of fiscal 2001, with no corresponding payments
made during the first quarter of fiscal 2000. Cash received from the exercise of
employee stock options and employee stock purchase plan transactions was $0.4
million and $1.0 million for the quarters ended December 31, 2000 and 1999,
respectively.
The Company's management believes that current financial resources, cash
generated from operations and the Company's potential capacity for additional
debt and/or equity financing will be sufficient to fund current and future
capital requirements.
FOREIGN CURRENCY
Effective January 1, 1999, eleven countries of the European Union converted to a
common currency called the "Euro." All invoicing activity within the European
Union is required to be transacted in Euros, effective January 1, 2002. This
action will cause some of the Company's European transactions to be negotiated,
invoiced and paid in Euros. Additional currency risk may exist when sales from
the United States into the European Union are transacted in Euros rather than
U.S. dollars. Such costs and risks are not quantifiable at this time.
The Company continues to hold long term debt denominated in Deutschemarks at its
Dortmund, Germany (ITK) location, related to the facility in Dortmund. This debt
balance is subject to fluctuations as a result of Deutschemark exchange rate
changes.
For the three months ended December 31, 2000, the Company had approximately
$10.3 million of net sales related to foreign customers, of which $8.6 million
was denominated in U.S. dollars and $1.7 million was denominated in
Deutschemarks.
In future periods, a significant portion of sales will be made in Deutschemarks
until full integration of the "Euro" is achieved. The Company has not
implemented a hedging strategy to reduce the risk of foreign currency
translation exposures.
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
INFLATION
Management believes inflation has not had a material effect on the Company's
operations or on its financial position.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q contains certain statements that are "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995, and within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe," "expect," "anticipate," "intend," "estimate," "target," "may,"
"will," "plan," "project," "should," "continue," or the negative thereof or
other expressions, which are predictions of or indicate future events and trends
and which do not relate to historical matters, identify forward-looking
statements. Such statements are based on information available to management as
of the time of such statements and relate to, among other things, expectations
of the business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding the
Company's mission and vision. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
RECENT ACCOUNTING DEVELOPMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101 "Revenue Recognition in Financial Statements." The
SAB summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB 101, as amended by SAB 101A and SAB 101B, must be adopted by
the fourth quarter of the Company's fiscal year ending September 30, 2001.
However, any effects of the SAB must be reflected retroactively to October 1,
2000 (the first day of fiscal year 2001). The Company has considered the effect
of the guidance outlined in SAB 101, and does not believe that it will impact
the Company's revenue recognition practices or consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material exposure to market risk from market risk
sensitive financial instruments other than the currency risk associated with
certain transactions being denominated in Deutschemarks.
15
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between January 3, 1997 and March 7, 1997, the Company and certain of its
previous officers were named as defendants in putative securities class action
lawsuits filed in the United States District Court for the District of Minnesota
by 21 lead plaintiffs on behalf of an alleged class of purchasers of the
Company's common stock during the period January 25, 1996 through December 23,
1996. The putative class actions were thereafter consolidated (Master File No.
97-5 DWF/RLE). The Consolidated Amended Class Action Complaint (Consolidated
Amended Complaint) alleges that the Company and certain of its previous officers
violated the federal securities laws by, among other things, misrepresenting
and/or omitting material information concerning the Company's operations and
financial results.
On February 25, 1997, the Company and certain of its previous officers also were
named as defendants in a securities lawsuit filed in the United States District
Court for the District of Minnesota by the Louisiana State Employees Retirement
System (Civil File No. 97-440, Master File No. 97-5 DWF/RLE) (the Louisiana
Amended Complaint). The Louisiana Amended Complaint alleges that the Company and
certain of its previous officers violated the federal securities laws and state
common law by, among other things, misrepresenting and/or omitting material
information concerning the Company's operations and financial results.
In a decision issued on May 22, 1998, the Court dismissed without leave to
replead all claims asserted in both cases, including all claims asserted against
defendant Gary L. Deaner, except for certain federal securities law claims based
upon alleged misrepresentations and/or omissions relating to the accounting
treatment applied to the Company's AetherWorks investment. The Court also
limited the claims asserted in the Louisiana Amended Complaint to the 11,000
shares of the Company's stock held subsequent to November 14, 1996, for which
the Louisiana Amended Complaint claims damages of $184,276 and seeks an award of
attorneys' fees, disbursements and costs. The Consolidated Amended Complaint
seeks compensatory damages of approximately $43.1 million, plus interest,
against all defendants, jointly and severally, and an award of attorneys' fees,
experts' fees and costs.
On August 17, 2000, the Court granted defendants' motions for summary judgment
and dismissed with prejudice the Consolidated Amended Complaint and the
Louisiana Amended Complaint. Although the 21 lead plaintiffs in the consolidated
putative class actions had previously moved for class certification, the Court
dismissed the actions before ruling on that motion.
On September 1, 2000, the Louisiana State Employees Retirement System filed an
appeal from the Court's August 17, 2000 decision. On September 14, 2000, the 21
lead plaintiffs in the consolidated putative class actions filed an appeal from
both the Court's May 22, 1998 and August 17, 2000 decisions. The two appeals
have been consolidated for briefing and argument, with briefing completed in
February 2001, and oral argument to be scheduled at a subsequent date.
The ultimate outcomes of these actions cannot be determined at this time, and no
potential assessment of their effect, if any, on the Company's financial
position, liquidity or future operations can be made.
16
17
PART II. OTHER INFORMATION (CONTINUED)
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
17
18
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
3(a) Restated Certificate of Incorporation of the Registrant, as
Amended (1)
3(b) Amended and Restated By-Laws of the Registrant (2)
4(a) Form of Rights Agreement, dated as of June 10, 1998 between
Digi International Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest Bank
Minnesota, National Association), as Rights Agent (3)
4(b) Amendment dated January 26, 1999, to Rights Agreement, dated
as of June 10, 1998 between Digi International Inc. and Wells
Fargo Bank Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as Rights Agent
(4)
10(e)(i) Amendment between the Company and Subramanian Krishnan dated
February 5, 2001*
10(i) 2000 Omnibus Stock Plan of the Company (5)
(b) Reports on Form 8-K:
Form 8-K, dated October 13, 2000, regarding the Company's
acquisition of Inside Out Networks on October 2, 2000.
- ----------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q.
18
19
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(1) Incorporated by reference to Exhibit 3(a) to the Company's Form 10-K
for the year ended September 30, 1993 (File no. 0-17972).
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form S-1 (File no. 33-42384).
(3) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A dated June 24, 1998 (File no. 0-17972).
(4) Incorporated by reference to Exhibit 1 to Amendment 1 to the Company's
Registration Statement on Form 8-A dated February 5, 1999 (File no.
0-17972).
(5) Incorporated by reference to Exhibit B to the Company's Proxy Statement
for its Annual Meeting of Stockholders held on January 24, 2001 (File
no. 0-17972).
19
20
PART II. OTHER INFORMATION (CONTINUED)
EXHIBIT INDEX
Exhibit Document
Number Description Form of Filing
- ------- ----------- --------------
3(a) Restated Certificate of Incorporation of the Registrant, as
Amended (incorporated by reference to the corresponding
exhibit number to the Company's Form 10-K for the year ended
September 30, 1993 (File No. 0-17972)).................................. Incorporated by Reference
3(b) Amended and Restated By-Laws of the Registrant (incorporated
by reference to the corresponding exhibit number to the
Company's Registration Statement on Form S-1 (File No.
33-42384)).............................................................. Incorporated by Reference
4(a) Form of Rights Agreement, dated as of June 10, 1998 between
Digi International, Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest Bank
Minnesota, National Association), as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated June 24, 1998 (File
No. 0-17972))........................................................... Incorporated by Reference
4(b) Amendment dated January 26, 1999, to Rights Agreement, dated
as of June 10, 1998 between Digi International Inc. and Wells
Fargo Bank Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as Rights Agent
(incorporated by reference to Exhibit 1 to Amendment No. 1 to
the Company's Registration Statement on Form 8-A dated
February 5, 1999 (File No. 0-17972)).................................... Incorporated by Reference
10(e)(i) Amendment between the Company and Subramanian Krishnan dated
February 5, 2001........................................................ Electronic Transmission
10(i) 2000 Omnibus Stock Plan of the Company.................................. Incorporated by Reference
20
21
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: February 14, 2001 By: /s/ Subramanian Krishnan
-----------------------------------
Subramanian Krishnan
Senior Vice President,
Chief Financial Officer
and Treasurer (duly authorized
officer and Principal Financial Officer)
21