1
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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: March 31, 2001.
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 May 9, 2001, there were 15,241,617 shares of the registrant's $.01 par value
Common Stock outstanding.
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2
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Condensed Consolidated Statement of Operations for
the three months and six months ended
March 31, 2001 and 2000................................................ 3
Condensed Consolidated Balance Sheet as of
March 31, 2001 and September 30, 2000.................................. 4
Condensed Consolidated Statement of Cash Flows for
the six months ended March 31, 2001 and 2000........................... 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............................................. 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............. 17
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. Legal Proceedings...................................................... 18
ITEM 2. Changes in Securities.................................................. 19
ITEM 3. Defaults Upon Senior Securities........................................ 19
ITEM 4. Submission of Matters to a Vote of Securities Holders.................. 19
ITEM 5. Other Information...................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K....................................... 20
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
Three months ended March 31 Six months ended March 31
--------------------------- -------------------------
2001 2000 2001 2000
----------- ------------ ------------ ------------
Net sales $ 33,037,854 $ 25,799,765 $ 67,481,003 $ 65,939,970
Cost of sales 15,839,973 13,526,558 32,122,042 31,491,787
------------ ------------ ------------ ------------
Gross margin 17,197,881 12,273,207 35,358,961 34,448,183
Operating expenses:
Sales and marketing 8,018,534 8,591,604 15,270,909 17,314,455
Research and development 5,049,909 5,313,061 9,607,932 11,079,322
General and administrative 3,620,756 4,864,484 8,413,114 11,055,425
Impairment loss -- 18,068,249 -- 18,068,249
Restructuring (47,731) (138,467) (229,769) (138,467)
------------ ------------ ------------ ------------
Total operating expenses 16,641,468 36,698,931 33,062,186 57,378,984
------------ ------------ ------------ ------------
Operating income (loss) 556,413 (24,425,724) 2,296,775 (22,930,801)
Other income 491,706 8,688,720 1,480,333 9,150,545
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,048,119 (15,737,004) 3,777,108 (13,780,256)
Income tax provision (benefit) 492,831 (2,455,067) 1,857,326 (1,515,827)
------------ ------------ ------------ ------------
Net income (loss) $ 555,288 $(13,281,937) $ 1,919,782 $(12,264,429)
============ ============ ============ ============
Net income (loss) per common share, basic $ 0.04 $ (0.88) $ 0.13 $ (0.82)
============ ============ ============ ============
Net income (loss) per common share, assuming dilution $ 0.04 $ (0.88) $ 0.13 $ (0.82)
============ ============ ============ ============
Weighted average common shares, basic 15,207,896 15,062,575 15,187,269 15,015,184
============ ============ ============ ============
Weighted average common shares, assuming dilution 15,215,892 15,062,575 15,199,649 15,015,184
============ ============ ============ ============
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 MARCH 31, 2001 AND SEPTEMBER 30, 2000
March 31 September 30
2001 2000
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,219,461 $ 38,785,936
Marketable securities 34,105,255 20,150,132
Accounts receivable, net 22,044,745 18,175,226
Inventories, net 20,602,282 19,700,010
Other 3,925,247 3,655,511
------------- -------------
Total current assets 100,896,990 100,466,815
Property, equipment and improvements, net 23,256,665 24,408,384
Intangible assets, net 21,910,824 16,397,744
Other 1,473,915 1,649,252
------------- -------------
Total assets $ 147,538,394 $ 142,922,195
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 2,709,000 $ 3,147,900
Current portion of long-term debt 203,388 330,305
Accounts payable 7,792,528 6,275,995
Income taxes payable 1,017,551 1,328,481
Accrued expenses:
Advertising 1,222,128 1,143,565
Compensation 3,723,381 1,862,517
Other 6,873,815 6,760,841
Restructuring reserves 60,620 1,531,992
------------- -------------
Total current liabilities 23,602,411 22,381,596
Long-term debt 6,914,943 7,081,396
Net deferred income taxes 1,395,666 --
------------- -------------
Total liabilities 31,913,020 29,462,992
Commitments and contingency
Stockholders' equity:
Preferred stock, $.01 par value: 2,000,000 shares
authorized; none outstanding
Common stock, $.01 par value: 60,000,000 shares
authorized; 16,361,379 and 16,322,949 issued 163,613 163,229
Additional paid-in capital 71,626,319 71,851,928
Retained earnings 63,329,643 61,409,861
Accumulated other comprehensive (loss) income (186,055) 166,750
------------- -------------
134,933,520 133,591,768
Unearned stock compensation (19,668) (89,618)
Treasury stock, at cost, 1,151,899 and 1,196,463 shares (19,288,478) (20,042,947)
------------- -------------
Total stockholders' equity 115,625,374 113,459,203
------------- -------------
Total liabilities and stockholders' equity $ 147,538,394 $ 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 SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ ------------
Operating activities:
Net income (loss) $ 1,919,782 $(12,264,429)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Asset impairment -- 18,068,249
Restructuring (229,769) (138,467)
Depreciation and amortization 4,799,079 7,679,559
Provision for losses on accounts receivable 215,024 326,462
Provision for inventory obsolescence 365,000 1,292,899
(Gain) loss on sale of fixed assets (1,315) 7,879
Stock compensation 57,278 94,164
Changes in operating assets and liabilities (3,652,272) (423,991)
------------ ------------
Total adjustments 1,553,025 26,906,754
------------ ------------
Net cash provided by operating activities 3,472,807 14,642,325
------------ ------------
Investing activities:
Purchase of marketable securities, net (13,955,123) (13,964,173)
Business acquisition, net of cash acquired (7,236,422)
Purchase of property, equipment, intangibles and improvements (611,669) (1,570,960)
------------ ------------
Net cash used in investing activities (21,803,214) (15,535,133)
------------ ------------
Financing activities:
(Payments) borrowings under line of credit agreements (462,200) 85,539
Principal payments on long-term debt (330,691) (140,040)
Stock benefit plan transactions, net 533,461 1,213,101
------------ ------------
Net cash (used in) provided by financing activities (259,430) 1,158,600
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 23,362 (596,614)
------------ ------------
Net decrease in cash and cash equivalents (18,566,475) (330,822)
Cash and cash equivalents, beginning of period 38,785,936 20,963,607
------------ ------------
Cash and cash equivalents, end of period $ 20,219,461 $ 20,632,785
============ ============
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 March 31,
2001, and for the three and six months ended March 31, 2001 and 2000, reflect,
in the opinion of management, all adjustments (which, other than the second
quarter 2000 impairment loss, 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. ACQUISITION
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 $7,550,844 has been allocated to the estimated fair value of assets
acquired and liabilities assumed.
The Company may be required to 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
--------
Three months Six months
ended March 31 ended March 31
-------------- --------------
Net sales $ 26,576,446 $ 67,758,108
Net loss (13,467,875) (12,510,471)
Net loss per share $ (0.89) $ (0.83)
6
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION (CONTINUED)
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 periods presented, nor are they necessarily indicative of
results that will be obtained in the future.
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 were originally expected to be completed by the end of
the second quarter of fiscal 2001. Final facility closure costs and cancellation
fees are now expected to be paid during the third quarter of fiscal year 2001.
As of March 31, 2001, the Company had paid $1,001,314 of termination costs
relating to the elimination of 67 positions in Dortmund, Germany, and $78,007
relating to the elimination of 2 positions in Bagshot, England. The Company paid
$114,806 of costs related to the Bagshot office closure during the 6 months
ended March 31, 2001. The Company paid $47,476 for cancellation fees related to
automobile leases, maintenance contracts, and office equipment leases during the
6 months ended March 31, 2001. The remaining accruals for closure of the Bagshot
office and cancellation fees of $19,421 and $41,199, respectively, relate to
expected facility closure costs in Bagshot, UK and Dortmund, Germany.
Change in estimate adjustments related to the severance component of the
restructuring accrual totaling $173,210 were recorded in the second quarter of
fiscal year 2001 because the Company made a decision to retain six employees who
had previously been notified that they would be severed. In addition, change in
estimate adjustments totaling $12,009 and $44,550, respectively, were recorded
relating to the estimated cancellation fees and the legal costs components of
the accrual. These change in estimate adjustments were reflected as a reduction
in the restructuring accrual and a corresponding increase to operating income. A
summary of payments and adjustments for the six months ended March 31, 2001 is
included in the table below.
7
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRUCTURING (CONTINUED)
- -------------------------------------------------------------------------------------------------
Balance at Change in Balance
September 30, Estimate at March 31,
Description 2000 Payments Adjustments 2001
- -------------------------------------------------------------------------------------------------
Severance and
termination
costs $1,252,531 $(1,079,321) $ (173,210) $ -
- -------------------------------------------------------------------------------------------------
Closure of
Bagshot office 134,227 (114,806) - 19,421
- -------------------------------------------------------------------------------------------------
Cancellation
fees 100,684 (47,476) (12,009) 41,199
- -------------------------------------------------------------------------------------------------
Severance-
related legal
expenses 44,550 - (44,550) -
- -------------------------------------------------------------------------------------------------
TOTAL $1,531,992 $(1,241,603) $ (229,769) $ 60,620
- -------------------------------------------------------------------------------------------------
4. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out method. Inventories at March 31, 2001 and September 30,
2000 consisted of the following:
March 31, 2001 September 30, 2000
-------------- ------------------
Raw materials $12,990,076 $12,496,226
Work in process 1,138,948 1,092,654
Finished goods 6,473,258 6,111,130
----------- -----------
$20,602,282 $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.
8
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMPREHENSIVE INCOME (LOSS) (CONTINUED)
Comprehensive income (loss) for the three months and six months ended March 31,
2001 and 2000 was as follows:
Three months ended Six months ended
March 31 March 31
--------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income (loss) $ 555,288 $(13,281,937) $ 1,919,782 $(12,264,429)
Foreign currency
translation adjustments 114,637 (40,763) (352,805) (1,082,326)
------------ ------------ ------------ ------------
Comprehensive
Income (loss) $ 669,925 $(13,322,700) $ 1,566,977 $(13,346,755)
============ ============ ============ ============
6. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated based on the weighted average of
common shares outstanding during the period. Net income (loss) per share,
assuming dilution, is computed by dividing net income (loss) 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.
The following table is a reconciliation of the numerators and denominators in
the income (loss) per share calculations:
Three months ended March 31 Six months ended March 31
------------------------------------------ -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ---------
2001
Basic income per share
Net income $ 555,288 15,207,896 $ 0.04 $ 1,919,782 15,187,269 $ 0.13
Effect of dilutive securities
Common equivalent shares - 7,996 - - 12,380 -
------------- ---------- ------- ------------ ---------- -------
Diluted income per share
Net income $ 555,288 15,215,892 $ 0.04 $ 1,919,782 15,199,649 $ 0.13
2000
Basic loss per share
Net loss $ (13,281,937) 15,062,575 $ (0.88) $(12,264,429) 15,015,184 $ (0.82)
Effect of dilutive securities
Common equivalent shares - - - - - -
------------- ---------- ------- ------------ ---------- -------
Diluted loss per share
Net loss $ (13,281,937) 15,062,575 $ (0.88) $(12,264,429) 15,015,184 $ (0.82)
9
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NET INCOME (LOSS) PER SHARE (CONTINUED)
Options to purchase 2,720,657 and 2,582,871 shares for the three and six month
periods ended March 31, 2001, and options to purchase 1,155,230 and 767,273
shares for the three and six month periods ended March 31, 2000, were not
included in the computation of diluted earnings per share because the exercise
prices of these options was greater than the average market price of common
shares and their effect would have been antidilutive.
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
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 is reviewing the guidance outlined in SAB 101 and does not believe that
the effect of adoption of SAB 101 will have a material impact on 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 % Six months %
ended Increase ended Increase
March 31 (decrease) March 31 (decrease)
-------------------- -------------- ---------------------- ----------
2001 2000 2001 2000
------ ------ ------ ------
Net sales 100.0 100.0 28.1 % 100.0 100.0 2.3 %
Cost of sales 47.9 52.4 17.1 47.6 47.8 2.0
----- ----- ---- ----- ----- ------
Gross margin 52.1 47.6 40.1 52.4 52.2 2.6
----- ----- ---- ----- ----- ------
Operating expenses:
Sales and marketing 24.2 33.3 (6.7) 22.6 26.2 (11.8)
Research and development 15.3 20.6 (5.0) 14.2 16.8 (13.3)
General and administrative 11.0 18.9 (25.6) 12.5 16.8 (23.9)
Impairment loss - 70.0 (100.0) - 27.4 (100.0)
Restructuring (0.1) (0.5) (65.5) (0.3) (0.2) 65.9
----- ----- ---- ----- ----- ------
Total operating expenses 50.4 142.3 (54.7) 49.0 87.0 (42.4)
----- ----- ---- ----- ----- ------
Operating income (loss) 1.7 (94.7) 102.3 3.4 (34.8) 110.0
Other income, net 1.5 33.7 (94.3) 2.2 13.9 (83.8)
----- ----- ---- ----- ----- ------
Income (loss) before income taxes 3.2 (61.0) 106.7 5.6 (20.9) 127.4
Provision (benefit) for income taxes 1.5 (9.5) 120.1 2.8 (2.3) 222.5
----- ----- ---- ----- ----- ------
Net income (loss) 1.7 (51.5) 104.2 % 2.8 (18.6) 115.7 %
===== ===== ===== ===== ===== ======
NET SALES
Net sales for the three and six months ended March 31, 2001 were higher than net
sales for the corresponding three and six months ended March 31, 2000, by $7.2
million or 28.1%, and $1.5 million or 2.3%, respectively. Net sales of the
Company's legacy board products, including sales of acquired ION products,
generated revenues of $21.9 million for the second quarter of fiscal 2001 versus
$16.2 million for the comparable quarter last year, and $44.8 million for the
first six months of fiscal 2001, compared to $44.4 million for the first six
months of fiscal 2000. Physical layer local area network (LAN) products sales
were $6.3 million and $12.5 million for the three and six months ended March 31,
2001, reflecting increased revenues of $3.2 million and $6.9 million,
respectively. Net sales of the Company's wide area network (WAN) products
declined $1.7 million and $5.8 million for the three and six-month periods ended
March 31, 2001, versus the comparable periods a year ago.
Net sales in the year ago quarter were negatively impacted by the industry-wide
slowdown in purchasing patterns as a result of concerns relating to the Year
2000 changeover.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
NET SALES (CONTINUED)
The following table sets forth revenue by principal product group expressed as a
percentage of net sales:
Three months Six months
ended March 31 ended March 31
------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
Server based 81.1 % 88.3 % 81.5 % 91.6 %
Physical layer 18.9 11.7 18.5 8.4
------- ------- ------- -------
Total 100.0 % 100.0 % 100.0 % 100.0 %
GROSS MARGIN
Gross margin for the three and six months ended March 31, 2001 was 52.1% and
52.4%, as compared to 47.6% and 52.2% for the three and six months ended March
31, 2000. Gross margin in the year ago quarter was negatively impacted by the
unabsorbed fixed costs associated with the lower than anticipated sales volumes
attributed primarily to the industry-wide slowdown in purchasing patterns as a
result of concerns relating to the Year 2000 changeover. For the six months
ended March 31, 2001, the increase of physical layer product sales and the
related margin improvement resulted in a minor increase in gross margin versus
the comparable six month period a year ago.
OPERATING EXPENSES
Operating expenses, excluding restructuring and asset impairment charges, for
the three months ended March 31, 2001 decreased $2.1 million, or 11.1%, as
compared to operating expenses for the three months ended March 31, 2000.
Operating expenses for European operations decreased by $3.1 million in the
second quarter of fiscal 2001, which is primarily attributable to the
restructuring which the Company executed in the fourth quarter of fiscal 2000.
Operating expenses at the Company's Sunnyvale location increased by $1.0 million
for the quarter ended March 31, 2001, as compared to operating expenses for the
three months ended March 31, 2000, primarily due to additional sales and
marketing personnel and related expenses to support the increase in revenue for
the LAN products. Incremental operating expenses of $1.2 million related to the
operations of ION, acquired in October 2000, were offset by cost containment
measures at other locations resulting in expense reductions of $1.2 million
relative to the comparable quarter last year.
Operating expenses, excluding restructuring and asset impairment charges, for
the six months ended March 31, 2001, decreased $6.2 million, or 15.6%, as
compared to operating expenses for the six months ended March 31, 2000. The
fiscal 2000 European restructuring plan
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
OPERATING EXPENSES (CONTINUED)
accounted for approximately $6.0 million of the total decrease in operating
expenses. Operating expenses increased by $1.5 million in Sunnyvale primarily to
support the 123.2% increase in sales for the first six months of fiscal 2001 as
compared to the first six months of fiscal 2000. In other locations additional
savings of $1.7 million were realized, due to a decrease in expenses of $3.7
million as a result of cost containment measures across the Company, partially
offset by incremental operating expenses of $2.0 million in the first six months
of fiscal 2001 related to the operations of ION.
Sales and marketing expenses for the three and six months ended March 31, 2001,
were $8.0 million and $15.3 million, versus $8.6 million and $17.3 million in
the comparable periods a year ago. The fiscal 2000 European restructuring
resulted in expense reductions of $0.9 million and $1.8 million for the three
and six-month periods ended March 31, 2001, respectively. Incremental sales and
marketing expenses related to the operations of ION for the three and six-month
periods ended March 31, 2001, were $0.3 and $0.5 million, respectively, while
sales and marketing expenses at other locations remained the same for the three
months ended March 31, 2001, versus the comparable quarter in the prior year,
but decreased by $0.7 million for the six months ended March 31, 2001, as a
result of expense control measures taken in fiscal 2001.
Research and development expenses were $5.0 million for the three months ended
March 31, 2001, a decrease of $0.3 million or 5.0% from the comparable period in
the prior year. For the six months ended March 31, 2001, research and
development expenses were $9.6 million, a decrease of $1.5 million or 13.3% from
the six-month period ended March 31, 2000. The fiscal 2000 European
restructuring resulted in expense reductions of $0.4 million and $1.0 million
for the three and six months ended March 31, 2001, respectively. Incremental
research and development expenses related to the operations of ION for the three
and six-month periods ended March 31, 2001, were $0.3 and $0.5 million,
respectively, while compensation and other employee related expenses at other
locations were lower by $0.2 million and $1.0 million for the three and
six-month periods ended March 31, 2001, as a result of a reduction in
engineering staffing.
General and administrative expenses for the three months and six months ended
March 31, 2001, were $3.6 million and $8.4 million, versus $4.9 million and
$11.1 million in the comparable periods a year ago. General and administrative
expenses declined by $1.8 million and $3.2 million related to the fiscal 2000
European restructuring for the three and six-month periods ended March 31, 2001,
respectively. Incremental general and administrative expenses related to the
operations of ION for the three and six-month periods ended March 31, 2001, were
$0.6 million and $1.0 million, respectively, of which $0.4 million and $0.7
million, respectively, resulted from amortization of acquired intangible assets.
General and administrative expense reductions at other locations of $0.1 million
and $0.5 million for the three and six-month periods ended March 31, 2001, were
realized due to expense control measures taken in fiscal 2001.
13
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
OTHER INCOME (EXPENSE)
Other income for the three and six months ended March 31, 2001 was $0.5 million
and $1.5 million. The Company realized interest income on short-term marketable
securities and cash and cash equivalents of $0.8 million and $1.8 million,
respectively, for the three and six months ended March 31, 2001. Interest
expense on lines of credit and long term debt was $0.2 million and $0.4 million,
respectively, for the three and six-month periods ended March 31, 2001.
Other income for the three months and six months ended March 31, 2000 was $8.7
million and $9.2 million. During the second fiscal quarter of 2000, the Company
received an $8.0 million payment from Nx Networks, the company which acquired
AetherWorks Corporation. This represented payment in full of a non-convertible
note receivable from AetherWorks (assumed by Nx Networks), previously recorded
by the Company as having no carrying value, due to significant uncertainty as to
its collectability. Other income also includes interest earned on cash and cash
equivalents, partially offset by interest expense on line of credit borrowings
and long-term debt.
INCOME TAXES
Income taxes have been provided for at an estimated annual effective rate of 49%
for the six months ended March 31, 2001. This effective tax rate exceeds the
U.S. statutory income tax rate primarily due to the annual amortization expense
relating to the intangible assets acquired in the Central Data Corporation (CDC)
and Inside Out Networks acquisitions which is not deductible for income tax
reporting purposes. For the six months ended March 31, 2000, income taxes were
provided for at an effective rate of 11% which was less than the U.S. statutory
income tax rate primarily due to the accounting treatment of deferred tax
liabilities related to the ITK intangible asset impairment loss.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
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 $77.3 million at March 31, 2001.
Net cash provided by operating activities was $3.5 million for the six months
ended March 31, 2001, compared to net cash provided by operations of $14.6
million for the six months ended March 31, 2000. In March 2000, the Company
received a one-time $8.0 million payment on a note receivable from AetherWorks
which had previously been recorded as uncollectable. In addition, there was an
additional $3.2 million outflow of cash resulting from changes in operating
assets and liabilities in the first six months of fiscal 2001 compared to the
first six months of fiscal 2000. The net cash outflow of $3.6 million relating
to the change in operating assets and liabilities in the first six months of
fiscal 2001 relates primarily to a $3.0 million increase in accounts receivable.
The net cash outflow of $0.4 million relating to the change in operating assets
and liabilities in the first six months of fiscal 2000 is due to a decline of
$11.6 million in accounts receivable as a result of the sales downturn following
the year 2000 changeover, offset by an accrued liabilities decrease of $8.4
million. Inventories also increased by $3.9 million due to the unanticipated
lower sales volumes during the first six months of fiscal 2000.
Net cash used in investing activities for the six months ended March 31, 2001,
consisted of net purchases of marketable securities of $14.0 million and $0.6
million of purchases of equipment and other capital improvements. In October
2000, the Company acquired Inside Out Networks, resulting in a $7.2 million use
of cash.
For the six months ended March 31, 2000, the Company had net purchases of
marketable securities of $14.0 million and used $1.6 million for the purchase of
equipment and capital improvements.
Net cash used for financing activities for the six months ended March 31, 2001
consisted of $0.5 million received from employee stock purchase plan
transactions. The Company also made payments of $0.8 million related to line of
credit and debt obligations. For the six months ended March 31, 2000, $1.2
million was received as a result of employee stock benefit plan transactions,
and $0.1 million was paid on line of credit and debt obligations.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
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 US
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 and six months ended March 31, 2001, the Company had approximately
$9.7 million and $20.0 million of net sales related to foreign customers,
respectively. For the three month period ended March 31, 2001, $9.1 million was
denominated in U.S. dollars and $0.6 million was denominated in Deutschemarks.
For the six month period ended March 31, 2000, $17.6 million was denominated in
U.S. dollars and $2.4 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.
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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
(CONTINUED)
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 is reviewing the guidance
outlined in SAB 101 and does not believe the effect of adoption of SAB 101 will
have a material impact on the Company's revenue recognition practices or
consolidated financial statements.
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FASB 133). The adoption of FASB 133 did not have an impact on the
Company's consolidated financial position or results of operations as the
Company does not have any derivative instruments nor does the Company
participate in any hedging activities.
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.
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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 judgement
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 has been scheduled for June 11, 2001.
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.
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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
At the Annual Meeting of Stockholders held on January 24, 2001, the stockholders
voted on the following:
(a) Proposal to elect one director, Mykola Moroz, for a one-year
term and one director, Michael Seedman, for a three-year term.
Mr. Moroz was elected on a vote of 12,771,735 in favor, with
1,527,544 shares withholding authority to vote. Mr. Seedman was
elected on a vote of 11,439,004 in favor, with 2,860,275 shares
withholding authority to vote. There were no broker non-votes.
(b) Proposal to approve the Digi International Inc. 2000 Omnibus
Stock Plan (the Plan) and to reserve 750,000 shares of Common
Stock for awards under the Plan. This proposal passed on a vote
of 9,439,413 in favor, 4,772,123 against and 87,743 abstentions
and no broker non-votes.
(c) Proposal to ratify the appointment of PricewaterhouseCoopers LLP
as independent public accountants of the Company for fiscal year
2001. The proposal passed on a vote of 12,787,380 in favor,
1,451,519 against and 60,380 abstentions and no broker
non-votes.
ITEM 5. OTHER INFORMATION
None
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PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. 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 Share 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)
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the quarterly period ended March 31,
2001.
- ------------------------------------------------
(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)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: May 15, 2001 By: /s/ S. Krishnan
---------------------------------------
S. Krishnan
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Number Document 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 Share
Rights Agreement, dated 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
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