EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements give effect to
the acquisition of ITK International, Inc. ("ITK") by Digi International, Inc.
(the "Company") using the purchase method of accounting. These unaudited pro
forma condensed financial statements are presented for illustrative purposes
only and are not necessarily indicative of the combined financial position or
results of operations for future periods or the results that actually would have
been realized had the Company and ITK been a combined company during the
specified periods. The pro forma condensed financial statements, including the
notes thereto, are qualified in their entirety and should be read in conjunction
with the historical consolidated financial statements of the Company and ITK.
The unaudited pro forma condensed financial statements are based on the
respective historical consolidated financial statements and the notes thereto of
the Company and ITK. The purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed. The preliminary purchase
price allocation is based on the Company's estimates of fair value. The Company
is awaiting additional information related to the fair value of certain assets
acquired and liabilities assumed. However, management does not expect the
finalization of the allocation of its purchase price to the assets acquired and
liabilities assumed of ITK will have a material effect on the purchase price
allocation.
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
ASSETS INC. INC. ADJUSTMENTS PRO FORMA
Current assets:
Cash and cash equivalents $ 44,945 $ 2,373 $(14,434)(a) $ 32,884
Accounts receivable, net 34,699 3,019 37,718
Inventories, net 16,404 5,267 21,671
Other 3,903 678 4,581
Total current assets 99,951 11,337 (14,434) 96,854
Property, equipment and improvements, net 22,572 10,668 33,240
Intangible assets, net 7,339 4,405 10,694(d) 22,438
Other 8,055 247 (5,000)(c) 3,302
Total assets $137,917 $26,657 $ (8,740) $155,834
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes payable 14,168 (5,000)(c) 9,168
Accounts payable 8,105 4,756 12,861
Income taxes payable 6,873 6,873
Accrued expenses 5,379 5,573 10,952
Compensation 3,144 1,847 4,991
Current portion of long-term debt 115 115
Total current liabilities 23,501 26,459 (5,000) 44,960
Long-term liabilities, net of current portion 9,511 9,511
Total liabilities 23,501 35,970 (5,000) 54,471
Stockholders' equity:
Common stock and capital in excess of par value
(Digi: 14,951,203 shares; ITK: 27,392,904
shares; and 15,527,560 shares on a
pro forma combined basis) 47,213 36,975 (13,910)(a) 61,123
(36,975)(b)
Retained earnings (accumulated deficit) 90,032 (42,891) (42,891)(b) 64,032
(26,000)(d)
Foreign currency translation adjustment (90) 90(b)
137,245 (6,006) (6,084) 125,155
Unearned stock compensation (975) (3,307) (963)(a) (1,938)
3,307(b)
Treasury stock, at cost (21,854) (21,854)
Total stockholders' equity 114,416 (9,313) (3,740) 101,363
Total liabilities and stockholders' equity $137,917 $26,657 $ (8,740) $155,834
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED
PRO FORMA CONDENSED BALANCE SHEET.
2
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
1. FINANCIAL STATEMENTS:
Digi International Inc. (the "Company") has a September 30 fiscal year end.
The unaudited historical balance sheet information of the Company as of
June 30, 1998 was derived from the unaudited consolidated condensed
financial statements of the Company which are included in the Company's
report on Form 10-Q for the quarter ended June 30, 1998. Prior to its
acquisition by the Company, ITK International Inc. ("ITK") had a June 30
fiscal year-end. The unaudited historical consolidated balance sheet
information of ITK as of June 30, 1998 was derived from the consolidated
financial statements of ITK included elsewhere in this Form 8-K/A. The pro
forma condensed balance sheet assumes the business combination took place
on June 30, 1998.
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS:
The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed. The pro forma adjustments presented are
as of June 30, 1998. The Company is awaiting additional information
related to the fair value of certain assets acquired and liabilities
assumed. However, management does not expect the finalization of the
allocation of its purchase price to the assets acquired and liabilities
assumed of ITK will have a material effect on the purchase price
allocation.
(a) Adjustment reflects the components of the purchase consideration
and related transaction costs, which included $14,434 in cash, the
Company's common stock with a market value of $11,671 and $1,276 of
replacement stock options issued by the Company to ITK option
holders. The cash and the Company's common stock were issued in
exchange for outstanding shares of ITK's common stock and the
Company's stock options were issued in exchange for the outstanding
ITK common stock options. The value of the Company's common stock
issued is based on a per share value of approximately $20.25, which
was the market value of the Company's common stock on the date the
Company and ITK agreed to the terms of the purchase. The value of
the Company's common stock options is based on the excess of the
market value of the Company's common stock over the option exercise
prices on the date that these options were granted to ITK
employees. The purchase price will increase by $963 if the
unvested portion of stock options granted to the ITK employees
vest. Such amount has been recorded as unearned stock compensation
in the stockholders' equity section of the unaudited pro forma
condensed balance sheet as of June 30, 1998.
(b) Adjustment reflects the elimination of ITK's historical stockholders'
equity.
(c) Adjustment reflects the elimination of note payable to the Company
from ITK resulting from funds advanced to ITK during June 1998.
3
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED
(DOLLARS IN THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
(d) Adjustment reflects portion of purchase price allocated to
identifiable intangible assets, including purchased in-process
research and development. Valuation of the intangible assets acquired
was conducted by an independent third-party appraisal company and
consists of purchased in-process research and development, proven
technology and an assembled workforce. The purchase price exceeded
the estimated fair value of tangible assets acquired and liabilities
assumed by approximately $41,099. This excess purchase price was
allocated to purchased in-process research and development,
identifiable intangible assets and goodwill, including certain
existing identifiable intangible assets and goodwill of ITK as of
June 30, 1998.
The table below is a summary of the preliminary amounts allocated to
purchased in-process research and development, identifiable intangible assets
and goodwill.
Cash and fair value of the Company's common stock and common
stock options issued $26,276
Direct acquisition costs 1,105
ITK liabilities assumed 35,970
Total purchase price 63,351
Estimated fair value of tangible assets acquired
(approximates recorded book value) 22,252
Purchase price in excess of estimated fair value of tangible
assets acquired $41,099
Estimated fair value of in-process research and development,
identifiable intangible assets and goodwill:
In-process research and development 26,000
Identifiable intangible assets 12,700
Goodwill 2,399
$41,099
Management estimates that $26,000 of the purchase price represents the fair
value of purchased in-process research and development that has not yet reached
technological feasibility and has no alternative future use. This amount was
expensed as a non-recurring, non-tax-deductible charge upon consummation of the
acquisition. This amount has been reflected as a reduction in stockholders'
equity and has not been included in the pro forma condensed statements of
operations due to its non-recurring nature.
4
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED
(DOLLARS IN THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
The Company is using the acquired in-process research and development
to create new products in the area of Internet Protocol Telephony,
which will become part of the Company's product line over the next
several years. The Company anticipates that the initial Internet
Protocol Telephony products will be released in 2000 and 2001. The
Company expects that the acquired in-process research and development
will reach technological feasibility, but there can be no assurance
that the commercial viability of these products will be achieved.
The nature of the efforts required to develop the acquired in-process
research and development into commercially viable products principally
relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish
that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements.
The estimated costs to be incurred to develop the purchased in-process
technology into commercially viable products are approximately $24,800
in the aggregate through the year 2007, consisting of $300 in 1998;
$2,000 in 1999; $4,800 in 2000; $4,800 in 2001; $4,300 in 2002; $3,200
in 2003; $2,500 in 2004; $1,400 in 2005; $900 in 2006 and $600 in
2007.
The value assigned to purchased in-process research and development
was determined through independent appraisers, who projected cash
flows related to future products expected to be derived once
technological feasibility is achieved, including costs to complete the
development of the technology and the future revenues and costs which
are expected to result from commercialization of the products. These
cash flows were discounted back to their present values. The
resulting net cash flows from such projects are based on estimates
made by the Company's management of revenues, cost of sales, research
and development costs, selling, general and administrative costs, and
income taxes resulting from such projects. These estimates are based
on the following assumptions:
The estimated revenues are based upon projected
average annual revenue growth rates from future
products expected to be derived once technological
feasibility is achieved of between 18% and 65%
during the period from 2000 through 2005. Estimated
total revenues expected from products to be
developed using purchased in-process research and
development peak in the year 2005 and decline
rapidly in 2006 and 2007 as other new products are
expected to enter the market. These projections are
based on estimates made by the Company's management
of market size and growth (which are supported by
independent market data), expected trends in technology
and the nature and expected timing of new product
introductions by ITK and its competitors. These
estimates also include growth related to the Company
utilizing certain ITK technologies under development in
conjunction with the Company's products, the Company
marketing and distributing the resulting products through
the Company's resellers, and the Company enhancing the
market's response to ITK's products by providing
incremental financial support and stability.
5
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET, CONTINUED
(DOLLARS IN THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET ADJUSTMENTS, CONTINUED:
The estimated cost of sales as a percentage of revenues is expected to
be lower than ITK's cost of sales would have been on a stand-alone
basis primarily due to the Company's expected ability to achieve more
favorable pricing from key component vendors and production
efficiencies due to economies of scale achieved through combined
operations.
The estimated selling, general and administrative costs are expected
to more closely approximate the Company's cost structure
(approximately 34% of revenues in 1997), which is lower than ITK's
cost structure (approximately 81% of revenues in fiscal 1997). Cost
savings are expected to result primarily from: (a) the changes
related to certain restructuring actions including the shut-down of
certain existing ITK facilities and a reduction in certain
administrative ITK employees; (b) the distribution of ITK's products
through the Company's resellers (i.e., sales of higher volume products
with lower direct selling costs); and (c) efficiencies due to
economies of scale through combined operations (i.e., consolidated
marketing and advertising programs). These cost savings are expected
to be realized primarily in 2000 and thereafter.
Discounting the net cash flows back to their present values is based
on the weighted average cost of capital (WACC). The WACC calculation
produces the average required rate of return of an investment in an
operating enterprise, based on various required rates of return from
investments in various areas of that enterprise. The WACC assumed for
the Company, as a corporate business enterprise, is 14%. The discount
rate used in discounting the net cash flows from purchased in-process
technology was 30%. This discount rate is higher than the WACC due to
the inherent uncertainties in the estimates described above including
the uncertainty surrounding the successful development of the
purchased in-process research and development, the useful life of such
completed research and development, the profitability levels of such
completed research and development and the uncertainty of
technological advances that are unknown at this time.
If these products are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other intangible assets acquired may
become impaired. The Company expects to begin to benefit from the
purchased in-process research and development in 2000.
The identifiable intangible assets of $12,700 included in the purchase
price allocation set forth above are comprised of proven technology with an
appraised fair value of
$11,300, and an assembled workforce with an appraised fair value of $1,400,
which have estimated useful lives of five years and six years,
respectively.
6
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
Net sales $ 165,598 $ 21,028 $ 186,626
Cost of sales 85,483 13,156 98,639
Gross margin 80,115 7,872 87,987
Operating expenses:
Sales and marketing 36,671 10,148 46,819
Research and development 17,978 5,191 23,169
General and administrative 19,325 6,843 $ 2,836(a) 29,004
Restructuring 10,471 10,471
Total operating expenses 84,445 22,182 2,836 109,463
Operating loss (4,330) (14,310) (2,836) (21,476)
Other income (expense), net 154 (249) (722)(b) (817)
Aetherworks Corporation net loss (5,764) (5,764)
Aetherworks Corporation write off (5,759) (5,759)
Loss before income taxes (15,699) (14,559) (3,558) (33,816)
Income tax provision (benefit) 92 (253)(b) (161)
Net loss $ (15,791) $ (14,559) $ (3,305) $ (33,655)
Net loss per common and common equivalent $(1.18) $(0.54) - $(0.82)
share, basic and diluted
Weighted average common shares,
basic and diluted 13,393,408 26,865,000 576,357(d) 40,834,765
The accompanying notes are an integral part of the unaudited
pro forma condensed statement of operations.
7
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
Net sales $ 134,098 $ 25,105 $ 159,203
Cost of sales 65,105 19,456 84,561
Gross margin 68,993 5,649 74,642
Operating expenses:
Sales and marketing 26,303 12,166 38,469
Research and development 11,887 4,860 16,747
General and administrative 10,025 6,693 $ 2,127(a) 18,845
Total operating expenses 48,215 23,719 2,127 74,061
Operating income (loss) 20,778 (18,070) (2,127) 581
Other income (expense), net 1,477 (929) (541)(b) 7
Aetherworks Corporation net loss 1,350 1,350
Income (loss) before income taxes 23,605 (18,999) (2,668) 1,938
Income tax provision (benefit) 8,686 8 (189)(b) 713
(7,792)(c)
Net income (loss) $ 14,919 $ (19,007) $ 5,313 $ 1,225
Net income (loss) per common share,
basic $1.10 $(0.69) - $0.03
Net income (loss) per common share,
assuming dilution $1.05 $(0.69) - $0.03
Weighted average common shares, basic 13,535,512 27,392,000 576,357(d) 41,503,869
Weighted average common shares,
assuming dilution 14,216,915 27,392,000 648,261(d) 42,257,176
The accompanying notes are an integral part of the unaudited
pro forma condensed statement of operations.
8
DIGI INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DIGI ITK
INTERNATIONAL INTERNATIONAL PRO FORMA
INC. INC. ADJUSTMENTS PRO FORMA
Net sales $ 123,473 $ 13,040 $ 136,513
Cost of sales 64,420 8,111 72,531
Gross margin 59,053 4,929 63,982
Operating expenses:
Sales and marketing 29,310 11,910 41,220
Research and development 14,284 3,916 18,200
General and administrative 13,964 $ 2,127(a) 16,091
Restructuring 10,472 10,472
Total operating expenses 68,030 15,826 2,127 85,983
Operating loss (8,977) (10,897) (2,127) (22,001)
Other income (expense), net 343 150 (541)(b) (48)
Aetherworks Corporation net loss (4,634) (4,634)
Loss before income taxes (13,268) (10,747) (2,668) (26,683)
Income tax benefit (1,357) (189)(b) (1,546)
Net loss $ (11,911) $(10,747) $ (2,479) $ (25,137)
Net loss per common and common
equivalent share, basic
and diluted $(0.89) $(0.40) - $(0.62)
Weighted average common shares,
basic and diluted 13,379,899 26,790,000 576,357(d) 40,746,256
The accompanying notes are an integral part of the unaudited
pro forma condensed statement of operations.
9
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
1. FINANCIAL STATEMENTS:
Digi International Inc. (the Company) has a September 30 fiscal year-end.
The unaudited historical statement of operations information of the Company
for the year ended September 30, 1997 was derived from the consolidated
financial statements of the Company, which are included in the Company's
annual report on Form 10-K for the year ended September 30, 1997. The
historical statement of operations information of the Company for the
nine-month periods ended June 30, 1998 and 1997 was derived from the
condensed financial statements of the Company which are included in the
Company's reports on Form 10-Q for the quarters ended June 30, 1997 and
1998.
Prior to the acquisition by the Company, ITK International Inc. (ITK) had a
June 30 fiscal year-end. Accordingly, the ITK statement of operations
information for the twelve-month period ended September 30, 1997 and the
nine-month periods ended June 30, 1998 and 1997 has been derived by
combining ITK's unaudited consolidated results of operations for the
applicable calendar quarters.
The pro forma condensed statements of operations assume the business
combination took place as of the beginning of the periods presented. The
pro forma condensed statement of operations for the twelve-month period
ended September 30, 1997 combines the Company's consolidated statement of
operations and ITK's consolidated statement of operations for the
twelve-month period then ended. The pro forma condensed statements of
operations for the nine-month periods ended June 30, 1998 and 1997 combine
the Company's unaudited consolidated statement of operations and ITK's
unaudited consolidated statement of operations for the nine-month periods
ended June 30, 1998 and 1997, respectively. On a combined basis there were
no material transactions between the Company and ITK during the periods
presented.
The pro forma combined provision for income taxes may not necessarily be
indicative of amounts that would have resulted had the Company and ITK
filed consolidated income tax returns during the periods presented.
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS:
The purchase price was allocated based upon the estimated fair value of
assets acquired and liabilities assumed. The preliminary purchase price
allocation is based on the Company's estimates of fair value. The Company
is awaiting additional information related to the fair value of certain
assets acquired and liabilities assumed. However, management does not
expect the finalization of the allocation of its purchase price to the
assets acquired and liabilities assumed of ITK will have a material effect
on the purchase price allocation.
10
DIGI INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
CONTINUED
(DOLLARS IN THOUSANDS)
2. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS ADJUSTMENTS,
CONTINUED:
(a) Adjustment reflects amortization of acquired identifiable intangible
assets and goodwill. Identifiable intangible assets of $12,700 are
comprised of proven technology with an appraised value of $11,300, and
an assembled workforce with an appraised value of $1,400 which have
estimated useful lives of five years and six years, respectively. The
estimated annual non-tax-deductible amortization charge related to the
proven technology and workforce is approximately $2,493. The
estimated annual non-tax-deductible amortization charge related to
amortization of the $2,399 allocated to goodwill, which has an
estimated useful life of seven years, is approximately $343.
(b) Adjustment reflects the decrease in interest income and related tax
effect resulting from the use of cash and cash equivalents to complete
the acquisition. The assumed rate of return on the cash balance was
5%.
(c) Adjustment reflects the portion of Digi's income tax provision which
would not have been recognized due to ITK's U.S. net operating losses
for the nine-moth period ended June 30, 1998.
(d) Adjustment reflects net increase (decrease) in weighted average common
shares and common equivalent shares outstanding for common stock and
common stock options issued in connection with the acquisition, as
well as equivalent shares of the Company that have an antidilutive
effect on pro forma diluted earnings per common share.
Pro forma basic earnings per common share for the periods presented
were calculated assuming that the 576,357 shares of the Company's
common stock issued in connection with the acquisition were issued
at the beginning of the periods presented.
The calculation of pro forma diluted earnings per common share
excludes the 71,904 equivalent shares of the Company attributable to
the common stock options issued by the Company in connection with
the acquisition, to replace existing ITK common stock options. Such
equivalent shares were excluded in determining the weighted average
equivalent shares outstanding for the year ended September 30, 1997
and the nine-month period ended June 30, 1997, because their effect
was antidilutive.
11