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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 41-1532464
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
(952) 912-3444
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
(Title of each class)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based on a closing price of $5.95 per share as reported on the
National Association of Securities Dealers Automated Quotation System-National
Market System on December 10, 2001 was $90,934,231.
Shares of common stock outstanding as of December 10, 2001: 15,374,947
INDEX
DOCUMENTS INCORPORATED BY REFERENCE
The following table shows, except as otherwise noted, the location of
information required in this Form 10-K, in the Registrant's Annual Report to
Stockholders for the year ended September 30, 2001 and Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled for January 23, 2002, a
definitive copy of which will be filed on or about December 28, 2001. All such
information set forth below under the heading "Page/Reference" is incorporated
herein by reference, or included in this Form 10-K on the pages indicated.
PART I. ITEM IN FORM 10-K PAGE/REFERENCE
------ ----------------- --------------
ITEM 1. Business 4
ITEM 2. Properties 7
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a
Vote of Security Holders 9
PART II.
ITEM 5. Market for Registrant's Common
Equity and Related Stockholder 10
Matters
ITEM 6. Selected Financial Data 11
ITEM 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 12
ITEM 7A. Quantitative and Qualitative Disclosures
About Market Risk 21
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 54
PART III. ITEM IN FORM 10-K PAGE/REFERENCE
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ITEM 10. Directors of the Registrant Election of Directors, Proxy
Statement
Executive Officers of the Registrant 55
Compliance with Section 16(a) of the Section 16(a) Beneficial
Exchange Act Ownership Reporting Compliance,
Proxy Statement
ITEM 11. Executive Compensation Executive Compensation; Election of Directors;
Summary Compensation Table; Option Grants in Last
Fiscal Year; Aggregated Option Exercises in the
Last Fiscal Year and Fiscal Year-end Option
Values; Employment Contracts; Severance,
Termination of Employment and Change-in-Control
Arrangements; Performance Evaluation, Proxy
Statement
ITEM 12. Security Ownership of Certain Beneficial Security Ownership of Principal Stockholders and
Stockholders and Management, Management, Proxy Statement
Owners and Management
ITEM 13. Certain Relationships and Related Not Applicable
Transactions
PART IV.
--------
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 57
3
PART I
ITEM 1. BUSINESS
Digi International Inc. (Digi or the Company) was formed in 1985 as a Minnesota
corporation and reorganized as a Delaware corporation in 1989 in conjunction
with its initial public offering. Digi is a worldwide provider of Connectware,
wired and wireless, hardware and software connectivity solutions that businesses
use to create, customize and control retail operations, industrial automation
and other applications. Connectware network enables the essential devices that
build business.
The Company operates exclusively in a single business segment and sells its
products through a global network of distributors, systems integrators,
value-added resellers (VARs) and original equipment manufacturers (OEMs). The
Company also sells direct to select accounts and the government.
The common stock of Digi International Inc. is traded on the Nasdaq National
Market under the symbol DGII. The Company has its worldwide headquarters in
Minnetonka, Minnesota, with regional and sales offices throughout the U.S. and
worldwide, including Germany, France, the Netherlands, Denmark, the United
Kingdom, Hong Kong and China.
PRODUCTS
Digi is a worldwide leader in connecting peripherals to networks. From
multi-port serial control to Universal Serial Bus (USB) connectivity to remote
access to Local Area Network (LAN) infrastructure, Digi's products enable a
virtually unlimited number of devices or users to be connected locally or
remotely to LANs, multi-user systems and the Internet. The Company's products
are compatible with all PC platforms, including Compaq, IBM, Hewlett-Packard and
Sun Microsystems, as well as popular operating systems, such as Microsoft
Windows NT/95/2000, Novell NetWare, Linux and UNIX.
The Company has sales offices located throughout North America, Europe and Asia.
Digi products are available through 180 distributors in more than 65 countries.
More than 650 VARs participate in the DigiVAR Program, introduced in July 1993.
The application markets where these products are most prominently used are
point-of-sales systems (POS), industrial automation, medical, hospitality, and
building automation. In addition, the Company has expanded into new applications
such as console management and wireless products to complement its existing
portfolio.
The Company's primary product lines are its multi-port serial adapters, device
servers, terminal servers, USB, and LAN connectivity products.
MULTI-PORT SERIAL ADAPTERS
The Company is a leader in this product category and offers one of the most
comprehensive multi-port serial adapter family of products. The Company's
products support a wide range of operating systems, port-density, bus type,
expansion options, and applications.
As Ethernet connections extend beyond current applications, the internal
multi-port serial adapter products are expected to gradually transition to
network-attached terminal server devices. The Company
4
ITEM 1. BUSINESS (CONTINUED)
MULTI-PORT SERIAL ADAPTERS (CONTINUED)
has strengthened its product offering to continue to successfully meet customer
needs and believes that multi-port serial adapters will continue to be an
important product category.
TERMINAL SERVER / DEVICE SERVER
The Company's terminal server and device server families offer flexible and easy
solutions for providing access to serial devices over Ethernet networks. As
Ethernet-based serial connections extend beyond their current applications and
into new market uses such as building automation, process control and console
port management on servers, routers, switches, and other network equipment, the
Company believes that terminal servers and device servers will continue to be a
major growth area.
UNIVERSAL SERIAL BUS
The Company expanded its product lines with its acquisition of Inside Out
Networks, Inc. (Inside Out Networks) in October 2000. The acquisition creates
the most comprehensive and complete USB product line in the industry, expanding
on the USB technology acquired in the July 1998 acquisition of Central Data
Corporation (CDC), and brings an extensive list of satisfied corporate customers
such as Agilent, Gateway, Hewlett-Packard, IBM, Lucent Technologies, Microsoft,
NCR Corporation, Sun Microsystems and others into the Company's customer base.
The Company also benefits from Inside Out Networks' pioneering EPIC software,
which provides seamless transition between legacy software/systems and
next-generation USB-attached devices, supporting feature-rich hardware and
software flow control signaling. This provides ease of use and integration while
protecting technology investments.
LAN CONNECTIVITY
The Company entered the LAN market with its acquisition of MiLAN Technology
Corporation (MiLAN) in November 1993. The Company's LAN business, MiLAN
Technology, provides a complete portfolio of multilayer networking products,
including wireless access points and clients, managed and unmanaged switches,
media converters, print servers and fault tolerant transceivers. These products
are designed to increase the reliability, security and management of
multi-tenant, campus and local area networks. The Company was recently awarded a
multi-million dollar contract to provide fiber-optic LAN connectivity for a
major school district in California.
DISTRIBUTION AND PARTNERSHIPS
Significant U.S. distributors include: Ingram Micro, Tech Data Corporation,
Gates/Arrow Distributing, Merisel, Avnet/Hallmark, Seneca Data and Express
Systems & Peripherals.
Significant Canadian distributors include: Gates/Arrow Electronics, EMJ Data
Systems, Ingram Micro Canada and Tech Data Canada.
Significant European distributors include: Miel, Arecta, Westbase Technology,
Sphinx Computer, Connect Service Riedlbauer, Mitrol, Euroline and Data
Solutions.
5
ITEM 1. BUSINESS (CONTINUED)
DISTRIBUTION AND PARTNERSHIPS (CONTINUED)
Significant Latin American and Asia Pacific distributors include: Tech Pacific,
Sumisho Datacom, Lantech and Ingram Dicom.
Digi maintains strategic alliances with other industry leaders to develop and
market technology solutions. These include most major communications software
vendors, operating system suppliers, and computer hardware manufacturers. Key
partners include: Citrix Systems, Compaq, Hewlett-Packard, IBM, Intel, Lotus,
Micron, Motorola, Novell, Red Hat, Santa Cruz Operation, Sun Microsystems and
Tobit.
CUSTOMERS
The Company's customer base includes many of the world's largest companies.
Long-time customer IBM made the Company's adapter boards the first integrated
communications offering for the iSeries (previously named AS400) in 2000, in
addition to the products currently being sold into the pSeries (previously named
RS6000). The Company has OEM relationships with leading vendors, allowing them
to ship the Company's board and network products as component parts of their
overall networking solutions. These vendors include NCR, Sun Microsystems,
Hewlett Packard, Compaq and Groupe Bull, among others. Many of the world's
leading telecommunications companies and Internet service providers also rely on
the Company's products, including Lucent, Nortel, AT&T, Sprint, Verizon and
Seimens.
During the year ended September 30, 2001, two customers comprised more than 10%
of net sales each: Tech Data at 13.9% and Ingram Micro at 11. 3%. During the
year ended September 30, 2000, two customers comprised more than 10% of net
sales each: Tech Data at 13.4% and Ingram Micro at 10.0%. During the year ended
September 30, 1999, two customers comprised more than 10% of net sales each:
Tech Data at 15.4% and Ingram Micro at 13.4%.
COMPETITIVE CONDITIONS
The computer industry is characterized by rapid technological advances and
evolving industry standards. The market can be significantly affected by new
product introductions and marketing activities of industry participants. The
Company competes for customers on the basis of product performance in relation
to compatibility, support, quality and reliability, product development
capabilities, price and availability.
The Company believes that it is a global market leader in multi-port serial
adapters. As this market continues to mature, the Company will focus on key
applications, customers, and markets to manage applications as they transition
to other technologies such as Ethernet, USB, and wireless connectivity products.
The Company also believes it is a leader in connecting peripheral devices to
Ethernet LANs with its terminal server and device server product lines. With
respect to the LAN business, the Company believes it commands less than a 5%
market share.
Some of the Company's competitors and potential competitors may have greater
financial, technological, manufacturing, marketing and personnel resources than
the Company. Present and future competitors may be able to identify new markets
and develop products more quickly which are superior to those
6
ITEM 1. BUSINESS (CONTINUED)
COMPETITIVE CONDITIONS (CONTINUED)
developed by the Company. They may also adapt new technologies faster, devote
greater resources to research and development, promote products more
aggressively and price products more competitively than the Company. There are
no assurances that competition will not intensify or that the Company will be
able to compete effectively in the markets in which the Company competes.
OPERATIONS
The Company's manufacturing operations procure all parts and certain services
involved in production and subcontracts most of its product manufacturing to
outside firms that specialize in such services. The Company believes that this
approach is beneficial because the Company can reduce its fixed costs, maintain
production flexibility and maximize its profit margins.
The Company's products are manufactured to its designs with standard and
semi-custom components. Most of these components are available from multiple
vendors. The Company has several single-sourced supplier relationships, either
because alternative sources are not available or because the relationship is
advantageous to the Company. If these suppliers are unable to provide a timely
and reliable supply of components, the Company could experience manufacturing
delays adversely affecting its results of operations.
During fiscal years 2001, 2000 and 1999, the Company's research and development
expenditures were $18.3, $20.2 and $21.8 million, respectively.
Due to rapidly changing technology in the computer industry, the Company
believes that its success depends primarily upon the engineering, marketing,
manufacturing and support skills of its personnel, rather than upon patent
protection. Although the Company may seek patents where appropriate and has
certain patent applications pending for proprietary technology, the Company's
proprietary technology or products are generally not patented. The Company
relies primarily on the copyright, trademark and trade secret laws to protect
its proprietary rights in its products. The Company has established common law
and registered trademark rights on a family of marks for a number of its
products.
As of September 30, 2001, the Company had backlog orders which management
believed to be firm in the amount of $1.4 million. All of these orders are
expected to be filled in the current fiscal year. Backlog as of September 30,
2000 and September 30, 1999 was $4.4 million and $5.0 million, respectively.
The Company had 425 employees at September 30, 2001.
ITEM 2. PROPERTIES
The Company's headquarters and research facilities are located in a 130,000
square foot office building in Minnetonka, Minnesota which the Company acquired
in August 1995 and has occupied since March 1996. The Company's primary
manufacturing facility is located in a 58,000 square foot building in Eden
Prairie, Minnesota, which the Company purchased in May 1993 and has occupied
since August 1993. Additional office and research facilities include a 63,000
square foot facility in Dortmund, Germany, a 46,170 square foot facility in
Sunnyvale, California, the lease for which expires in April 2002, and a 5,000
square foot facility in Champaign, Illinois, the lease for which expires in
January
7
ITEM 2. PROPERTIES (CONTINUED)
2002. Subsequent to the Company's fiscal year end, the lease was extended to
expire in February 2005. In connection with the acquisition of Inside Out
Networks in October 2000, the Company acquired an additional 10,465 square foot
facility in Austin, Texas and a 3,655 square foot facility in Torrance,
California. The leases on these facilities expire in October 2005 and September
2003, respectively.
Management believes that the Company's facilities are suitable and adequate for
current office, research and warehouse requirements, and that its manufacturing
facilities provide sufficient production capacity to meet the Company's
currently anticipated needs.
ITEM 3. 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 District 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
District 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 District 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 District Court dismissed the
actions before ruling on that motion. Both the Louisiana State Employees
Retirement System and the 21 lead plaintiffs in the consolidated putative class
actions filed appeals from the decisions of the District Court.
8
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
On July 5, 2001, the United States Court of Appeals for the Eighth Circuit
affirmed the decisions of the District Court and ordered that judgment be
entered in favor of defendants on the claims alleged in the Consolidated Amended
Complaint and the Louisiana Amended Complaint. On September 28, 2001, the Court
of Appeals denied a petition for rehearing en banc filed by the 21 lead
plaintiffs in the consolidated putative class actions.
Management does not expect that the outcome of the action will have a material
adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders during the
quarter ended September 30, 2001.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER'S MATTERS
STOCK LISTING
The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market(TM) under the symbol "DGII." On December 10, 2001, the
number of holders of the Company's Common Stock was approximately 15,374,947,
consisting of 250 record holders and approximately 6,200 stockholders whose
stock is held by a bank, broker or other nominee.
High and low sale prices for each quarter during the years ended September 30,
2001 and 2000, as reported on the Nasdaq Stock Market, were as follows:
STOCK PRICES
2001 first second third fourth
High $9.25 $8.13 $10.40 $9.50
Low $5.53 $5.41 $ 4.50 $4.70
2000 first second third fourth
High $17.75 $15.13 $ 9.63 $ 9.06
Low $10.06 $ 8.19 $ 4.63 $ 6.00
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
The Company does not have a Dividend Reinvestment Plan or a Direct Stock
Purchase Plan.
10
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
For the fiscal years ended September 30 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Net sales $ 130,405 $ 132,525 $ 193,506 $ 182,932 $ 165,598
Acquired in-process research and development -- -- -- 16,065 --
Restructuring 1,121 1,382 607 1,020 10,472
AetherWorks Corporation net operating loss -- -- -- -- (5,764)
AetherWorks Corporation gain (write-off) -- -- -- 1,350 (5,759)
AetherWorks Corporation note recovery -- 8,000 -- -- --
Impairment loss -- (26,146) -- -- --
Income (loss) before cumulative
effect of accounting change 119 (16,825) 3,192 (71) (15,791)
Cumulative effect of accounting change (1,902) -- -- -- --
Net (loss) income (1,783) (16,825) 3,192 (71) (15,791)
Net (loss) income per common share - basic:
Continuing operations -- (1.12) 0.22 (0.01) (1.18)
Cumulative effect of accounting change (0.12) -- -- -- --
Net (loss) income per common share -
assuming dilution:
Continuing operations -- (1.12) 0.22 (0.01) (1.18)
Cumulative effect of accounting change (0.12) -- -- -- --
Working capital 74,233 78,085 59,946 37,896 61,979
Total assets 139,453 142,922 176,330 191,521 118,311
Long-term debt 5,499 7,081 9,206 11,124 --
Stockholders' equity 112,917 113,459 127,164 121,251 95,471
Book value per share 7.39 7.45 8.52 8.34 7.09
Number of employees 425 525 583 703 481
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report 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.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the highly competitive market in which the Company operates; (ii) the
Company's ability to respond to rapidly developing changes in its marketplace;
(iii) delays in the Company's product development efforts; (iv) the useful life
of products once developed; (v) the Company's ability to integrate its recent
acquisitions and proposed acquisition of NetSilicon, Inc. (NetSilicon) and to
develop marketable products from the acquired in-process research and
development; (vi) the Company's reliance on distributors; (vii) declining prices
of networking products; (viii) uncertainty in consumer acceptance of the
Company's products; and (ix) changes in the Company's level of revenue or
profitability. These and other risks, uncertainties and assumptions identified
from time to time in the Company's filings with the Securities and Exchange
Commission, including without limitation, its quarterly reports on Form 10-Q and
its registration statements, could cause the Company's actual future results to
differ materially from those projected in the forward-looking statements as a
result of the factors set forth in the Company's various filings with the
Securities and Exchange Commission and of changes in general economic
conditions, changes in interest rates and/or exchange rates and changes in the
assumptions used in making such forward-looking statements.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The following table sets forth selected information from the Company's
Consolidated Statements of Operations, expressed as a percentage of net sales.
Year ended September 30, Increase/(Decrease)
2001 over 2000 over
2001 2000 1999 2000 1999
---------- ---------- ---------- ---------- ----------
Net sales 100.0% 100.0% 100.0% (1.6)% (31.5)%
Cost of sales 50.8 47.4 49.3 5.3 (34.0)
---------- ---------- ---------- ---------- ----------
Gross margin 49.2 52.6 50.7 (7.8) (29.1)
Operating expenses:
Sales and marketing 23.5 26.0 22.7 (10.8) (21.5)
Research and development 14.1 15.2 11.3 (9.1) (7.7)
General and administrative 12.4 14.6 12.2 (16.0) (18.2)
Impairment loss -- 19.7 -- -- --
Restructuring 0.9 1.1 0.3 (18.9) 127.5
---------- ---------- ---------- ---------- ----------
Total operating expenses 50.9 76.6 46.5 (34.5) 12.8
Operating (loss) income (1.7) (24.0) 4.2 93.1 (486.5)
Other income (expense), net 1.8 2.0 (0.1) (10.2) 1,140.8
AetherWorks Corporation note recovery -- 6.0 -- -- --
Income (loss) before income taxes
and cumulative effect of accounting change 0.1 (16.0) 4.1 100.9 (365.2)
Income tax provision (benefit) -- (3.3) 2.5 101.5 (190.6)
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative
effect of accounting change 0.1 (12.7) 1.6 100.7 (627.1)
---------- ---------- ---------- ---------- ----------
Cumulative effect of accounting change, net of taxes (1.5) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss) income (1.4)% (12.7)% 1.6% 89.4% (627.1)%
---------- ---------- ---------- ---------- ----------
NET SALES
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues.
The Company generally recognizes revenue at the date that products are shipped
to distributors or original equipment manufacturers. Upon adoption of SAB 101 in
the fourth quarter of fiscal 2001, the Company changed its revenue recognition
policy with regard to certain product sales. Essentially, the new policy
recognizes that the risks and rewards of ownership in certain transactions do
not substantively transfer to customers upon shipment of the products. These new
policies are consistent with the guidance contained in SAB 101. The effect of
this change in revenue recognition policy, as of October 1, 2000, has been
reported as the cumulative effect of an accounting change in the first quarter
of fiscal 2001 of $1.9 million, net of taxes, which includes revenue of
approximately $6.3 million, less cost of sales and certain direct selling
expenses. (See Note 18 to the Company's Consolidated Financial Statements.)
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
The following table presents the estimated consolidated results of operations of
the Company on an unaudited pro forma basis if SAB 101 guidance had been
effective in fiscal 2000. Information to estimate the fiscal 1999 impact of the
accounting change was not available as a result of a change in the Company's
financial reporting system in fiscal 1999.
2000
------------
Net sales $135,411,197
Net loss $(15,828,728)
Net loss per share $ (1.05)
The $2.1 million or 1.6% decrease in net sales from 2000 to 2001 and the $61.0
million or 31.5% decrease in net sales from 1999 to 2000 occurred within the
Company's principal product groups as follows:
Percent of Annual Net Sales
---------------------------
2001 2000 1999
---- ---- ----
Growth 26.4% 19.7% 16.3%
Mature 56.3% 70.2% 73.4%
LAN 17.4% 10.1% 10.3%
In addition to the factors discussed below, the Company's net sales in 2001 were
lower than initially anticipated and lower than fiscal 2000 net sales, partially
due to an industry-wide decline in demand associated with the economic downturn.
Net sales of the Company's products addressing growth markets, which consists of
terminal server, USB and device server products, generated revenues of $34.4
million for the 2001 fiscal year, an increase of $8.3 million, or 31.7%,
relative to the net sales recognized during the year ago period for these
products. The increase in net sales is a result of the Company's repositioning
of its product lines into growth markets and acquired expertise in USB and
device server connectivity solutions. Net sales of the products addressing
mature markets, which consists of asynchronous, synchronous and RAS products,
were $73.4 million, a decrease of $19.6 million, or 21.1%. The continued erosion
of the asynchronous product market, offset partially by market share gain,
accounts for $10.5 million of the decline. The phase out of the ISDN product
line resulted in a $5.0 million decrease compared to the year ago period, and
the Company's digital remote access server (RAS) products sales decreased by
$4.1 million. Net sales of the Company's physical layer LAN products were $22.6
million and increased by $9.2 million, or 68.9%, relative to fiscal year 2000,
primarily as a result of many new product introductions, as well as increases in
the volume of media conversion products the Company delivered to the education
market.
Net sales decreased by $61.0 million from 1999 to 2000 largely due to a decline
in revenues of $49.1 million, or 34.5%, from products addressing mature markets.
The decrease is related to the erosion of the asynchronous product market and
the demand downturn associated with the post Year 2000 period.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET SALES (CONTINUED)
The decline in asynchronous products accounts for $38.8 million of the decrease
in sales in fiscal 2000 as compared to 1999. In addition, in the second quarter
of fiscal 2000, the Company eliminated the VoIP product line, and the ISDN
product line experienced a slowdown in sales, resulting in reduced revenues of
$15.9 million relative to the net sales recognized during fiscal 1999 for these
products. Net sales of the Company's digital RAS and synchronous products
contributed an additional $5.6 million of revenues during fiscal 2000 as
compared to the prior year. Net sales of the products addressing growth markets
declined by $5.4 million, or 17.2%, in fiscal 2000 compared to 1999, due to a
lack of new product introductions and the effect of the post Year 2000 period.
Net sales of the Company's physical layer products declined by $6.5 million, or
32.6%, in 2000 relative to 1999.
Net sales to OEMs in 2001 decreased 29.7% relative to 2000, and as a percentage
of total net sales, decreased 8.4% from 29.3% in 2000 to 20.9% in 2001. Net
sales to OEMs for 1999 were 24.9% of total net sales.
Net sales into the distribution channel declined 5.5% from 2000 and as a
percentage of total net sales, declined 2.5% to 60.9% as compared to 63.4% in
2000. International distribution net sales decreased by 1.0% over fiscal 2000.
Domestic distribution net sales declined by 8.6% due to overall market
conditions discussed previously. Net sales to the distribution market for 1999
represented 69.3% of total net sales.
During fiscal years 2001, 2000 and 1999, the Company's net sales to customers
outside the United States, primarily in Europe, were approximately $43.0
million, $46.1 million, and $67.4 million, respectively, comprising
approximately 33.0%, 34.8%, and 34.8% of total net sales, respectively.
As a result of repositioning its product lines into growth markets during fiscal
year 2001, the Company expects to continue to enhance its Connectware
positioning into these growth markets in the future.
GROSS MARGIN
Gross margin in 2001 was 49.2%, compared to 52.6% in 2000, primarily due to the
$3.0 million write down of inventories associated with a discontinued RAS
product line and the overall impact of sales volume declines in fiscal 2001.
Gross margin in 2000 improved to 52.6%, compared to 50.7% in 1999, primarily due
to fewer pricing and volume discount incentives offered to channel partners in
fiscal 2000 and an increase in sales of higher margin DSP RAS products.
OPERATING EXPENSES
Operating expenses in 2001, excluding restructuring and asset impairment
charges, decreased $8.7 million or 11.7% as compared to operating expenses for
2000. Operating expenses in 2001, excluding restructuring and asset impairment
charges, were 50.0% of net sales compared to 55.8% of net sales in 2000. All
operating expense categories, including sales and marketing, research and
development, and
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
general and administrative, were less in 2001 than in 2000 in terms of both
total dollars and as a percentage of net sales. The savings were a result of
several factors, including controls placed on discretionary spending throughout
the fiscal year, the closure of foreign locations during fiscal 2001, and
savings realized as a result of prior year restructuring decisions.
Sales and marketing expenses declined by $3.7 million primarily as a result of
cost control initiatives which the Company implemented early in 2001. The
Company took actions to hold most discretionary expenses below the prior year
levels in response to the lower sales volumes in 2001. The Company generated
savings of $3.8 million primarily by reducing spending for compensation and
employee related costs $0.8 million, advertising spending $0.5 million,
discretionary marketing expenses $1.7 million and other expenses $0.8 million.
The technical support function was eliminated in Europe and moved to the
corporate location in Minnetonka as a result of the European restructuring which
took place in 2000, creating a savings of $0.6 million in technical support
costs in 2001. In fiscal 2001, the Company also closed its Australia and
Singapore foreign sales offices resulting in sales and marketing savings of $0.4
million compared to 2000. Incremental sales and marketing expenses related to
the operations of Inside Out Networks and INXTECH, which were acquired in 2001,
totaled $1.2 million.
Research and development expenses decreased by $1.8 million relative to 2000,
largely due to compensation and other employee-related cost savings of $1.1
million associated with a reduction in the engineering staff. As a result of the
2000 restructuring in Europe, research and development costs decreased by $2.0
million, partially offset by incremental research and development costs of $1.3
million related to the operations of Inside Out Networks and INXTECH during
2001.
General and administrative expenses in 2001 decreased by $3.1 million relative
to 2000, of which $2.1 million resulted from a decrease in amortization
associated with the write-off of the VoIP and ISDN identifiable intangibles and
goodwill of $3.8 million, partially offset by $1.7 million in amortization
associated with the Inside Out Networks and INXTECH acquisitions. An additional
$1.6 million in savings were realized due to a reduction in employees and the
cost containment measures implemented throughout the Company. The Company
realized another $0.2 million of cost reductions as a result of the 2000
restructuring of European operations. The Company incurred $0.8 million of
incremental general and administrative costs related to the operations of Inside
Out Networks and INXTECH.
Operating expenses in 2000, excluding restructuring, reorganization and asset
impairment charges, decreased $15.4 million or 17.2% as compared to operating
expenses for 1999. Sales and marketing expenses declined by $9.4 million as a
result of lower salaries of $3.6 million related to 1999 restructuring
activities, lower advertising costs and commissions of $1.1 million and $0.7
million, respectively, resulting from lower sales volumes in 2000, and lower
travel expenses of $0.6 million in response to cost control measures implemented
primarily due to the lower sales volumes experienced in 2000. Marketing expenses
were lower than in 1999 by $3.4 million due to fewer new product introductions
and less trade show activity. Research and development expenses in 2000
decreased by $1.7 million relative to 1999, largely due to the discontinuance of
the NetBlazer technology and the elimination of the related VoIP product line in
Germany. General and administrative expenses in 2000 decreased by $4.3 million
relative to 1999, of which $2.7 million resulted from the decrease in
amortization associated with the write-off of the VoIP identifiable intangibles
and goodwill, and prior year restructuring activities which created cost
reductions in 2000 of approximately $0.6 million. An
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSES (CONTINUED)
additional $1.0 million in savings were realized due to cost controls
implemented across the entire Company.
The $1.4 million of restructuring charges recorded in fiscal 2001 were the
result of a board-approved workforce reduction of approximately 13% or 61
employees. The restructuring charge consists entirely of severance and
termination costs for the 61 positions affected by the restructuring.
Restructuring activities were completed at the end of the fourth quarter of
fiscal 2001. The Company anticipates annual cost savings of approximately $4.0
million from these restructurings. (See Note 4 to the Company's consolidated
financial statements.)
The $1.5 million of restructuring charges recorded in fiscal 2000 were
associated with the board-approved plan to restructure the European organization
located in Dortmund, Germany and Bagshot, England, by transitioning all product
development, technical support and manufacturing functions to the Company's
corporate headquarters located in Minnetonka, Minnesota. The restructuring
charge consists principally of severance and termination costs for the 75
positions affected by the restructuring. Restructuring activities were completed
by the end of the second quarter of fiscal 2001. The Company realized cost
savings of approximately $3.6 million in fiscal year 2001 from these
restructurings. (See Note 4 to the Company's consolidated financial statements.)
The $1.2 million of net restructuring charges recorded in fiscal 1999 were
associated with the board- approved plan to reorganize the sales and marketing
functions in Germany, England and the United States, by consolidating worldwide
sales and marketing resources into strategic locations. The charges consisted
principally of existing commitments for rent on facilities vacated by the
Company and termination payments associated with the elimination of 42
positions. These activities were completed in December 1999. The Company
realized cost savings of approximately $0.4 million in fiscal year 2001 from
these restructurings. (See Note 4 to the Company's consolidated financial
statements.)
IMPAIRMENT LOSS
In the second quarter of fiscal 2000, the Company recorded an $18.1 million
charge reflecting the write-down of the carrying value of all of the intangible
assets associated with the NetBlazer technology and some of the goodwill
acquired in the Company's July 1998 purchase of ITK. The write-down resulted
from the Company's March 2000 decision to discontinue development of the
NetBlazer technology when the key technical members of the NetBlazer technology
team elected to leave the Company and the Company concluded that it would not be
able to successfully develop a competitive product from the technology.
Accordingly, the Company determined that future undiscounted cash flows from the
acquired ITK assets would be substantially reduced, and therefore, the carrying
value of the acquired ITK assets would be impaired. (See Note 3 to the Company's
consolidated financial statements.)
In September 2000, the Company recorded a charge of $5.8 million reflecting a
write-down of the remaining carrying value of identifiable intangible assets and
goodwill associated with the Integrated Services Digital Network (ISDN)
technology and some of the other long-lived assets acquired in the Company's
July 1998 purchase of ITK. The write-down resulted from the Company's September
2000
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IMPAIRMENT LOSS (CONTINUED)
decision to discontinue all business activities in the ISDN market. The Company
determined that it did not have the capability to invest at the levels necessary
to achieve significant market share in the ISDN market and, therefore, has
discontinued development activities associated with the ISDN product lines.
Accordingly, the Company determined that future undiscounted cash flows from the
remaining acquired
ITK intangible assets would be reduced and, therefore, the carrying value of the
remaining acquired ITK intangible assets would be impaired.
OTHER INCOME (EXPENSE)
Other income of $2.4 million in 2001 consisted primarily of interest income on
short-term investments of $2.7 million and $0.3 million of miscellaneous other
income, partially offset by $0.6 million of interest expense on the Company's
borrowings. Other income of $2.7 million in 2000 consisted primarily of interest
income on short-term investments of $2.7 million and $0.7 million of
miscellaneous other income. These items were partially offset by $0.8 million of
interest expense on the Company's borrowings. Other expense of $0.3 million in
1999 consisted primarily of $1.0 million of interest expense on lines of credit
and long-term debt partially offset by $0.8 million of interest income on
short-term investments.
AETHERWORKS CORPORATION NOTE RECOVERY
In March 2000, the Company received a payment of $8.0 million on a
non-convertible note receivable from AetherWorks Corporation, at which time an
$8.0 million gain was recognized. The note had been recorded as having no
carrying value in 1998 due to significant uncertainty as to its collectibility.
The note was subsequently paid in connection with the acquisition of AetherWorks
Corporation by Nx Networks, Inc.
INCOME TAXES
The Company recorded a $0.1 million tax provision for 2001, before cumulative
effect of accounting change. A tax benefit of $4.3 million and a tax provision
of $4.8 million were recorded for fiscal years 2000 and 1999, respectively. The
tax provision for 2001 is recorded at a rate slightly greater than the U.S.
statutory rate primarily due to non-deductible amortization of goodwill acquired
in the purchase of CDC, Inside Out Networks and INXTECH, partially offset by the
exclusion of non-taxable foreign source income. The tax benefit in 2000 is
recorded at a rate less than the U.S. statutory rate primarily due to
non-deductible charges and amortization, partially offset by the non-taxable
gain recognized upon recovery of the AetherWorks Corporation note. For fiscal
1999, the Company recorded taxes at a rate in excess of the U.S. statutory rate
primarily due to the amortization of goodwill acquired in the purchase of ITK
and CDC, which was not deductible for income tax reporting purposes.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS
On October 30, 2001, the Company announced that they have entered into a
definitive merger agreement whereby Digi will acquire NetSilicon, a provider of
Ethernet microprocessing solutions for intelligent networked devices. The
transaction is subject to approval by shareholders of both companies. (See Note
17 to the Company's consolidated financial statements.)
INFLATION
The Company believes inflation has not had a material effect on its operations
or its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations, and, in prior years, with proceeds from earlier public offerings.
The Company's working capital decreased from $78.1 million at September 30,
2000, to $74.2 million at September 30, 2001, as compared to an increase of
$18.2 million, from $59.9 million to $78.1 million, at September 30, 2000 versus
September 30, 1999, respectively. The Company maintains a line of credit with a
banking institution in Germany providing for borrowings of up to $5.0 million,
depending upon levels of eligible accounts receivable and inventories. As of
September 30, 2001, $0.9 million had been borrowed under these line of credit
agreements.
Net cash provided by operating activities totaled $10.5 million during fiscal
2001 as compared to $27.4 million during fiscal 2000. The decrease in net cash
provided by operations during fiscal 2001 was primarily due to a net increase of
$1.3 million in operating assets and liabilities compared to a net decrease of
$6.1 million in operating assets and liabilities during fiscal 2000. The
increase in net operating assets and liabilities generated in fiscal 2001 is
primarily the result of a slowdown in accounts receivable collections in the
last half of fiscal 2001. Net cash provided by operations was also lower in
fiscal 2001 compared to fiscal 2000 since the Company received an $8.0 million
cash payment for the AetherWorks note in fiscal 2000. The decrease in net cash
provided by operations during fiscal 2000 compared to fiscal 1999 was primarily
due to less favorable operating results.
Investing activities in 2001 consisted of net investments of $5.7 million in
marketable securities and purchases of $1.6 million of equipment, capital
improvements and other intangible assets. The Company also used $10.1 million of
cash for the acquisitions of Inside Out Networks and INXTECH (see Note 2 of the
Company's consolidated financial statements.) In 2000 investing activities
included net investments of $6.4 million in marketable securities and purchases
of $2.5 million of equipment and other intangible assets. Investing activities
in 1999 consisted of net investments of $13.6 million in marketable securities
and purchases of $4.8 million of equipment, and expansion of the Company's
enterprise-wide Enterprise Resource Planning (ERP) software system.
Financing activities consisted of payments on line of credit and debt
obligations totaling $2.9 million, $1.4 million and $5.9 million for 2001, 2000
and 1999, respectively. These payments were partially offset by $1.3 million,
$1.5 million and $3.0 million in 2001, 2000 and 1999, respectively, received
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
from the exercise of employee stock options and employee stock purchase plan
transactions. In 1999, the Company also spent $0.8 million to repurchase shares
of its common stock.
The Company's management believes that current financial resources, cash
generated from operations and the Company's potential capacity for debt and/or
equity financing will be sufficient to fund current and future business
operations.
FOREIGN CURRENCY TRANSLATION
Effective January 1, 1999, eleven countries of the European Union converted to a
common currency called the "Euro." This action caused some of the Company's
European transactions to be negotiated, invoiced, and paid in "Euros." The
conversion will most likely add currency exchange costs and risks, although such
costs and risks are not quantifiable at this time.
During 2001, the Company had approximately $43.0 million of net sales related to
foreign customers, of which $33.6 million were denominated in U.S. dollars, $9.3
million were in Deutschemark-denominated sales, and $0.1 million were in
Euro-denominated sales. During 2001, the average monthly exchange rate for the
U.S. dollar to the Deutschemark increased by approximately 4.7% from .4455 to
.4666.
During 2000, the Company had approximately $46.1 million of net sales related to
foreign customers, of which $41.0 million were denominated in U.S. dollars, $5.0
million were in Deutschemark- denominated sales, and $0.1 million were in
Euro-denominated sales. During 2000, the average monthly exchange rate for the
U.S. dollar to the Deutschemark dropped by approximately 17.0% from .5370 to
.4455.
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.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141),
and No. 142, "Goodwill and Other Intangible Assets" (FAS 142). The most
significant changes made by FAS No. 141 are: 1) requiring that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and 2) establishing specific criteria for the recognition of
intangible assets separately from goodwill. FAS No. 142 primarily addresses the
accounting for acquired goodwill and intangible assets (i.e., the
post-acquisition accounting). The provisions of FAS No. 142 will be effective
for the Company in fiscal year 2003. The most significant changes made by FAS
No. 142 are: 1) goodwill and indefinite-lived intangible assets will no longer
be amortized, and 2) goodwill and indefinite-lived intangible assets will be
tested for impairment at least annually. Goodwill and intangible assets acquired
after June 30, 2001, will be subject immediately to the nonamortization and
amortization provisions of this statement. These standards only permit
prospective application of the new accounting; accordingly, adoption of these
standards will not affect previously reported financial information of the
Company.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
Although the Company has not completed its assessment of the impact of the
adoption of FAS 142, management believes that the principal effect will be the
Company ceasing the amortization of goodwill and assembled workforce. Goodwill
and assembled workforce amortization was approximately $2,427,000 for the year
ended September 30, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (FAS 143), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 requires an entity to recognize the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. Upon
initial recognition of a liability for an asset retirement obligation, an entity
shall capitalize an asset retirement cost by increasing the carrying amount of
the related long-lived asset by the same amount as the liability. FAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Although the Company has not completed its analysis of FAS 143, it
does not expect the impact of adoption to be significant.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 retains and expands upon the fundamental provisions of existing guidance
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Generally, the provisions of FAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Earlier application is encouraged. Although the Company has not completed its
analysis of FAS 144, it does not expect the impact of adoption to be
significant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material exposure to market risk from market sensitive
financial instruments other than the currency risk associated with certain
transactions being denominated in Deutschemarks.
The Company has some exposure to credit risk related to its accounts receivable
portfolio. Exposure to credit risk is controlled through continuous monitoring
procedures, credit limits and collaboration with sales management on customer
contacts to facilitate payment.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal years ended September 30 2001 2000 1999
-------------- -------------- --------------
Net sales $ 130,404,745 $ 132,524,630 $ 193,506,059
Cost of sales 66,192,549 62,871,689 95,313,636
-------------- -------------- --------------
Gross margin 64,212,196 69,652,941 98,192,423
Operating expenses:
Sales and marketing 30,715,581 34,423,150 43,844,557
Research and development 18,334,929 20,174,918 21,847,230
General and administrative 16,252,453 19,357,867 23,657,586
Impairment loss -- 26,146,300 --
Restructuring 1,121,121 1,381,642 607,398
-------------- -------------- --------------
Total operating expenses 66,424,084 101,483,877 89,956,771
-------------- -------------- --------------
Operating (loss) income (2,211,888) (31,830,936) 8,235,652
Other income (expense):
Interest expense (616,964) (775,678) (1,015,331)
Interest income 2,668,957 2,733,912 856,457
Other income (expense) 344,263 709,582 (97,446)
-------------- -------------- --------------
Total other income (expense) 2,396,256 2,667,816 (256,320)
AetherWorks Corporation note recovery -- 8,000,000 --
-------------- -------------- --------------
Income (loss) before income taxes and cumulative
effect of accounting change 184,368 (21,163,120) 7,979,332
Income tax provision (benefit) 65,819 (4,338,440) 4,787,599
-------------- -------------- --------------
Income (loss) before cumulative effect
of accounting change 118,549 (16,824,680) 3,191,733
-------------- -------------- --------------
Cumulative effect of accounting change (net of
income tax benefit of $1,055,928) (1,901,853) -- --
-------------- -------------- --------------
Net (loss) income $ (1,783,304) $ (16,824,680) $ 3,191,733
============== ============== ==============
Net (loss) income per common share, basic:
Continuing operations $ -- $ (1.12) $ 0.22
Cumulative effect of accounting change (0.12) -- --
-------------- -------------- --------------
$ (0.12) $ (1.12) $ 0.22
============== ============== ==============
Net (loss) income per common share,
assuming dilution:
Continuing operations $ -- $ (1.12) $ 0.22
Cumulative effect of accounting change (0.12) -- --
-------------- -------------- --------------
$ (0.12) $ (1.12) $ 0.22
============== ============== ==============
Weighted average common shares, basic 15,235,258 15,061,774 14,696,057
============== ============== ==============
Weighted average common shares,
assuming dilution 15,287,935 15,061,774 14,831,242
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
At September 30,
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,347,253 $ 38,785,936
Marketable securities 25,804,947 20,150,132
Accounts receivable, net 16,161,143 18,175,226
Inventories, net 16,791,851 19,700,010
Other 4,602,668 3,655,511
-------------- --------------
Total current assets 93,707,862 100,466,815
Property, equipment and improvements, net 22,677,155 24,408,384
Goodwill, net 10,521,157 10,114,490
Identifiable intangible assets, net 11,017,233 6,283,254
Other 1,529,169 1,649,252
-------------- --------------
Total assets $ 139,452,576 $ 142,922,195
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit agreements $ 938,400 $ 3,147,900
Current portion of long-term debt 1,584,156 330,305
Accounts payable 6,012,296 6,275,995
Income taxes payable -- 1,328,481
Accrued expenses:
Advertising 856,939 1,143,565
Compensation 3,317,935 1,862,517
Other 5,395,249 6,760,841
Restructuring reserves 1,369,799 1,531,992
-------------- --------------
Total current liabilities 19,474,774 22,381,596
-------------- --------------
Long-term debt 5,499,226 7,081,396
Net deferred income taxes 1,561,155 --
-------------- --------------
Total liabilities 26,535,155 29,462,992
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value: 2,000,000 shares authorized; none issued
and outstanding
Common stock, $.01 par value; 60,000,000 shares authorized; 16,425,606
and 16,322,949 shares issued and outstanding 164,256 163,229
Additional paid-in capital 71,458,733 71,851,928
Retained earnings 59,626,557 61,409,861
Accumulated other comprehensive income 7,969 166,750
-------------- --------------
131,257,515 133,591,768
Unearned stock compensation -- (89,618)
Treasury stock, at cost, 1,095,881 and 1,196,463 shares (18,340,094) (20,042,947)
-------------- --------------
Total stockholders' equity 112,917,421 113,459,203
-------------- --------------
Total liabilities and stockholders' equity $ 139,452,576 $ 142,922,195
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended September 30,
2001 2000 1999
------------ ------------ ------------
Operating activities:
Net (loss) income $ (1,783,304) $(16,824,680) $ 3,191,733
Adjustments to reconcile net (loss) income to
cash provided by operating activities:
Impairment loss -- 26,146,300 --
Restructuring 1,121,121 1,381,642 (672,167)
Depreciation of property and equipment 3,905,455 4,296,143 5,988,640
Amortization of intangibles 5,992,614 8,463,573 12,807,568
(Gain) loss on sale of fixed assets (18,172) 85,809 243,524
Provision for losses on accounts receivable 1,149,286 1,150,068 179,366
Provision for inventory obsolescence 3,836,989 1,632,685 6,218,261
Deferred income taxes (2,198,879) (5,234,720) (2,119,056)
Stock compensation 76,849 164,909 582,981
Changes in operating assets and liabilities:
Accounts receivable 2,047,277 12,792,380 12,359,264
Inventories 82,498 898,344 (1,618,415)
Income taxes payable (1,296,674) (3,943,276) 1,761,296
Other assets 235,966 3,546,641 2,228,897
Accounts payable (823,078) (2,829,261) (3,822,046)
Accrued expenses (1,855,153) (4,362,890) (4,025,827)
------------ ------------ ------------
Total adjustments 12,256,099 44,188,347 30,112,286
------------ ------------ ------------
Net cash provided by operating activities 10,472,795 27,363,667 33,304,019
------------ ------------ ------------
Investing activities:
Purchase of property and equipment and certain other intangible assets (1,625,576) (2,544,171) (4,759,893)
Proceeds from sale of fixed assets -- -- 843,995
Proceeds from maturities of held-to-maturity marketable securities 84,807,237 76,531,426 7,000,000
Purchase of held-to-maturity marketable securities (90,462,052) (82,967,136) (20,633,113)
Business acquisitions, net of cash acquired (10,086,848) -- --
------------ ------------ ------------
Net cash used in investing activities (17,367,239) (8,979,881) (17,549,011)
------------ ------------ ------------
Financing activities:
Payments on long-term debt (630,596) (859,264) (1,072,747)
Payments on line of credit (2,277,000) (508,317) (4,843,096)
Purchase of treasury stock -- -- (815,000)
Stock option transactions 776,412 937,723 2,381,422
Employee stock purchase plan transactions 515,283 580,855 586,324
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,615,901) 150,997 (3,763,097)
------------ ------------ ------------
Effect of exchange rates changes on cash and cash equivalents 71,662 (712,454) (1,383,672)
Net (decrease) increase in cash and cash equivalents (8,438,683) 17,822,329 10,608,239
Cash and cash equivalents, beginning of period 38,785,936 20,963,607 10,355,368
------------ ------------ ------------
Cash and cash equivalents, end of period $ 30,347,253 $ 38,785,936 $ 20,963,607
============ ============ ============
Supplemental Cash Flows Information:
Interest paid $ 717,154 $ 699,228 $ 937,306
Income taxes paid $ 2,609,798 $ 4,358,892 $ 3,742,898
The accompanying notes are an integral part of the consolidated financial
statements.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended September 30, 2001, 2000 and 1999
Common Stock Treasury Stock Additional
Shares Par Value Shares Value Paid-in-Capital
------------ ------------ ------------ ------------ ---------------
Balances, September 30, 1998 15,790,975 $ 157,910 1,247,094 $(21,894,812) $ 70,461,123
Purchase of treasury stock, at cost 105,000 (815,000)
Employee stock purchase issuances (80,482) 1,384,310 (797,986)
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 402,022 4,020 2,377,402
Tax benefit realized upon exercise
of stock options 198,041
Forfeiture of stock options (777,968)
Foreign currency translation adjustment
Net income
------------ ------------ ------------ ------------ ----------------
Balances, September 30, 1999 16,192,997 161,930 1,271,612 (21,325,502) 71,460,612
Employee stock purchase issuances (75,149) 1,282,555 (701,700)
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 129,952 1,299 936,424
Tax benefit realized upon exercise
of stock options 241,751
Forfeiture of stock options (85,159)
Foreign currency translation adjustment
Net loss
------------ ------------ ------------ ------------ ----------------
Balances, September 30, 2000 16,322,949 163,229 1,196,463 (20,042,947) 71,851,928
Employee stock purchase issuances (100,582) 1,702,853 (1,187,570)
Stock compensation
Issuance of stock upon exercise of
stock options, net of withholding 102,657 1,027 775,386
Tax benefit realized upon exercise
of stock options 31,758
Forfeiture of stock options (12,769)
Foreign currency translation adjustment
Net loss
------------ ------------ ------------ ------------ ----------------
Balances, September 30, 2001 16,425,606 $ 164,256 1,095,881 $(18,340,094) $ 71,458,733
============ ============ ============ ============ ===============
The accompanying notes are an integral part of the consolidated financial
statements.
Continued Next Page
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(CONTINUED)
For the years ended September 30, 2001, 2000 and 1999
Accumulated
Unearned Other Total
Retained Stock Comprehensive Stockholders' Comprehensive
Earnings Compensation Income (Loss) Equity (Loss) Income
-------------- -------------- -------------- -------------- --------------
Balances, September 30, 1998 $ 75,042,808 $ (1,700,635) $ (815,809) $ 121,250,585 $ (886,903)
==============
Purchase of treasury stock, at cost (815,000)
Employee stock purchase issuances 586,324
Stock compensation 582,981 582,981
Issuance of stock upon exercise of
stock options, net of withholding 2,381,422
Tax benefit realized upon exercise
of stock options 198,041
Forfeiture of stock options 777,968
Foreign currency translation adjustment (211,724) (211,724) (211,724)
Net income 3,191,733 3,191,733 3,191,733
-------------- -------------- -------------- -------------- --------------
Balances, September 30, 1999 78,234,541 (339,686) (1,027,533) 127,164,362 $ 2,980,009
==============
Employee stock purchase issuances 580,855
Stock compensation 164,909 164,909
Issuance of stock upon exercise of
stock options, net of withholding 937,723
Tax benefit realized upon exercise
of stock options 241,751
Forfeiture of stock options 85,159
Foreign currency translation adjustment 1,194,283 1,194,283 1,194,283
Net loss (16,824,680) (16,824,680) (16,824,680)
-------------- -------------- -------------- -------------- --------------
Balances, September 30, 2000 61,409,861 (89,618) 166,750 113,459,203 $ (15,630,397)
==============
Employee stock purchase issuances 515,283
Stock compensation 76,849 76,849
Issuance of stock upon exercise of
stock options, net of withholding 776,413
Tax benefit realized upon exercise
of stock options 31,758
Forfeiture of stock options 12,769
Foreign currency translation adjustment (158,781) (158,781) (158,781)
Net loss (1,783,304) (1,783,304) (1,783,304)
-------------- -------------- -------------- -------------- --------------
Balances, September 30, 2001 $ 59,626,557 $ -- $ 7,969 $ 112,917,421 $ (1,942,085)
============== ============== ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi International is a worldwide provider of Connectware, wired and wireless,
hardware and software connectivity solutions that businesses use to create,
customize and control retail operations, industrial automation and other
applications. Connectware network enables the essential devices that build
business.
Digi's products are marketed through a global network of distributors, systems
integrators, original equipment manufacturers (OEMs), and value-added resellers
(VARs).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Those having original
maturities in excess of three months are classified as marketable securities.
Marketable securities consist of high-grade commercial paper and corporate bonds
that have maturities of less than one year. Marketable securities classified as
held to maturity are carried at amortized cost. Gross unrealized holding gains
and losses were $39,223 and $3,426, respectively, as of September 30, 2001, and
were $0 and $70,833, respectively, as of September 30, 2000.
REVENUE RECOGNITION
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101). SAB 101 summarizes the SEC's
views in applying generally accepted accounting principles to selected revenue
revenue recognition issues.
The Company recognizes revenue at the date that products are shipped to
distributors or original equipment manufacturers. Sales to authorized domestic
distributors and original equipment manufacturers are made with certain rights
of return and price protection provisions. Estimated reserves for future returns
and pricing adjustments are established by the Company based on historical
experience and current business factors and are charged against revenues in the
same period as the corresponding sales are recorded. Estimated warranty costs
are accrued based on historical experience and current business factors, and are
recorded in the same period as the corresponding sales.
The Company offers rebates to authorized domestic and international distributors
and authorized resellers. The rebates are incurred based on the level of sales
to the respective distributors and resellers, and are charged to operations as a
reduction in revenue in the same period as the corresponding sales.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company generally recognizes revenue at the date that products are shipped
to distributors or original equipment manufacturers. Upon adoption of SAB 101 in
the fourth quarter of fiscal 2001, the Company changed its revenue recognition
policy with regard to certain product sales. Essentially, the new policy
recognizes that the risks and rewards of ownership in certain transactions do
not substantively transfer to customers upon shipment of the products. These new
policies are consistent with the guidance contained in SAB 101. The effect of
this change in revenue recognition policy, as of October 1, 2000, has been
reported as the cumulative effect of an accounting change in the first quarter
of fiscal 2001 of $1.9 million, net of taxes, which includes revenue of
approximately $6.3 million, less cost of sales and certain related expenses such
as direct selling expenses.
The Company recognizes license revenue upon meeting each of the following
criteria: execution of a license agreement or contract; delivery of software;
the license fee is fixed or determinable; collectibility of the proceeds is
assessed as being probable; and vendor specific objective evidence exists to
allocate the total fee to undelivered elements of the arrangement.
Vendor-specific objective evidence is based on the price charged when an element
is sold separately.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost
determined on the first-in, first-out method. Fair market value for raw
materials is based on replacement cost and for other inventory classifications
based on net realizable value. Appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value. During the year ended September 30, 2001, the Company discontinued the
Datafire RAS product line, in connection with its strategy of focusing resources
on growth areas such as the terminal server and device server markets. The
Company recorded a $2.7 million charge to adjust the Datafire RAS inventory to
net realizable value. The charge was included in cost of sales in the
consolidated statement of operations for the fiscal year ended September 30,
2001.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
provided by charges to operations using the straight-line method over their
estimated useful lives. Furniture and fixtures and other equipment are
depreciated over a period of three to five years. Building improvements and
buildings are depreciated over ten and thirty-nine years, respectively. Periodic
reviews for impairment of the carrying value of property, equipment and
improvements are made based on undiscounted expected future cash flows.
Expenditures for maintenance and repairs are charged to operations as incurred,
while major renewals and betterments are capitalized. The assets and related
accumulated depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Purchased proven technology, license agreements, covenants not to compete and
other intangible assets are recorded at fair value when acquired in a business
acquisition, or at cost when purchased directly. Goodwill represents the excess
of cost over the fair value of identifiable assets acquired and is being
amortized on a straight-line basis over estimated useful life periods ranging
from five to fifteen years. Purchased in-process research and development costs
(IPR&D) are expensed upon consummation of the purchase. All other intangible
assets are amortized on a straight-line basis over their estimated useful lives
of four to seven years.
The carrying amount of intangible assets is periodically, at least quarterly,
reviewed to assess the remaining useful lives and the recoverability based on
undiscounted expected future cash flows.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Software development
costs are expensed as incurred. Such costs are required to be expensed until the
point that technological feasibility and proven marketability of the product are
established. Costs otherwise capitalized after such point also are expensed
because they are insignificant.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Tax credits are accounted for under the flow-through method, which recognizes
the benefit in the year in which the credit is utilized.
(LOSS) INCOME PER COMMON SHARE
Basic net (loss) income per share is calculated based on the weighted average of
common shares outstanding during the period. Net (loss) income per share,
assuming dilution, is computed by dividing net (loss) 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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(LOSS) INCOME PER COMMON SHARE (CONTINUED)
The following table is a reconciliation of the numerators and denominators in
the (loss) income per share calculations:
(Loss)
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
For the year ended September 30, 2001
BASIC LOSS PER SHARE
Loss available to common stockholders $ (1,783,304) 15,235,258 $ (0.12)
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares 52,677
-------------- -------------- --------------
DILUTED LOSS PER SHARE
Loss available to common stockholders $ (1,783,304) 15,287,935 $ (0.12)
For the year ended September 30, 2000
BASIC LOSS PER SHARE
Loss available to common stockholders $ (16,824,680) 15,061,774 $ (1.12)
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares
-------------- -------------- --------------
DILUTED LOSS PER SHARE
Loss available to common stockholders $ (16,824,680) 15,061,774 $ (1.12)
For the year ended September 30, 1999
BASIC INCOME PER SHARE
Income available to common stockholders $ 3,191,733 14,696,057 $ 0.22
EFFECT OF DILUTIVE SECURITIES
Common equivalent shares 135,185
-------------- -------------- --------------
DILUTED INCOME PER SHARE
Income available to common stockholders $ 3,191,733 14,831,242 $ 0.22
Common equivalent shares of 160,853 at September 30, 2000 were not included in
the computation of diluted earnings per share because their effect is
antidilutive.
Options to purchase 1,705,964, 1,230,224 and 811,753 shares at September 30,
2001, 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 and therefore their effect would be
antidilutive.
Pursuant to Statement of Financial Accounting Standards No. 128, "Earnings per
Share", income before cumulative effect of accounting change has been used in
determining diluted earnings per share for the year ended September 30, 2001.
As discussed in Note 17, the Company has proposed to acquire NetSilicon in
exchange for cash and common stock.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the Company's international
subsidiaries are measured using local currencies as the functional currency.
Assets and liabilities of these operations are translated at the exchange rates
in effect at each fiscal year-end. Statements of operations accounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation account in
stockholders' equity. The Company has not implemented a hedging strategy to
reduce the risk of foreign currency translation exposures.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME (LOSS)
For the Company, comprehensive income (loss) includes net income (loss) and
foreign currency translation adjustments. Foreign currency translation
adjustments are charged or credited to the accumulated other comprehensive
income (loss) account in stockholders' equity.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141),
and No. 142, "Goodwill and Other Intangible Assets" (FAS 142). The most
significant changes made by FAS No. 141 are: 1) requiring that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and 2) establishing specific criteria for the recognition of
intangible assets separately from goodwill. FAS No. 142 primarily addresses the
accounting for acquired goodwill and intangible assets (i.e., the
post-acquisition accounting). The provisions of FAS No. 142 will be effective
for the Company in fiscal year 2003. The most significant changes made by FAS
No. 142 are: 1) goodwill and indefinite-lived intangible assets will no longer
be amortized, and 2) goodwill and indefinite-lived intangible assets will be
tested for impairment at least annually. Goodwill and intangible assets acquired
after June 30, 2001, will be subject immediately to the nonamortization and
amortization provisions of this statement. These standards only permit
prospective application of the new accounting; accordingly, adoption of these
standards will not affect previously reported financial information of the
Company. Although the Company has not completed its assessment of the impact of
the adoption of FAS 142, management believes that the principal effect will be
the Company ceasing the amortization of goodwill and assembled workforce.
Goodwill and assembled workforce amortization was approximately $2,427,000 for
the year ended September 30, 2001.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (FAS 143), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 requires an entity to recognize the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. Upon
initial recognition of a liability for an asset retirement obligation, an entity
shall capitalize an asset retirement cost by increasing the carrying amount of
the related long-lived asset by the same amount as the liability. FAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Although the Company has not completed its analysis of FAS 143, it
does not expect the impact of adoption to be significant.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 retains and expands upon the fundamental provisions of existing guidance
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Generally, the provisions of FAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Earlier application is encouraged. Although the Company has not completed its
analysis of FAS 144, it does not expect the impact of adoption to be
significant.
2. ACQUISITIONS
In October 2000, the Company acquired Inside Out Networks, 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 was
allocated to the estimated fair value of assets acquired and liabilities
assumed.
The purchase consideration, including related transaction costs, consists of
$7,684,176 in cash. The Company paid $1,398,577 in November 2001 and may be
required to pay up to $7,101,423 of additional cash consideration for the
purchase subject to Inside Out Networks achieving specific revenue and operating
income targets during the three years following the acquisition.
The table below sets forth the purchase price allocation.
Cash $ 7,494,844
Direct acquisition costs 56,000
Guaranteed employee retention payments 133,332
------------
Total purchase price $ 7,684,176
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
Estimated fair value of tangible assets acquired 1,261,598
Identifiable intangible assets 6,422,578
Goodwill 2,504,806
Deferred tax liabilities related to
identifiable intangibles (2,504,806)
-----------
$ 7,684,176
The identifiable intangible assets of $6,422,578 included in the purchase price
allocation set forth above are comprised of proven technology with an estimated
fair value of $5,692,578 and an assembled workforce with an estimated fair value
of $730,000, which have estimated useful lives of six years and five years,
respectively. The remaining unallocated purchase price represents goodwill,
which is being amortized over six years.
In June 2001, the Company acquired INXTECH, the parent company of Decision
Europe, a French designer and manufacturer of data communications systems sold
under the Xcell Technology brand. The transaction was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed.
The purchase consideration, including related transaction costs, consists of
$2,424,095 in cash. The Company may be required to pay up to $2,500,000 of
additional cash consideration for the purchase subject to Decision Europe
achieving certain future product development milestones and retention of certain
key employees during the three years following the acquisition.
The table below sets forth the purchase price allocation.
Cash $ 2,372,965
Direct acquisition costs 51,130
-----------
Total purchase price $ 2,424,095
Estimated fair value of tangible assets acquired 577,439
Identifiable intangible asset 1,846,656
Goodwill 743,077
Deferred tax liabilities related to
identifiable intangibles (743,077)
-----------
$ 2,424,095
The identifiable intangible asset of $1,930,492 included in the purchase price
allocation set forth above is proven technology, which has an estimated useful
life of four and one-half years. The remaining unallocated purchase price
represents goodwill, which is being amortized over four and one-half years.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma condensed consolidated results of operations
have been prepared as if the acquisitions of Inside Out Networks and INXTECH had
occurred as of the beginning of fiscal 2000:
2001 2000
------------ ------------
Net sales $131,821,522 $137,701,141
Net loss $ (1,995,047) $(16,794,902)
Net loss per share $ (0.13) $ (1.12)
The unaudited pro forma condensed consolidated results of operations are not
necessarily indicative of results that would have occurred had the acquisitions
occurred as of the beginning of fiscal 2000, nor are they necessarily indicative
of the results that will be obtained in the future.
3. IMPAIRMENT LOSS
In March 2000, the Company recorded a charge of $18,068,249 reflecting the
write-down of the carrying value of all of the intangible assets associated with
the NetBlazer technology and some of the goodwill acquired in the Company's July
1998 purchase of ITK. The write-down resulted from the Company's March 2000
decision to discontinue development of the NetBlazer technology when the key
technical members of the NetBlazer technology team elected to leave the Company
and the Company concluded that it would not be able to successfully develop a
competitive product from the technology. Accordingly, the Company determined
that future undiscounted cash flows from the acquired ITK assets would be
substantially reduced and, therefore, the carrying value of the acquired ITK
assets would be impaired.
The Company utilized a discounted cash flows valuation method as described in
Statement of Financial Accounting Standards Board No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FASB 121), to measure the March 2000 adjustment to the carrying value of the
acquired ITK intangible assets.
In September 2000, the Company recorded a charge of $8,078,051 reflecting a
write-down of the remaining carrying value of identifiable intangible assets and
goodwill associated with the Integrated Services Digital Network (ISDN)
technology and some of the other long-lived assets acquired in the Company's
July 1998 purchase of ITK. The write-down resulted from the Company's September
2000 decision to discontinue all business activities in the ISDN market. The
Company determined that it did not have the capability to invest at the levels
necessary to achieve significant market share in the ISDN market and, therefore,
discontinued development activities associated with the ISDN product lines.
Accordingly, the Company determined that future undiscounted cash flows from the
remaining acquired ITK intangible assets would be reduced and, therefore, the
carrying value of the remaining acquired ITK intangible assets would be
impaired. As a result of discontinuing business activities in the ISDN market,
as well as the decision to restructure the European operations to a sales and
marketing organization, the
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. IMPAIRMENT LOSS (CONTINUED)
Company determined that its Dortmund, Germany facility (the Dortmund Facility),
including certain furniture and fixtures, would no longer be needed to support
operations. During September 2000, the Company began efforts to sell the
Dortmund Facility. As a result of placing the Dortmund Facility on the
commercial real estate market, the Company determined that the Dortmund
Facility's fair market value was less than its carrying value. An independent
appraisal of the Dortmund Facility was completed. Based on the results of this
appraisal, the Company wrote-down the carrying value of the Dortmund Facility to
its estimated fair market value as of September 30, 2000. The carrying value of
certain furniture and fixtures at the Dortmund Facility were written down to
estimated fair value, given the actions taken by the Company as described above.
The estimated fair value of the Dortmund Facility, including the furniture and
fixtures, is $4.9 million and is classified as part of property, equipment and
improvements on the Company's balance sheet at September 30, 2001.
The Company utilized a discounted cash flows valuation method as described in
FASB 121 to measure the September 2000 adjustment to the carrying value of the
remaining acquired ITK intangible assets. The Company utilized an independent
appraisal to measure the September 2000 adjustment to the carrying value of the
acquired Dortmund Facility. The September 2000 adjustment to carrying value of
the acquired ITK furniture and fixtures was based on the Company's estimate of
selling prices for the furniture and fixtures.
The write-down of the carrying value of the long-lived assets, as described in
the previous paragraphs, consists of the following:
Identifiable Identifiable
Intangible Assets Intangible Assets
and Goodwill and Goodwill
Associated with Associated with Total
Asset the NetBlazer the ISDN Other Long Lived Impairment
Description Technology Technology Assets Loss
----------- ----------------- ----------------- ---------------- -----------
Current technology $10,491,837 $ 2,241,167 $12,733,004
Assembled workforce 252,646 670,484 923,130
Goodwill 7,323,766 2,852,737 10,176,503
Building - Dortmund facility $ 1,955,366 1,955,366
Furniture and fixtures 358,297 358,297
----------- ----------- ----------- -----------
Totals $18,068,249 $ 5,764,388 $ 2,313,663 $26,146,300
=========== =========== =========== ===========
The Company recognized $5,327,981 of tax benefits as a result of the elimination
of the deferred tax liabilities associated with the identifiable intangible
assets of ITK's NetBlazer and ISDN technologies, which were written off as
described above.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING
In September 2001, the Company implemented a restructuring plan that resulted in
a workforce reduction of 50 employees in Minnetonka, Minnesota and 11 employees
in Sunnyvale, California. A charge of $1,351,870 was recorded for severance and
outplacement costs. Payment of all costs related to the September 2001
restructuring is expected to be completed in the second quarter of fiscal 2002.
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 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 two 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, and maintenance contracts, and office
equipment leases, and $44,550 for severance-related legal expenses. As of March
31, 2001, the Company had paid $1,079,321 of severance and termination costs
relating to the elimination of 69 positions. Change in estimate adjustments
related to the severance component of the restructuring accrual totaling
$173,210 were recorded in the quarter ended March 31, 2001 because the Company
made a decision to retain six employees who had previously been notified that
their employment would be terminated. In fiscal 2001, the Company paid $134,227
related to the closure of the Bagshot office for lease cancellation and paid
$69,766 of cancellation fees related to automobile leases, maintenance
contracts, and office equipment leases. Changes in estimate for
severance-related legal expenses of $44,550 and cancellation fees of $12,989
were recorded as a reduction of the restructuring accrual with a corresponding
increase to operating income during the year ended September 30, 2001.
In March 1999, the Company's Board of Directors approved a restructuring plan
related to the reorganization of sales and marketing functions in Germany,
England and the United States, by consolidating worldwide sales and marketing
resources into strategic locations. The original related charge of $1,452,909
($581,164 net of tax benefits) consisted of $151,038 of existing commitments for
rent on facilities vacated by the Company in Hamburg, Nurnberg, and Frankfurt,
Germany and $1,301,871 of termination payments associated with the elimination
of 44 positions in Dortmund, Germany; Bagshot, England; Sunnyvale, California;
and Minnetonka, Minnesota.
As of December 31, 1999, the Company had paid $906,299 of termination costs
relating to the elimination of 33 positions. Restructuring activities were
completed as of December 1999. During the second quarter of fiscal 2000, the
final severance and termination expenses were paid, and the Company adjusted the
remaining restructuring accrual to zero. In fiscal 2000, severance and
termination costs of $146,767 and rent commitment payments of $7,312 were
charged to the restructuring accrual. Changes in estimate for severance and
termination costs of $124,937 and rent commitments of $13,160 were recorded as a
reduction of the restructuring accrual with a corresponding increase to
operating income during the year ended September 30, 2000.
In July 1998, the Company's Board of Directors approved a restructuring plan
related to the consolidation of its offices in Germany and England. The
restructuring plan related to the closure of existing leased facilities rendered
redundant by the acquisition of ITK. The original charge of $1,020,000 ($647,000
net of tax benefits), consisted of $61,483 of noncancellable rent commitments
the Company expected to incur following closure of the Cologne, Germany
facility; $100,110 of contractual
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING (CONTINUED)
payment obligations for office furniture and other equipment the Company
expected to incur following the closure of the Cologne, Germany facility;
$202,039 related to the write-off of leasehold improvements in connection with
the closure of the Cologne, Germany facility; and $656,368 of termination
payments associated with the elimination of six positions in Cologne, Germany
and Bagshot, England.
The Company closed the Cologne facility in December 1998. As of December 31,
1999, the Company had paid $301,044 of termination costs relating to the
elimination of two positions. Restructuring activities were completed as of June
1999. In the third quarter of fiscal 2000, the Company adjusted the remaining
restructuring accrual to zero, as all obligations had been satisfied. In fiscal
year 2000, rent commitment payments of $12,636 and payments of $27,646 for
write-off of leasehold improvements were charged to the restructuring accrual.
Changes in estimate for rent commitments of $2,573 and write-off of leasehold
improvements of $9,680 were recorded as a reduction of the restructuring accrual
with a corresponding increase to operating income during the year ended
September 30, 2000.
In connection with the Company's acquisition of ITK, the Company formulated a
plan of reorganization and, accordingly, recognized a $3,484,000 restructuring
liability which the Company included as a component of total liabilities assumed
in the acquisition. Components of the original estimated liability included
$1,844,000 of termination payments associated with 10 employees the Company
expected to eliminate at the Chelmsford, Massachusetts ITK location and 20
employees the Company expected to eliminate at the Dortmund, Germany location
and $1,640,000 of noncancellable rent obligations for facilities the Company
expected to incur following closure of facilities in Chelmsford, Massachusetts
and Bristol and Newbury, England.
The Company vacated the Chelmsford, Bristol, and Newbury facilities in March
1999, October 1998 and May 1999, respectively. Restructuring activities were
completed as of June 1999. During the second quarter of fiscal 2000, the final
severance, termination and facility closure costs were paid. In fiscal 2000,
severance and termination costs of $5,217 and facility closure costs of $1,928
were charged against the restructuring accrual. Changes in estimate relating to
severance and termination costs of $17,652 and facilities closures of $33,469
were recorded as a reduction in the restructuring accrual with corresponding
offsets to goodwill during the year ended September 30, 2000.
In connection with the Company's acquisition of CDC, the Company formulated a
plan of reorganization and, accordingly, recognized a $750,000 restructuring
liability which the Company included as a component of total liabilities assumed
in the acquisition. Components of this estimated liability included $675,000 of
termination payments, associated with 22 employees the Company expected to
eliminate when it closed the Champaign, Illinois facility in January 1999 and
$75,000 related to facility closure costs the Company expected to incur
following closure and sale of the Champaign, Illinois facility. Restructuring
activities were completed as of June 1999. During the second quarter of fiscal
2000, the Company paid the final severance costs of $7,128 associated with this
restructuring and the accrual was adjusted to zero. Total payments against the
restructuring accrual in fiscal year 2000 included severance and termination
costs of $88,661. An additional expense of $3,340 was also recorded related to a
change in estimate in the original restructuring accrual. Adjustments to the
restructuring accrual were reflected as changes to the restructuring accrual
with corresponding offsets to goodwill.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING (CONTINUED)
The Company's restructuring activities are summarized as follows:
BALANCE AT CHANGE IN BALANCE AT
SEPTEMBER 30, ESTIMATE SEPTEMBER 30,
DESCRIPTION 2000 PROVISION PAYMENTS ADJUSTMENTS 2001
----------- ------------- ----------- ----------- ----------- -------------
September 2001 Restructuring Plan:
- Severance and termination costs $ 1,351,870 $ 1,351,870
----------- ----------- ----------- ----------- -----------
Subtotal 1,351,870 $ 1,351,870
----------- ----------- ----------- ----------- -----------
September 2000 European Restructuring Plan:
- Severance and termination costs $ 1,252,531 $(1,079,321) $ (173,210) $ --
- Office lease cancellation fees 134,227 (134,227) --
- Other lease cancellation fees and contractual payments 100,684 (69,766) (12,989) 17,929
- Legal costs 44,550 (44,550) --
----------- ----------- ----------- ----------- -----------
Subtotal 1,531,992 -- (1,283,314) (230,749) 17,929
----------- ----------- ----------- ----------- -----------
Totals $ 1,531,992 $ 1,351,870 $(1,283,314) $ (230,749) $ 1,369,799
=========== =========== =========== =========== ===========
5. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company views its operations and manages its business as one segment - a
provider of connectivity solutions that businesses use to create, customize and
control retail operations, industrial automation and other applications. Factors
used to identify the Company's single operating segment include the
organizational structure of the Company and the financial information used by
executive management in making decisions about how to allocate resources and
assess performance. The following table sets forth the various components of net
sales by product line as a percentage of total net sales:
Percent of Annual Net Sales
------------------------------------
2001 2000 1999
------ ------ ------
Growth 26.3% 19.7% 16.3%
Mature 56.3% 70.2% 73.4%
LAN 17.4% 10.1% 10.3%
The operations of the Company are primarily conducted in the Unites States, the
Company's country of domicile. The data in the tables below are determined by
reference to the location of the Company's operations in the United States and
Europe for the years ended September 30:
Revenue derived by operational location:
Year Ended September 30,
2001 2000 1999
------------ ------------ ------------
United States $111,832,491 $114,066,232 $166,557,811
Europe 18,572,254 18,458,398 26,948,248
------------ ------------ ------------
$130,404,745 $132,524,630 $193,506,059
============ ============ ============
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
Net long-lived assets by location:
Year Ended September 30,
2001 2000 1999
----------- ----------- -----------
United States $36,698,844 $35,232,754 $40,921,789
Foreign 7,516,701 5,573,374 37,125,699
----------- ----------- -----------
Total net long-lived
assets $44,215,545 $40,806,128 $78,047,488
=========== =========== ===========
The Company's foreign export sales, primarily to Europe, comprised 33.0%, 34.8%,
and 34.8% of net sales for the years ended September 30, 2001, 2000 and 1999,
respectively.
During fiscal 2001, one customer accounted for 13.9% of net sales and 7.6% of
the trade accounts receivable as of September 30, 2001, while another accounted
for 11.3% of net sales and 21.9% of the trade accounts receivable as of
September 30, 2001.
During fiscal 2000, one customer accounted for 13.4% of net sales and 14.7% of
the trade accounts receivable as of September 30, 2000, while another accounted
for 10.0% of net sales and 25.4% of the trade accounts receivable as of
September 30, 2000.
During fiscal 1999, one customer accounted for 15.4% of net sales and 8.7% of
the trade accounts receivable as of September 30, 1999, while another accounted
for 13.4% of net sales and 22.5% of the trade accounts receivable as of
September 30, 1999.
6. INVESTMENT IN AETHERWORKS CORPORATION
In May 1998, the Company exchanged its previously purchased $13,796,525 of
convertible notes from AetherWorks Corporation, a development stage company
engaged in the development of wireless and dial-up remote access technology, for
a non-interest bearing $8,000,000 non-convertible note. As a part of the
exchange, the Company relinquished its rights to any future technology or claims
on any of AetherWorks' intellectual properties. In exchange, the Company was
released from all of its guarantees of certain lease obligations of AetherWorks.
Due to the significant uncertainty as to its collectibility, the $8,000,000 note
was recorded by the Company as having no carrying value.
In March 2000, the Company received a payment of $8,000,000 from AetherWorks,
representing payment on the aforementioned non-convertible note. The note was
paid as a result of AetherWorks Corporation being acquired by Nx Networks. As a
result of this payment, the Company recorded $8,000,000 of other income during
the year ended September 30, 2000.
The Company leased to AetherWorks $1,325,000 of computer equipment under a
three-year direct financing lease, expiring in August 2000. The lease contained
an option for AetherWorks to acquire the equipment for $132,598 upon termination
of the lease, and with 30 days' prior written notice. AetherWorks did not
exercise its option to acquire the equipment, and the equipment was returned to
the Company in September 2000.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SELECTED BALANCE SHEET DATA
2001 2000
----------- -----------
Accounts receivable, net:
Trade accounts receivable $17,621,225 $19,990,463
Less allowance for doubtful accounts 1,460,082 1,815,237
----------- -----------
$16,161,143 $18,175,226
=========== ===========
Inventories, net:
Raw materials $11,480,340 $14,152,861
Work in process 664,055 1,092,654
Finished goods 4,647,456 4,454,495
----------- -----------
$16,791,851 $19,700,010
=========== ===========
Property, equipment and improvements, net:
Land $ 2,219,683 $ 2,202,241
Buildings 17,948,937 17,641,451
Improvements 1,566,183 1,254,023
Equipment 20,549,526 22,218,933
Purchased software 9,537,120 9,504,099
Furniture and fixtures 1,537,239 1,505,238
----------- -----------
53,358,688 54,325,985
Less accumulated depreciation and amortization 30,681,533 29,917,601
----------- -----------
$22,677,155 $24,408,384
=========== ===========
Goodwill, net:
Goodwill $18,837,074 $16,216,257
Less accumulated amortization 8,315,917 6,101,767
----------- -----------
$10,521,157 $10,114,490
=========== ===========
Identifiable intangible assets, net:
Purchased technology $17,023,070 $ 9,400,000
License agreements 40,000 2,915,600
Assembled workforce 1,130,000 400,000
Other 689,464 698,369
----------- -----------
18,882,534 13,413,969
Less accumulated amortization 7,865,301 7,130,715
----------- -----------
$11,017,233 $ 6,283,254
=========== ===========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BORROWINGS UNDER LINE OF CREDIT AGREEMENT
The Company maintains a line credit with Deutsche Bank that provides for
borrowings of up to $5,000,000 depending upon levels of eligible accounts
receivable and inventories. As of September 30, 2001 and 2000, the Company had
borrowed $938,400 and $3,147,900 under this credit line at interest rates of
7.98% and 7.25% at September 30, 2001 and 2000, respectively. The Company is
required to maintain, until March 31, 2002, $5,000,000 deposited in a financial
institution as collateral for the balance outstanding at September 30, 2001.
This collateral is included in marketable securities at September 30, 2001.
9. LONG-TERM DEBT
Long-term debt consists of the following at September 30,
2001 2000
---------- ----------
5.25% fixed rate long-term collateralized note $1,326,178 $1,353,068
5.20% fixed rate long-term collateralized note 956,340 944,370
6.25% fixed rate long-term collateralized note 3,111,744 3,194,044
6.00% fixed rate long-term uncollateralized notes 1,689,120 1,618,920
5.00% to 10.60% subsidized long-term notes -- 301,299
---------- ----------
7,083,382 7,411,701
Less current portion 1,584,156 330,305
---------- ----------
$5,499,226 $7,081,396
========== ==========
Maturities of long term debt are as follows as of September 30, 2001:
FISCAL
YEAR AMOUNT
------ -----------
2002 $ 1,584,156
2003 833,437
2004 364,237
2005 364,237
2006 364,237
Thereafter 3,573,078
-----------
Total $ 7,083,382
===========
The 5.25% fixed rate long-term note is due on March 30, 2017, and is payable in
semi-annual principal installments beginning September 2000. The 5.20% fixed
rate long-term note is due on December 30, 2017, and is payable in semi-annual
principal installments beginning June 2001. The 6.25% fixed rate long-term note
is due on September 30, 2016, and is payable in semi-annual principal
installments beginning March 2000. Interest on the notes is payable on a
quarterly basis. These notes are collateralized by land, buildings and equipment
with a carrying value of $4,945,447 on September 30, 2001. The 6.0% fixed rate
long-term uncollateralized notes are due on November 5, 2001 ($1,219,920)
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
and on September 15, 2003 ($469,200). Interest is payable annually on the 2001
note, and payable on a quarterly basis for the 2003 notes.
All of the long-term debt was incurred in connection with the construction of
the Dortmund Facility acquired in the ITK purchase. (See Note 3). The Company
intends to prepay all long-term debt if the Dortmund Facility is sold.
10. INCOME TAXES
The components of the provision (benefit) for income taxes before cumulative
effect of accounting change for the years ended September 30 is as follows:
2001 2000 1999
----------- ----------- -----------
Currently payable:
Federal $ 1,859,018 $ 667,992 $ 6,201,277
State 405,680 228,288 705,378
Deferred (2,198,879) (5,234,720) (2,119,056)
----------- ----------- -----------
$ 65,819 $(4,338,440) $ 4,787,599
=========== =========== ===========
The net deferred tax asset at September 30 consists of the following:
2001 2000
----------- -----------
Uncollectible accounts
and other reserves $ 1,687,335 $ 2,016,254
Inventories 1,659,604 168,128
Compensation costs 498,420 589,685
Net operating loss carryforwards 2,738,658 2,582,194
Intangible assets (4,143,334) (2,113,800)
----------- -----------
Net deferred tax asset $ 2,440,683 $ 3,242,461
=========== ===========
The net deferred tax asset consists of the following at September 30:
2001 2000
----------- -----------
Current deferred tax asset $ 3,845,359 $ 2,774,067
Net non-current deferred tax asset -- 468,394
Net non-current deferred tax liability (1,404,676) --
----------- -----------
$ 2,440,683 $ 3,242,461
=========== ===========
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred tax liabilities of $5,327,981 were eliminated as a result of the
write-off of the identifiable intangible assets of ITK during fiscal year 2000.
(See Note 3.)
As of September 30, 2001 and 2000, the Company had federal net operating loss
carryforwards of approximately $8.0 million and $7.6 million, respectively,
which expire at various dates through 2011.
The reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate before cumulative effect of accounting change for the
years ended September 30, 2001, 2000 and 1999 is as follows:
2001 2000 1999
------ ------ ------
Statutory income tax rate 34.0% (34.0)% 35.0%
Increase (reduction) resulting from:
State taxes, net of federal benefits 145.2 (0.7) 5.7
Utilization of low income housing credits (162.7) (1.9) (5.0)
AetherWorks Corporation recovery (12.9)
Impairment loss, net of deferred taxes 13.1
Non-deductible intangible amortization 322.9 3.8 15.3
Foreign operations (211.1) 6.8 2.9
Other (92.6) 5.3 6.1
------ ------ ------
35.7% (20.5)% 60.0%
====== ====== ======
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
The Company's stock option plan (the Stock Option Plan) provides for the
issuance of nonstatutory stock options (NSOs) and incentive stock options (ISOs)
to key employees and nonemployee board members holding less than 5% of the
outstanding shares of the Company's common stock. The Company's Non-Officer
Stock Option Plan (the Non-Officer Plan and, together with the Stock Option
Plan, the Plans), provides for the issuance of NSOs to key employees who are not
officers or directors of the Company. The Company's 2000 Omnibus Stock Plan (the
Omnibus Plan) provides for the issuance of stock-based incentives, including
ISOs and NSOs, to employees and others who provide services to the Company,
including consultants, advisers and directors. Options granted under the plans
will expire if unexercised after ten years from the date of grant. Options
granted under the plans generally vest over a four year service period.
The exercise price for ISOs and non-employee directors options granted under the
Stock Option Plan or the Omnibus Plan is set at the fair market value of the
Company's common stock on the date of grant. The exercise price for nonstatutory
options granted under the Plans is set by the Compensation Committee of the
Board of Directors. The authority to grant options under the Plans and set other
terms and conditions rests with the Compensation Committee. The Stock Option
Plan terminates in 2006 and the Omnibus Plan terminates in 2010. The Non-Officer
Plan does not have a designated termination date.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
The Plans have provisions allowing employees to elect to pay their withholding
obligation through share reduction. No employees elected to pay income tax
withholding obligations through share reduction during fiscal 2001, 2000 or
1999. Income tax withholding is limited to the employer's minimum statutory
withholding rate.
During the year ended September 30, 1998 the Board of Directors authorized the
issuance of incentive stock options for the purchase of 486,631 shares and the
issuance of nonstatutory stock options for the purchase of 543,461 shares, at
prices below the market value of the stock on the grant dates.
The difference between the option price and market value at the date of grant
for the above option arrangements has been recorded as additional paid-in
capital with an offsetting debit within stockholders' equity to unearned stock
compensation. The compensation expense related to these option grants was
amortized to operations over the contractual vesting period in which employees
performed services and amounted to $76,849 in 2001, $164,909 in 2000, and
$582,981 in 1999.
Stock options and common shares reserved for grant under the Plans are as
follows:
Weighted
Average
Available For Options Price Per
Grant Outstanding Share
------------- ----------- ---------
Balances, September 30, 1998 869,937 2,731,267 $12.75
Granted (1,019,100) 1,019,100 9.32
Exercised (402,022) 5.95
Cancelled 1,244,635 (1,244,635) 14.26
---------- ----------
Balances, September 30, 1999 1,095,472 2,103,710 $11.50
Additional shares approved for grant 500,000
Granted (1,158,450) 1,158,450 9.42
Exercised (129,952) 7.44
Cancelled 525,995 (529,498) 10.16
---------- ----------
Balances, September 30, 2000 963,017 2,602,710 $11.05
Additional shares approved for grant 2,250,000
Granted (1,607,214) 1,607,214 5.96
Exercised (102,657) 7.57
Cancelled 298,796 (298,796) 10.80
---------- ----------
Balances, September 30, 2001 1,904,599 3,808,471 $ 9.02
========== ==========
Exercisable at September 30, 1999 893,374 $12.84
Exercisable at September 30, 2000 1,066,579 $12.82
Exercisable at September 30, 2001 1,893,484 $10.36
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
Commencing April 1996, the Company has sponsored an Employee Stock Purchase Plan
(the Purchase Plan) that covers all domestic employees with at least 90 days of
service. The Purchase Plan allows eligible participants the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at the
beginning or end of each three-month offering period. Employee contributions to
the Purchase Plan were $560,562, $580,855 and $586,324 in the fiscal years ended
2001, 2000 and 1999, respectively. Pursuant to the Purchase Plan, 100,582,
75,149 and 80,482 shares were issued to employees during the fiscal years ended
2001, 2000 and 1999, respectively. As of September 30, 2001, 128,152 shares are
available for future issuances under the Purchase Plan.
12. STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation costs for stock options granted to employees are measured as the
excess, if any, of the fair value of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. Such
compensation costs, if any, are amortized on a straight-line basis over the
option vesting schedule.
Had the Company used the fair-value-based method of accounting for its stock
options granted in 2001, 2000 and 1999, and charged operations over the option
vesting periods based on the fair value of options on the date of grant, net
(loss) income and net (loss) income per common share would have been changed to
the following pro forma amounts:
2001 2000 1999
-------------- -------------- --------------
Net (loss) income:
As reported $ (1,783,304) $ (16,824,680) $ 3,191,733
Pro forma $ (4,668,100) $ (20,981,166) $ 281,852
Net (loss) income per share - basic:
As reported $ (0.12) $ (1.12) $ 0.22
Pro forma $ (0.31) $ (1.39) $ 0.02
Net (loss) income per share - assuming dilution:
As reported $ (0.12) $ (1.12) $ 0.22
Pro forma $ (0.31) $ (1.39) $ 0.02
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK-BASED COMPENSATION (CONTINUED)
The weighted average fair value of options granted in fiscal years 2001, 2000
and 1999 was $3.45, $5.38 and $5.24, respectively. The weighted average fair
value was determined based upon the fair value of each option on the grant date,
utilizing the Black-Scholes option-pricing model and the following assumptions:
Assumptions: 2001 2000 1999
------- ------- -------
Risk free interest rate 3.50% 5.88% 5.75%
Expected option holding period 4 years 4 years 4 years
Expected volatility 75% 50% 50%
Expected dividend yield 0 0 0
At September 30, 2001, the weighted average exercise price and remaining life of
the stock options are as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Options Contractual Life Average Options Average
Exercise Prices Outstanding (In Years) Exercise Price Exercisable Exercise Price
--------------- ------------ ---------------- -------------- ----------- --------------
$2.36 7,556 6.0 $ 2.36 6,629 $ 2.36
$5.20 1,006,294 10.0 $ 5.20 523,794 $ 5.20
$5.75 - $8.00 1,529,963 8.0 $ 7.11 598,059 $ 7.48
$8.25 - $14.00 868,085 7.3 $ 11.41 393,393 $ 11.78
$14.31 - $20.50 134,948 4.9 $ 15.97 132,902 $ 15.99
$20.75 - $29.25 261,625 4.8 $ 23.61 238,707 $ 23.63
------------ -----------
$2.36 - $29.25 3,808,471 8.1 $ 9.02 1,893,484 $ 10.36
============ ===========
13. SHARE RIGHTS PLAN
The Company has adopted a share rights plan. Under the plan, the Company
distributed as a dividend one right for each share of the Company's common stock
outstanding on June 30, 1998. Each right entitles its holder to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $115, subject to adjustment. The rights are exercisable
only if certain ownership considerations are met. The Company will be entitled
to redeem the rights prior to the rights becoming exercisable.
14. COMMITMENTS
The Company has entered into various operating lease agreements for office space
and equipment, the last of which expires in fiscal 2013. These leases generally
require the Company to pay a pro-rata share
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS (CONTINUED)
of the lessor's operating expenses. Below is a schedule of future minimum
commitments under noncancellable operating leases:
FISCAL
YEAR AMOUNT
------ -----------
2002 $ 892,000
2003 462,000
2004 335,000
2005 243,000
2006 45,000
Thereafter 83,000
Total $ 2,060,000
Total rental expense for all operating leases, including a pro-rata share of
lessor operating expenses, for the years ended September 30, 2001, 2000 and 1999
was $1,525,000, $1,967,000 and $1,838,000, respectively.
15. EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan pursuant to Section 401(k) of
the Internal Revenue Code (the Code), whereby eligible employees may contribute
up to 15% of their pre-tax earnings, not to exceed amounts allowed under the
Code. In addition, the Company may make contributions to the plan at the
discretion of the Board of Directors.
The Company provided matching contributions of $579,000, $508,000 and $325,000
for the fiscal years ended September 30, 2001, 2000 and 1999, respectively.
16. CONTINGENCIES
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") alleged 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 alleged that the Company
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES (CONTINUED)
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 District 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
District 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 sought 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 District 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
District Court dismissed the actions before ruling on that motion. Both the
Louisiana State Employees Retirement System and the 21 lead plaintiffs in the
consolidated putative class actions filed appeals from the decisions of the
District Court.
On July 5, 2001, the United States Court of Appeals for the Eighth Circuit
affirmed the decisions of the District Court and ordered that judgment be
entered in favor of defendants on the claims alleged in the Consolidated Amended
Complaint and the Louisiana Amended Complaint. On September 28, 2001, the Court
of Appeals denied a petition for rehearing en banc filed by the 21 lead
plaintiffs in the consolidated putative class actions.
Management does not expect that the outcome of the action will have a material
adverse effect on the Company's financial position.
17. SUBSEQUENT EVENT
On October 30, 2001, the Company announced a definitive merger agreement whereby
the Company will acquire NetSilicon for cash and common stock with a value of
approximately $56,000,000. NetSilicon is a provider of Ethernet microprocessing
solutions for intelligent networked devices. The Boards of Directors of both
companies have approved the transaction, which, subject to shareholder approval,
is expected to close during the second quarter of the Company's 2002 fiscal
year.
Under the terms of the definitive merger agreement, each share of NetSilicon
stock will be converted into the right to receive either (1) cash, (2) the
Company's common stock, or (3) a combination of cash and the Company's common
stock. The exchange ratio is fixed at .6500 shares of the Company's common stock
for each share of NetSilicon common stock. The maximum cash to be paid by the
Company is $15,000,000. If the elections would cause Digi to pay more than
$15,000,000 in cash in the merger, all requests will be prorated among the
electing stockholders with the balance paid in stock.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENT (CONTINUED)
The transaction is subject to approval by shareholders of both companies.
Holders of at least two-thirds of the outstanding voting shares of NetSilicon
must vote in favor of the acquisition and a majority of the outstanding shares
present at the Company's shareholder meeting must vote in favor of issuing
shares of the Company's common stock in the merger.
The transaction will be accounted for using the purchase method of accounting as
required for combinations initiated after June 30, 2001. Accordingly, the
purchase price will be allocated to the estimated fair value of assets acquired
and liabilities assumed.
18. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the fourth quarter of fiscal 2001, the Company adopted Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). The
Company recorded a cumulative effect charge of $1,901,853, net of an income tax
benefit of $1,055,928, related to this accounting change. Upon adoption of SAB
101, the Company changed its revenue recognition policy with regard to certain
product sales. The Company's previous policy stated that revenue is recognized
upon shipment of products to customers. Essentially, the new policy recognizes
that the risks and rewards of ownership in certain transactions do not
substantively transfer to customers upon shipment of the products. These new
policies are consistent with the guidance contained in SAB 101. The effect of
this change in revenue recognition policy, as of October 1, 2000, has been
reported as the cumulative effect of an accounting change in the first quarter
of fiscal 2001. Previously reported fiscal 2001 quarters have been restated to
reflect the change. The effect of the change in revenue recognition policy
resulted in an increase in revenues of $6.3 million. This change did not have a
significant effect on 2001 net income.
The following table presents the estimated consolidated results of operations of
the Company on an unaudited pro forma basis if SAB 101 guidance had been
effective in fiscal 2000. Information to estimate the fiscal 1999 impact of the
accounting change was not available as a result of a change in the Company's
financial reporting system in fiscal 1999.
2000
-------------
Net sales $ 135,411,197
Net loss $ (15,828,728)
Net loss per share $ (1.05)
49
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of period expenses Other Accounts Deductions period
----------- ---------- ---------- -------------- ---------- ----------
September 30, 2001
Valuation account - doubtful accounts $ 1,815 $ 1,149 $ 1,504(1) $ 1,460
September 30, 2000
Valuation account - doubtful accounts $ 1,761 $ 1,150 $ 1,096(1) $ 1,815
September 30, 1999
Valuation account - doubtful accounts $ 1,560 $ 179 $ (22)(1) $ 1,761
September 30, 2001
Valuation account, inventory obsolescence $ 4,074 $ 3,837 $ 2,203(2) $ 5,708
September 30, 2000
Valuation account, inventory obsolescence $ 4,539 $ 1,633 $ 2,098(2) $ 4,074
September 30, 1999
Valuation account, inventory obsolescence $ 3,107 $ 6,218 $ 4,786(2) $ 4,539
(1) Uncollectible accounts charged against allowance net of recoveries.
(2) Scrapped inventory charged against allowance.
50
REPORT OF MANAGEMENT
TO THE STOCKHOLDERS OF DIGI INTERNATIONAL INC.
The Company's management is responsible for the integrity, objectivity and
consistency of the financial information presented in this Annual Report on Form
10-K. The consolidated financial statements contained herein were prepared in
accordance with generally accepted accounting principles and were based on
informed judgments and management's best estimates as required. Financial
information elsewhere in this annual report is consistent with that contained in
the consolidated financial statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are properly
executed in accordance with management's authorization, and accounting records
may be relied upon for the preparation of financial statements and other
financial information. The system is monitored by direct management review.
Limitations exist in any system of internal control, based upon the recognition
that the cost of the system should not exceed the benefits derived.
The Company's consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. Their
audit was conducted in accordance with auditing standards generally accepted in
the United States of America. As part of their audits of the Company's
consolidated financial statements, these independent accountants considered the
Company's internal controls to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests.
The Audit Committee of the Board of Directors is composed entirely of
non-employee directors and is responsible for monitoring and overseeing the
quality of the Company's accounting and reporting policies, internal controls
and other matters deemed appropriate. The independent certified public
accountants have free access to the Audit Committee without management present.
/s/ Joseph T. Dunsmore
Joseph T. Dunsmore
Chairman, President and
Chief Executive Officer
/s/ Subramanian Krishnan
Subramanian Krishnan
Senior Vice President, Chief Financial Officer and Treasurer
December 28, 2001
51
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF DIGI INTERNATIONAL INC.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 57 present fairly, in all material
respects, the financial position of Digi International Inc. and its subsidiaries
(the Company) at September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 57
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 18, in 2001 the Company adopted the provisions of the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 relating
to revenue recognition.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 27, 2001
52
QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands except per share amounts Quarter ended
Dec. 31 Mar. 31 June 30 Sept. 30
-------- -------- -------- --------
2001
Net sales $ 34,958 $ 32,065 $ 31,081 $ 32,300
Gross margin 18,434 16,692 16,163 12,923
Restructuring (182) (48) -- 1,351
Income (loss) before income taxes and cumulative
effect of accounting change 2,981 581 705 (4,083)
Cumulative effect of accounting change (net of
income tax benefit of $1,056 (1,902) -- -- --
Net income (loss) (411) 320 366 (2,058)
Net income (loss) per share, before cumulative
effect of accounting change - basic 0.10 0.02 0.02 (0.13)
- assuming dilution 0.10 0.02 0.02 (0.13)
Net income (loss) per share, cumulative effect
of accounting change - basic (0.13) -- -- --
- assuming dilution (0.13) -- -- --
Net income (loss) per share - basic (0.03) 0.02 0.02 (0.13)
Net income (loss) per share - assuming dilution (0.03) 0.02 0.02 (0.13)
2000
Net sales $ 40,140 $ 25,800 $ 32,354 $ 34,231
Gross margin 22,175 12,273 17,175 18,030
Impairment loss 18,068 8,078
Restructuring (138) (12) 1,532
Net income (loss) 1,018 (13,282) 2,513 (7,074)
Net income (loss) per share - basic 0.07 (0.88) 0.17 (0.47)
Net income (loss) per share - assuming dilution 0.07 (0.88) 0.17 (0.47)
1999
Net sales $ 51,395 $ 42,631 $ 51,145 $ 48,335
Gross margin 26,491 18,478 27,147 26,076
Restructuring 1,453 (685) (161)
Net income (loss) 475 (2,251) 2,253 2,715
Net income (loss) per share - basic 0.03 (0.15) 0.15 0.18
Net income (loss) per share - assuming dilution 0.03 (0.15) 0.15 0.18
The summation of quarterly net income per share may not equate to the year-end
calculation as quarterly calculations are performed on a discrete basis.
Previously reported fiscal 2001 quarterly information included above has been
restated to reflect the change in revenue recognition policy as described in
Note 18 to the consolidated financial statements. The following table summarizes
previously reported fiscal 2001 quarters.
53
QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
2001 Dec. 31 Mar. 31 June 30
-------- -------- --------
Net sales $ 34,443 $ 33,038 $ 30,155
Gross margin 18,161 17,198 15,681
Restructuring (182) (48) --
Net income 1,364 555 139
Net income per share - basic 0.09 0.04 0.01
Net income per share - assuming dilution 0.09 0.04 0.01
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
54
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of filing this Form 10-K, the following individuals were
executive officers of the Registrant:
Name Age Position
---- --- --------
Joseph T. Dunsmore 43 Chairman, President and
Chief Executive Officer
Douglas J. Glader 58 Executive Vice President and
General Manager of MiLAN Technology
Subramanian Krishnan 47 Senior Vice President, Chief Financial Officer
and Treasurer
Bruce Berger 41 Senior Vice President and
General Manager of European Operations
Mr. Dunsmore joined the Company on October 24, 1999, as President and Chief
Executive Officer and as a member of the Board of Directors. Prior to joining
Digi, Mr. Dunsmore had been Vice President of Access for Lucent
Microelectronics, a telecommunications company now known as Agere Systems Inc.,
since July 1999. From October 1998 to June 1999, he acted as an independent
consultant to various high technology companies. From February 1998 to October
1998, Mr. Dunsmore was Chief Executive Officer of NetFax, Inc., a
telecommunications company. From October 1995 to February 1998, he held
executive management positions at US Robotics and then at 3COM after 3COM
acquired US Robotics in June 1997. Prior to that, Mr. Dunsmore held various
marketing management positions at AT&T Paradyne Corporation since May 1983.
Mr. Glader was named Executive Vice President and General Manager of MiLAN
Technology on May 8, 2000, Executive Vice President and Chief Operating Officer
on April 19, 1999, Senior Vice President, Manufacturing Operations on April 23,
1997 and Vice President of Operations in February 1995. Before that, he was
Director of Manufacturing and Operations for MiLAN Technology Corporation, which
the Company acquired in November 1993. He began his career with Memorex
Corporation and also worked for Measurex Corporation, Altus Corporation and
Direct Incorporated. He founded and was Vice President of Operations for
Greyhawk Systems, Inc., a manufacturer of electronic imaging hardware and
software.
Mr. Krishnan was named Senior Vice President, Chief Financial Officer and
Treasurer on February 1, 1999, prior to which he served as the Company's Vice
President of Finance since January 11, 1999. Prior to joining the Company, he
served as a principal with LAWCO Financial, an investment banking firm in
Minneapolis, MN from January 1997 to January 1999. Prior to LAWCO, he served for
13 years with the Valspar Corporation as the Director of Corporate Financial
Planning and Reporting and Taxes and was primarily responsible for mergers,
acquisitions and joint ventures.
Mr. Berger was named Vice President and Managing Director of European Operations
in May 2000. Prior to joining the Company he served as Vice President and
General Manager, Business Development at TeCom Incorporated where he was
responsible for development of TeCom's original business plan,
55
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
development and implementation of the strategic plan and management of aspects
of the business. Prior to TeCom his tenure included 11 years with AT&T Paradyne
Corporation in a variety of product management positions, international sales
and marketing and business development experience. At AT&T Paradyne, Mr. Berger
was responsible for international sales channel development in Europe, Canada,
Latin America, the Far East and Australia.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedules of the Company
1. Consolidated Statements of Operations for the fiscal years
ended September 30, 2001, 2000 and 1999
Consolidated Balance Sheets as of September 30, 2001 and
2000
Consolidated Statements of Cash Flows for the fiscal years
ended September 30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the
fiscal years ended September 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Schedule of Valuation and Qualifying Accounts
3. Report of Independent Accountants
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended
September 30, 2001.
57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Exhibits
Exhibit
Number Description
3(a) Restated Certificate of Incorporation of the
Company (1)
3(b) Amended and Restated By-Laws of the Company (as
amended through December 1, 2001)
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 (2)
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 (3)
10(a) Stock Option Plan of the Company (4)
10(b) Form of indemnification agreement with directors
and officers of the Company (5)
10(c) Employment Arrangement between the Company and
Douglas Glader *(6)
10(c)(i) Amendment to Employment Agreement between the
Company and Douglas Glader, dated as of December
13, 2000* (7)
10(d) Agreement between the Company and Subramanian
Krishnan dated March 26, 1999*(8)
10(d)(i) Amendment to Agreement between the Company and
Subramanian Krishnan dated February 5, 2001* (9)
10(e) Employment Agreement between the Company and
Joseph T. Dunsmore dated October 24, 1999*(10)
10(f) Agreement between the Company and Bruce Berger
dated March 29, 2000* (11)
10(f)(i) Agreement between the Company and Bruce Berger
dated December 14, 2001*
10(g) Employee Stock Purchase Plan of the Company (12)
10(h) 2000 Omnibus Stock Plan of the Company (13)
10(i) Agreement and Plan of Merger among the Company,
Dove Sub Inc. and NetSilicon, Inc. dated as of
October 30, 2001 (14)
----------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
58
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Exhibits (continued)
Exhibit
Number Description
21 Subsidiaries of the Company
23 Consent of Independent Accountants
24 Powers of Attorney
59
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 of Exhibit 1 to the Company's Registration
Statement on Form 8-A dated June 24, 1998 (File no. 0-17972).
(3) 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).
(4) Incorporated by reference to the corresponding exhibit number to the
Company's Form 10-K for the year ended September 30, 1998 (File no.
0-17972).
(5) Incorporated by reference to Exhibit 10(b) to the Company's
Registration Statement on Form S-1 (File no. 33-30725).
(6) Incorporated by reference to Exhibit 10(q) to the Company's Form 10-K
for the year ended September 30, 1995 (File no. 0-17972).
(7) Incorporated by reference to Exhibit 10(d)(i) to the Company's Form
10-K for the year ended September 30, 2000 (File no. 0-17972).
(8) Incorporated by reference to Exhibit 10(k) to the Company's Form 10-Q
for the quarter ended March 31, 1999 (File no. 0-17972).
(9) Incorporated by reference to Exhibit 10(e)(i) to the Company's Form
10-Q for the quarter ended December 31, 2000 (File no. 0-17972).
(10) Incorporated by reference to Exhibit 10(j) to the Company's Form 10-K
for the year ended September 30, 1999 (File no. 0-17972).
(11) Incorporated by reference to Exhibit 10(g) to the Company's Form 10-K
for the year ended September 30, 2000 (File no. 0-17972).
(12) Incorporated by reference to Exhibit B to the Company's Proxy Statement
for its Annual Meeting of Stockholders held on January 31, 1996 (File
no. 0-17972).
(13) Incorporated by reference to Exhibit B to the Company's Proxy Statement
for its Annual Meeting of Stockholders held on January 24, 2000 (File
no. 0-17972).
(14) Incorporated by reference to Annex A to the Company's Registration
Statement on Form S-4 (File no. 333-74118).
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 28, 2001 By: /s/ Joseph T. Dunsmore
----------------------------------------
Joseph T. Dunsmore
President, Chief Executive Officer, and
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
December 28, 2001 /s/ Joseph T. Dunsmore
----------------------------------------
Joseph T. Dunsmore
President, Chief Executive Officer, and
Chairman (Principal Executive Officer)
December 28, 2001 /s/ Subramanian Krishnan
----------------------------------------
Subramanian Krishnan
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer)
JOSEPH T. DUNSMORE
KENNETH E. MILLARD
MYKOLA MOROZ A majority of the Board of Directors*
MICHAEL SEEDMAN
DAVID STANLEY
BRADLEY J. WILLIAMS
*Subramanian Krishnan, by signing his name hereto, does hereby sign this
document on behalf of each of the above named directors of the Registrant
pursuant to Powers of Attorney duly executed by such persons.
December 28, 2001 /s/ Subramanian Krishnan
----------------------------------------
Subramanian Krishnan
Attorney-in-fact
61
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
3(a) Restated Certificate of Incorporation of the Incorporated by
Registrant, as amended Reference
3(b) Amended and Restated By-Laws of the Registrant Filed Electronically
(as amended through December 1, 2001)
4(a) Form of Rights Agreement, dated as of June 10, 1998 Incorporated by
between Digi International Inc. and Wells Fargo Bank Reference
Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as
Rights Agent
4(b) Amendment dated January 26, 1999, to Shares Rights Incorporated by
Agreement, dated as of June 10, 1998 between Digi Reference
International Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent
10(a) Stock Option Plan of the Registrant Incorporated by
Reference
10(b) Form of indemnification agreement with directors Incorporated by
and officers of the Registrant Reference
10(c) Employment Arrangement between the Registrant and Incorporated by
Douglas Glader Reference
10(c)(i) Amendment to Employment Agreement between the Incorporated by
Registrant and Douglas Glader, dated as of Reference
December 13, 2000
10(d) Agreement between the Registrant and Subramanian Incorporated by
Krishnan dated March 26, 1999 Reference
10(d)(i) Amendment to the Agreement between the Registrant and Incorporated by
Subramanian Krishnan dated February 5, 2001 Reference
10(e) Employment Agreement between the Registrant and Incorporated by
Joseph T. Dunsmore, dated October 24, 1999 Reference
10(f) Agreement between the Registrant and Bruce Incorporated by
Berger dated March 29, 2000 Reference
10(f)(i) Agreement between the Company and Bruce Berger Filed Electronically
dated December 14, 2001
10(g) Employee Stock Purchase Plan of the Registrant Incorporated by
Reference
10(h) 2000 Omnibus Stock Plan of the Company Incorporated by
Reference
10(i) Agreement and Plan of Merger among the Company, Incorporated by
Dove Sub Inc. and NetSilicon, Inc. dated as of Reference
October 30, 2001
21 Subsidiaries of the Registrant Filed Electronically
23 Consent of Independent Accountants Filed Electronically
24 Powers of Attorney Filed Electronically
62