UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
/X/ EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1995.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
/X/ SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6400 Flying Cloud Drive
Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
(612) 943-9020
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
----- -----
On April 30, 1995, there were 13,756,367 shares of the registrant's $.01
par value Common Stock outstanding.
This document contains 12 pages.
-1-
INDEX
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Condensed Statements of Operations
for the three months and six months ended
March 31, 1995 and 1994. 3
Consolidated Condensed Balance Sheets as of
March 31, 1995 and September 30, 1994. 4
Consolidated Condensed Statements of Cash
Flows for the three months ended
March 31, 1995 and 1994. 5
Notes to Consolidated Condensed Financial
Statements. 6
ITEM 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 8
Part II. OTHER INFORMATION
- - - - - - - ---------------------------
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of
Securities Holders 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
-2-
DIGI INTERNATIONAL INC.
Consolidated Condensed Statements of Operations
(UNAUDITED)
Three Months Ended March 31 Six Months Ended March 31
--------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
Net sales $40,075,983 $31,647,748 $77,954,911 $57,636,385
Cost of sales 18,906,695 14,975,801 37,040,992 26,228,883
----------- ----------- ----------- -----------
Gross margin 21,169,288 16,671,947 40,913,919 31,407,502
Operating expenses:
Sales & marketing 7,888,237 5,511,685 14,897,568 10,587,055
Research & development 3,398,490 2,550,050 6,450,956 4,318,957
General & administrative 3,220,926 2,700,569 6,288,597 4,836,619
----------- ----------- ----------- -----------
14,507,653 10,762,304 27,637,121 19,742,631
----------- ----------- ----------- -----------
Operating income 6,661,635 5,909,643 13,276,798 11,664,871
Other income, principally interest 461,897 264,592 826,574 551,043
----------- ----------- ----------- -----------
Income before income taxes 7,123,532 6,174,235 14,103,372 12,215,914
Provision for income taxes 2,526,941 2,051,390 5,015,456 4,057,228
----------- ----------- ----------- -----------
Net income $ 4,596,591 $ 4,122,845 $ 9,087,916 $ 8,158,686
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common and common
equivalent share $.33 $.28 $.65 $.56
---- ---- ---- ----
---- ---- ---- ----
Weighted average common and
common equivalent shares outstanding 14,117,274 14,732,602 14,036,061 14,697,102
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated condensed financial statements.
-3-
DIGI INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(UNAUDITED)
March 31, September 30,
1995 1994
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 10,743,666 $ 13,849,017
Marketable securities 34,481,589 23,412,434
Accounts receivable, net 23,201,352 21,559,115
Inventories, net 24,383,413 23,359,489
Other 2,388,025 2,136,113
------------ ------------
Total current assets 95,198,045 84,316,168
Property, equipment and improvements, net 10,775,744 9,844,801
Intangible assets, net 7,089,453 7,682,910
Other 803,511 914,248
------------ ------------
Total assets $113,866,753 $102,758,127
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,979,437 $ 3,929,146
Income taxes payable 657,282 1,027,658
Accrued liabilities 6,571,107 6,688,148
------------ ------------
Total current liabilities 13,207,826 11,644,952
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000
shares authorized; none outstanding
Common stock, $.01 par value; 60,000,000
shares authorized; 14,507,240 and
14,474,663 shares issued 145,072 144,747
Additional paid-in-capital 40,137,484 39,788,556
Retained earnings 71,361,349 62,273,433
------------ ------------
111,643,905 102,206,736
Unearned stock compensation (283,749) (392,332)
------------
Treasury stock at cost, 755,229 shares (10,701,229) (10,701,229
------------ ------------
Total stockholders' equity 100,658,927 91,113,175
------------ ------------
Total liabilities and stockholders' equity $113,866,753 $102,758,127
------------ ------------
------------ ------------
See accompanying notes to unaudited consolidated condensed financial
statements.
-4-
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31
(UNAUDITED)
1995 1994
---- ----
Operating activities:
Net income $ 9,087,916 $ 8,158,686
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,751,958 1,530,488
Provision for losses on accounts receivable 108,321 308,971
Stock compensation 73,664 88,249
Changes in operating assets and liabilities (1,352,783) (11,600,783)
----------- -----------
Total adjustments 581,160 (9,673,075)
----------- -----------
Net cash provided by (used in) operating activities 9,669,076 (1,514,389)
----------- -----------
Investing activities:
Purchase of property, equipment and improvements (2,089,444) (1,857,986)
Sale/(purchase) of marketable securities, net (11,069,155) 9,483,286
Business acquisition, net of cash acquired - (2,536,766)
----------- -----------
Net cash (used in) provided by investing activities (13,158,599) 5,088,534
----------- -----------
Financing activities:
Purchase of treasury stock (466,250)
Stock option transactions, net 384,172 787,309
----------- -----------
Net cash used in financing activities 384,172 321,059
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,105,351) 3,895,204
Cash and cash equivalents, beginning of period 13,849,017 17,831,258
----------- -----------
Cash and cash equivalents, end of period $10,743,666 $21,726,462
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated condensed financial
statements.
-5-
DIGI INTERNATIONAL INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included in this Form 10-Q have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed, or
omitted pursaunt to such rules and regulations. These financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto included in the Company's 1994 Annual Report and Form
10-K.
The financial statements presented herein, as of March 31, 1995 and for the
three months and six months then ended, reflect, in the opinion of
management, all adjustments (which only consist of normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations for the periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. Inventories at March 31, 1995 and
September 30, 1994 consisted of the following:
March 31 September 30
-------- ------------
Raw materials $16,222,721 $13,647,651
Work in progress 3,870,385 5,231,662
Finished goods 4,290,307 4,480,176
----------- -----------
$24,383,413 $23,359,489
----------- -----------
----------- -----------
3. INCOME PER SHARE
Income per common share is computed by dividing net income by the weighted
average number of common shares and common equivalent shares outstanding
during the period. Common stock equivalents result from dilutive stock
options.
-6-
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONT.)
4. COMMON STOCK
During the six months ended March 31, 1995, 32,577 shares of the Company's
common stock were issued upon the exercise of outstanding stock options for
37,538 shares. The difference between the shares issued and options
exercised results from the stock option plan's provision allowing the
employees to elect to pay their withholding obligations through share
reduction. Withholding taxes paid by the Company, as a result of the share
reduction option, amounted to $108,900.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES
Sales for the quarter and six months ended March 31, 1995, exceeded sales for
the corresponding periods of 1994 by $8,428,235 and $20,318,526,
respectively, which represent percentage increases of 26.6% and 35.3%,
respectively. Sales in all product markets increased over prior year figures
as follows:
1995
Product Quarterly Six Month Percent of Six
Market Increase Increase Month Revenue
------- -------- -------- -------------
Multi-user 18.8% 24.0% 73.2%
Remote Access 112.8% 100.6% 9.2%
Lan Connect 37.6% 79.1% 17.6%
Sales to original equipment manufactures (OEMs) increased from 20.7% of net
sales in the quarter ended March 31, 1994 to 22.4% in 1995 and 20.5% for the
six months ended March 31, 1994 to 23.3% for the corresponding six month
period of 1995. Sales of the Company's products in international markets
increased by 14.8% on a quarterly basis and 15.8% for the first six months of
1995.
The Company believes that the revenue from its Remote Access and Lan Connect
markets will continue to show rapid growth, while the Multi-user market
growth will stabilize or perhaps decline slightly.
GROSS MARGINS
Gross margins increased from $16,671,947 or 52.7% of net sales for the
quarter ended March 31, 1994 to $21,169,288 or 52.8% of net sales for the
quarter ended March 31, 1995. For the six months ended March 31, 1994 gross
margins of $31,407,502 or 54.5% of net sales, increased to $40,913,919 or
52.5% of net sales for the same period of 1995. The increase in gross margin
dollars for the quarter and six month periods is primarily related to the
increase in overall sales levels, while the decrease in margin percentage for
the first six months of 1995 reflects the impact of lower gross margin lan
connect products and increased OEM business.
OPERATING EXPENSES
Operating expenses increased from $10,762,304 for the quarter ended March 31,
1994 to $14,507,653 for the quarter ended March 31, 1995, an increase of
34.8%. Operating expenses were $19,742,631 for the six months ended March
31, 1994 and increased to $27,637,121 for the six months ended March 31,
1995, an increase of 40%. The quarterly and year-to-date increases can by
attributed primarily to increased R&D and Market Development spending for new
products and markets, principally in the Remote Access and Lan Connect
markets, plus increased staffing levels.
-8-
NON OPERATING INCOME
Interest income increased from $264,592 for the quarter ended March 31, 1994
to $461,897 for the quarter ended March 31, 1995. For the six months ended
March 31, 1994 interest income was $551,043 compared to $821,830 for the same
period of 1995. These increases result from an increase in invested balances
coupled with an increase in investment yield.
INCOME TAXES
The Company's effective income tax rate was 35.5% in the current quarter
compared to 33.2% in the corresponding quarter of last year. The effective
rate for six month period ended March 31, 1995 was 35.6% compared to 33.2%
for the same period of 1994. These increases result from a decrease in the
federal R&D credit and increased state taxes resulting from the MiLAN
acquisition, which was completed in November 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from
operations and proceeds from public stock offerings.
Cash flows from operations for the six months ended March 31, 1994 were
negatively impacted by increased levels of inventories and accounts
receivable, mainly resulting from the MiLAN acquisition. Cash flows from
operations for the six months ended March 31, 1995 have returned to
historical levels, which the Company expects to continue.
Investing activities for the period ended March 31, 1995, primarily include
new investments of excess cash and reinvestment of maturing investments.
On March 27, 1995, the Company's board of director's authorized a one million
share repurchase program, which will be funded by available cash balances
over an unspecified period of time.
The Company expects to expend, from current funds, up to $5.5 million for
plant acquisition during the next six to nine months. This will consolidate
four different Minnesota locations into one facility, providing for improved
operating efficiencies and control. In addition, the Company recently
announced its intention to acquire Lan Access Corporation for approximately
$4.25 million in cash, subject to due diligence reviews and execution of
definitive agreements. The purchase will be funded from current cash and/or
investment balances.
At March 31, 1995, the Company had working capital of $82.0 million, no debt
and no established lines of credit. Management believes current financial
resources, cash generated by operations and the Company's potential capacity
for debt and/or equity financing will be sufficient to fund current business
operations and any anticipated business expansion.
-9-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3(a) RESTATED CERTIFICATE OF INCORPORATION OF
THE REGISTRANT*
3(b) AMENDED AND RESTATED BY-LAWS OF THE
REGISTRANT***
10(a) STOCK OPTION PLAN OF THE REGISTRANT****
10(b) FORM OF INDEMNIFICATION AGREEMENT WITH
DIRECTORS AND OFFICERS OF THE
REGISTRANT**
10(c) AMENDED AND RESTATED EMPLOYMENT
AGREEMENT BETWEEN THE REGISTRANT AND
JOHN P. SCHINAS*******
10(f) 401-(K) SAVINGS AND PROFIT SHARING PLAN
OF DIGI INTERNATIONAL INC.*****
10(g) EMPLOYMENT ARRANGEMENT BETWEEN THE
COMPANY AND ERVIN F. KAMM, JR.*******
-10-
10(h) CONSULTING ARRANGEMENT BETWEEN THE
COMPANY AND MYKOLA MOROZ*******
10(n) EMPLOYMENT ARRANGEMENT WITH RAY D.
WYMER******
10(o) EMPLOYMENT ARRANGEMENT WITH KEITH C.
RERICHA******
10(p) STAR GATE TECHNOLOGIES, INC. 401(K)
PLAN, AS AMENDED******
* INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1992 (FILE NO. 0-17972).
** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S REGISTRATION STATEMENT ON FORM
S-1 (FILE NO. 33-30725).
*** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S REGISTRATION STATEMENT ON FORM
S-1 (FILE NO. 33-42384).
**** INCORPORATED BY REFERENCE TO EXHIBIT A TO THE
REGISTRANT'S PROXY STATEMENT FOR ITS ANNUAL MEETING OF
STOCKHOLDERS HELD ON JANUARY 31, 1995 (FILE NO.
0-17972).
***** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1991 (FILE NO. 0-17972).
****** INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1993 (FILE NO. 0-17972).
******* INCORPORATED BY REFERENCE TO THE CORRESPONDING EXHIBIT
NUMBER OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1994 (FILE NO. 0-17972).
(b) Reports on Form 8-K:
None
-11-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIGI INTERNATIONAL INC.
Date: May 12, 1995 By: /s/Gerald A. Wall
-----------------------
Gerald A. Wall
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
-12-
5
0000854775
DIGI INTERNATIONAL INC.
6-MOS
SEP-30-1995
OCT-01-1994
MAR-31-1995
10,743,666
34,481,589
23,865,858
664,506
24,383,413
95,198,045
17,865,197
0
113,866,753
13,207,826
0
145,072
0
0
100,513,855
113,866,753
77,954,911
77,954,911
37,040,992
27,637,121
0
0
0
14,103,372
5,015,456
9,087,916
0
0
0
9,087,916
0.65
0.65
