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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number: 0-17972
DIGI INTERNATIONAL INC.
____________________________
(Exact name of registrant as specified in its charter)
Delaware 41-1532464
_____________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11001 Bren Road East
Minnetonka, Minnesota 55343
______________________________
(Address of principal executive offices) (Zip Code)
(612) 912-3444
_____________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
On April 30, 1996, there were 13,274,862 shares of the registrant's $.01 par
value Common Stock outstanding.
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1
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements PAGE
Consolidated Condensed Statements of Operations
for the three months and six months ended March 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheets as of
March 31, 1996 and September 30, 1995 . . . . . . . . . . . ..4
Consolidated Condensed Statements of Cash
Flows for the six months ended March 31, 1996 and 1995. . . . 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 . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 12
ITEM 4. Submission of Matters to a Vote of . . . . . . . . . . . . . .12
Securities Holders
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 12
2
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
----------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $48,498,275 $40,075,983 $92,364,538 $77,954,911
Cost of sales 22,582,177 18,906,695 42,569,381 37,040,992
----------- ----------- ----------- -----------
Gross margin 25,916,098 21,169,288 49,795,157 40,913,919
Operating expenses:
Sales & marketing 9,350,532 7,888,239 18,170,634 14,897,568
Research & development 4,428,193 3,398,490 8,573,029 6,450,956
General & administrative 4,206,294 3,220,926 8,104,648 6,288,597
----------- ----------- ----------- -----------
Total operating expenses 17,985,019 14,507,653 34,848,311 27,637,121
----------- ----------- ----------- -----------
Operating income 7,931,079 6,661,635 14,946,846 13,276,798
Other income, principally 151,275 461,897 544,635 826,574
interest ----------- ----------- ----------- -----------
Income before income taxes 8,082,354 7,123,532 15,491,481 14,103,372
Provision for income taxes 2,806,750 2,526,941 5,414,649 5,015,456
----------- ----------- ----------- -----------
Net income $ 5,275,604 $ 4,596,591 $10,076,832 $ 9,087,916
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common and
common equivalent share $.39 $.33 $.73 $.65
---- ---- ---- ----
---- ---- ---- ----
Weighted average common and
common equivalent shares
outstanding 13,693,597 14,117,274 13,787,075 14,036,061
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated condensed financial statements.
3
DIGI INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31 September 30
1996 1995
---------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $1,670,992 $5,103,731
Marketable securities 235,994 27,968,775
Accounts receivable, net 46,237,820 31,960,936
Inventories, net 32,805,710 27,019,085
Other 5,713,511 2,225,058
--------------- ---------------
Total current assets 86,664,027 94,277,585
Property, equipment and improvements, net 24,498,811 17,716,819
Intangible assets, net 11,411,468 11,633,305
Note receivable and other 5,754,418 2,415,755
--------------- ---------------
Total assets $128,328,724 $126,043,464
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $13,009,270 $12,106,515
Income taxes payable 823,997 --
Accrued expenses 4,787,008 8,110,402
--------------- ---------------
Total current liabilities 18,620,275 20,216,917
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; 14,618,800 and 14,562,958 shares
outstanding 146,188 145,630
Additional paid-in capital 42,240,857 41,306,320
Retained earnings 91,681,358 81,604,526
--------------- ---------------
134,068,403 123,056,476
Unearned stock compensation (479,073) (598,387)
Treasury stock, at cost 1,347,729 and 1,032,729
shares (23,880,881) (16,631,542)
--------------- ---------------
Total stockholders' equity $109,708,449 $105,826,547
--------------- ---------------
Total liabilities and stockholders' equity $128,328,724 $126,043,464
--------------- ---------------
--------------- ---------------
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 1996 AND 1995
(UNAUDITED)
Six Months Ended
----------------
1996 1995
---- ----
Operating activities:
Net Income $10,076,832 $ 9,087,916
------------ -------------
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation and amortization 2,830,774 1,751,958
Provision for losses on accounts receivable 124,709 108,321
Stock compensation 104,967 73,664
Changes in operating assets and liabilities (25,236,418) (1,352,783)
------------ -------------
Total adjustments (22,175,968) 581,160
------------ -------------
Net cash (used in) provided by
operating activities (12,099,136) 9,669,076
------------ -------------
Investing activities:
Purchase of property, equipment and improvements (9,390,929) (2,089,444)
Sale (purchase) of marketable securities, net 27,732,781 (11,069,155)
Increase in note receivable (3,375,558) --
------------ -------------
Net cash ( used in) provided by
investing activities 14,966,294 (13,158,599)
------------ -------------
Financing activities:
Purchase of treasury stock (7,249,339) --
Stock option transactions, net 949,442 384,172
------------ -------------
Net cash (used in) provided by
financing activities (6,299,897) 384,172
------------ -------------
Net decrease in cash and cash equivalents (3,432,739) (3,105,351)
Cash and cash equivalents, beginning of period 5,103,731 13,849,017
------------ -------------
Cash and cash equivalents, end of period $ 1,670,992 $ 10,743,666
------------ -------------
------------ -------------
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 consolidated condensed 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, pursuant to such rules and regulations. These
consolidated condensed financial statements should be read in conjunction
with the financial statements and related notes thereto included in the
Company's 1995 Annual Report and Form 10-K.
The consolidated condensed financial statements presented herein, as of March
31, 1996 and for the three and six months then ended, reflect, in the opinion
of management, all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows 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, 1996 and
September 30, 1995 consisted of the following:
MARCH 31 SEPTEMBER 30
-------- ------------
Raw materials $17,100,896 $12,476,953
Work in process 9,692,650 7,645,002
Finished goods 6,012,164 6,897,130
----------- -----------
$32,805,710 $27,019,085
------------- -------------
------------- -------------
6
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
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.
4. COMMON STOCK
During the six month period ended March 31, 1996, 58,073 shares of the
Company's common stock were issued upon the exercise of outstanding stock
options for 61,825 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 $92,780.
On March 27, 1995, the Company's Board of Directors authorized a one million
share repurchase program, which will be funded by available cash balances
over an unspecified period of time. During the six month period ended March
31, 1996, $7,249,339 was used for treasury stock purchases. On January 31,
1996, the Company's Board of Directors authorized a separate 500,000 share
repurchase program for the purpose of purchasing Common Stock for the
Company's Employee Stock Purchase Plan.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Sales for the three month and six month period ended March 31, 1996 increased
by $8,422,292 and $14,409,627, or 21.0% and 18.5%, respectively, over the
corresponding periods ended March 31, 1995. Sales in all product markets
increased over prior year periods, as set forth in the following table:
PRODUCT MARKET QUARTERLY SIX MONTH PERIOD PERCENT OF SIX
- -------------- --------- ---------------- --------------
INCREASE INCREASE MONTH REVENUE
-------- -------- -------------
Multi-user 13.5% 14.5% 66.6%
Remote Access 46.0% 40.9% 16.0%
LAN Connect 34.7% 17.0% 17.4%
The Company believes that the revenues from sales of its Remote Access and
LAN Connect products will continue to grow as a result of the Company's
efforts to increase market awareness for products introduced earlier in the
fiscal year, the introduction of new products, and growth in the market for
Remote Access and LAN Connect products generally. The Company believes that
sales of its Multi-user products may grow at a reduced rate or even decline
as the market for such products continues to mature.
For the three month period ended March 31, 1996, sales to original equipment
manufacturer ("OEM") customers across all product markets increased to
$10,047,500, representing a 11.7% increase over sales for the three month
period ended March 31, 1995, but decreased to 20.7% from 22.4% as a percent
of total sales for the respective quarters, due to increased sales to
distributors. For the six month period ended March 31, 1996, OEM sales
decreased by 10.6% from sales for the corresponding period in 1995, and
decreased to 17.6% from 23.3%, respectively, as a percent to total sales for
the period. The decrease in OEM business for the six month period was due
primarily to industry-wide allocation of components during the Company's
first fiscal quarter. The Company expects the increase in OEM sales
experienced in its most recent quarter to continue, based on firm orders and
increased component availability.
International sales of the Company's products for the three month period
ended March 31, 1996 increased by 17.6% over the three month period ended
March 31, 1995. International sales for the six month period ended March 31,
1996 increased by 24.2% over the corresponding period in 1995. International
sales for the three month period ended March 31, 1996 accounted for
approximately 20.7% of total sales.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED
GROSS MARGIN
Gross margin as a percent of net sales increased to 53.4% for the three month
period ended March 31, 1996 from 52.8% for the three month period ended March
31, 1995. For the six month period, gross margins as a percent of net sales
increased to 53.9% for the period ended March 31, 1996 from 52.5% for the
period ended March 31, 1995. The increase in gross margin for the three
month period and six month period was primarily due to reduction in the cost
of sales for the Company's Multi-user products and to a slight decrease, as a
percent of total sales, in sales to OEM customers. Sales to OEM customers
have traditionally resulted in lower gross margins than have non-OEM sales.
OPERATING EXPENSES
Operating expenses for the three month period ended March 31, 1996 increased
24.0% over operating expenses for the corresponding period ended March 31,
1995, and increased as a percent of sales to 37.1% for the three month period
ended March 31, 1996 from 36.2% for the three month period ended March 31,
1995. Operating expenses for the six month period ended March 31, 1996,
increased by 26.1% over the corresponding period ended March 31, 1995, and
increased as a percent of sales 37.7% for the six months ended March 31,
1996, from 35.5% for the corresponding period in 1995. The period increases
primarily were due to increased research and development for new products, to
marketing in connection with new product introductions, the establishment of
the Company in the Remote Access and LAN Connect markets, the consolidation,
under the "Digi" brand, of products formerly sold under the identities of
subsidiaries of the Company, and to the expansion of and upgrades to the
Company's infrastructure. A significant portion of the expenditures in
connection with each of the foregoing was due to increases in personnel
required to support such efforts. The Company expects total operating
expenses to continue to increase as these efforts continue, but to decrease
as a percent of revenue as past efforts continue to generate increased sales.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest for the three month period ended March 31,
1996 decreased to $151,275 from $461,897 for the three month period ended
March 31, 1995. For the six month period ended March 31, 1996, interest and
other income decreased to $544,635 from $826,574 for the corresponding period
in 1995. The period decreases are the result of a decrease in funds invested.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
INCOME TAXES
The Company's effective income tax rate for the three month and six month
periods ended March 31, 1996 was 34.7% and 35.0%, respectively, compared to
35.5% and 35.6%, respectively, in the corresponding periods in 1995. The
period decreases are due primarily to an increase in the foreign sales
corporation benefit due to increased foreign sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company traditionally has financed its operations principally with funds
generated from operations and proceeds from public stock offerings. From the
time of its last public offering in 1991, the Company has financed its
operations almost exclusively through funds generated from operations. The
Company customarily holds excess funds generated from operations in the form
of cash and cash equivalents and marketable securities.
In the six months ended March 31, 1996, the Company sold in excess of $27.5
million in marketable securities to finance growth in the Company's accounts
receivable and inventories, as well as the acquisition of new product
technology. The increase in accounts receivable was due primarily to
increased sales volume, particularly late in the quarter ended March 31,
1996, and to favorable credit terms extended to distributors to facilitate
acceptance of the Company's new products. The Company increased inventories
in anticipation additional sales. The Company expects its cash and cash
equivalent and marketable securities balances, as well as its accounts
receivable, to return to historic levels as current promotional credit terms
mature. The Company further expects to manage its current inventory level to
return closer to historic levels.
Investing activities for the six month period ended March 31, 1996, consisted
primarily of redemption of maturing investments offset by purchases of
property, equipment and improvements and an increase in notes receivable.
The increase in notes receivable arose from the Company's purchase of a
secured convertible note from a company engaged in the development of remote
access technology. If the company developing such technology attains certain
development and financial performance milestones, the Company will be
obligated to purchase one additional secured convertible note in the
principal amount of approximately $1.4 million in the third quarter. The
Company is currently negotiating with such company to provide additional
financing for the development of additional new technologies.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the six month period ended March 31, 1996, the Company made open
market purchases of the Company's common stock aggregating $7,249,339,
pursuant to a one million share repurchase program authorized by the
Company's board of directors on March 27, 1995. Due to current market
conditions and the Company's current cash position, the Company expects the
level of repurchases to decrease significantly. On January 31, 1996, the
Company's Board of Directors authorized a separate 500,000 share repurchase
program for the purpose of purchasing Common Stock to be utilized for the
Company's Employee Stock Purchase Plan, which purchase will be funded through
employee withholding.
At March 31, 1996, the Company had working capital of $68.0 million and no
debt. The Company has no established line of credit. The Company is currently
negotiating an unsecured line of credit with its bank, which it expects to
have in place in the third quarter. However, the Company's management does
not anticipate having to draw on the line of credit in the near future. The
Company's management believes that 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 and anticipated business
operations.
The Financial Accounting Standards Board (FASB) has issued Statement No. 123,
"Accounting for Stock-Based Compensation." The Company plans to adopt this
Statement in fiscal year 1997. Although it has not made a definite
determination of its impact, the Company does not expect the adoption of
Statement No. 123 to have a materially adverse effect on its financial
position of results of operations.
11
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**
27 FINANCIAL DATA SCHEDULE
* 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.33-42384).
(b) Reports on Form 8-K:
There were no reports filed on form 8-K during the quarter ended
March 31, 1996.
12
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 10, 1996 By: /s/Gerald A. Wall
-----------------
Gerald A. Wall
Chief Financial Officer
(duly authorized officer and
Principal Financial Officer)
13
5
0000854775
DIGI INTERNATIONAL INC.
6-MOS
SEP-30-1996
OCT-01-1995
MAR-31-1996
1,670,992
235,994
46,237,820
0
32,805,710
86,664,027
24,498,811
0
128,328,724
18,620,275
0
0
0
146,188
109,562,261
128,328,724
92,364,538
92,364,538
42,569,381
34,848,311
0
0
0
15,491,481
5,414,649
10,076,832
0
0
0
10,076,832
.73
.73
