SEC Filing | Digi International Inc.

- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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: June 30, 1999. 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 August 6, 1999, there were 14,910,085 shares of the registrant's $.01 par value Common Stock outstanding. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------

INDEX PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page Condensed Consolidated Statement of Operations for the three months and nine months ended June 30, 1999 and 1998................................................3 Condensed Consolidated Balance Sheet as of June 30, 1999 and September 30, 1998..................................4 Condensed Consolidated Statement of Cash Flows for the nine months ended June 30, 1999 and 1998......................5 Notes to Condensed Consolidated Financial Statements............................................................6 Review Report of Independent Accountants.............................12 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........................13 Forward-looking Statements...........................................20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...........20 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings....................................................21 ITEM 2. Changes in Securities................................................22 ITEM 3. Defaults Upon Senior Securities......................................22 ITEM 4. Submission of Matters to a Vote of Securities Holders................22 ITEM 5. Other Information....................................................22 ITEM 6. Exhibits and Reports on Form 8-K.....................................23 2

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGI INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) Three months ended June 30 Nine months ended June 30 -------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ----------- ------------- ------------ Net sales $ 51,144,524 $46,449,286 $ 145,171,035 $134,098,319 Cost of sales 23,997,831 21,890,041 73,055,760 65,104,699 ------------ ----------- ------------- ------------ Gross margin 27,146,693 24,559,245 72,115,275 68,993,620 ------------ ----------- ------------- ------------ Operating expenses: Sales and marketing 9,323,592 9,036,250 32,270,668 26,303,159 Research and development 6,003,762 4,127,946 18,367,708 11,886,956 General and administrative 5,941,674 2,969,649 19,126,262 10,025,425 Restructuring (685,397) -- 767,512 -- ------------ ----------- ------------- ------------ Total operating expenses 20,583,631 16,133,845 70,532,150 48,215,540 ------------ ----------- ------------- ------------ Operating income 6,563,062 8,425,400 1,583,125 20,778,080 Other income (expense), net 64,251 659,916 (181,050) 1,477,270 AetherWorks Corporation net gain -- 1,350,000 -- 1,350,000 ------------ ----------- ------------- ------------ Income before income taxes 6,627,313 10,435,316 1,402,075 23,605,350 Provision for income taxes 4,374,028 4,024,409 925,370 8,686,768 ------------ ----------- ------------- ------------ Net income $ 2,253,285 $ 6,410,907 $ 476,705 $ 14,918,582 ------------ ----------- ------------- ------------ ------------ ----------- ------------- ------------ Net income per common share, basic $ 0.15 $ 0.47 $ 0.03 $ 1.10 ------------ ----------- ------------- ------------ ------------ ----------- ------------- ------------ Net income per common share, assuming dilution $ 0.15 $ 0.45 $ 0.03 $ 1.05 ------------ ----------- ------------- ------------ ------------ ----------- ------------- ------------ Weighted average common shares, basic 14,714,942 13,617,518 14,625,908 13,535,512 ------------ ----------- ------------- ------------ ------------ ----------- ------------- ------------ Weighted average common shares, assuming dilution 14,772,315 14,385,012 14,767,841 14,216,915 ------------ ----------- ------------- ------------ ------------ ----------- ------------- ------------ The accompanying notes are an integral part of the condensed consolidated financial statements 3

DIGI INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET June 30 September 30 1999 1998 ----------- ------------- (unaudited) (as restated) ASSETS Current assets: Cash and cash equivalents $ 25,770,254 $ 10,355,368 Accounts receivable, net 35,330,537 48,549,145 Inventories, net 21,968,124 27,365,924 Other 5,128,023 6,139,941 ------------- ------------- Total current assets 88,196,938 92,410,378 Property, equipment and improvements, net 30,376,062 33,990,923 Intangible assets, net 52,489,501 63,602,435 Other 2,384,553 2,978,883 ------------- ------------- Total assets $ 173,447,054 $ 192,982,619 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under line of credit agreements $ 5,213,322 $ 10,707,000 Current portion of long-term debt 202,910 264,025 Accounts payable 8,634,942 15,255,175 Income taxes payable 5,077,369 3,797,588 Accrued expenses: Advertising 2,514,273 2,651,742 Compensation 5,324,280 6,776,292 Other 6,984,064 9,808,835 Restructuring 1,462,344 5,254,000 ------------- ------------- Total current liabilities 35,413,504 54,514,657 Long-term debt 9,070,890 11,124,446 Net deferred income taxes 4,027,833 5,817,933 Other -- 275,000 ------------- ------------- Total liabilities 48,512,227 71,732,036 Commitments and contingency Stockholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; none outstanding Common stock, $.01 par value; 60,000,000 shares authorized; 16,170,583 and 15,790,975 shares issued 161,706 157,910 Additional paid-in capital 71,563,903 70,461,123 Retained earnings 75,519,511 75,042,806 Cumulative foreign currency translation adjustment (140,818) (815,809) ------------- ------------- 147,104,302 144,846,030 Unearned stock compensation (400,305) (1,700,635) Treasury stock, at cost, 1,297,818 and 1,247,094 common shares (21,769,170) (21,894,812) ------------- ------------- Total stockholders' equity 124,934,827 121,250,583 ------------- ------------- Total liabilities and stockholders' equity $ 173,447,054 $ 192,982,619 ------------- ------------- ------------- ------------- The accompanying notes are an integral part of the condensed consolidated financial statements. 4

DIGI INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) 1999 1998 ------------ ------------ Operating activities: Net income $ 476,705 $ 14,918,582 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring 208,266 -- Depreciation and amortization 11,264,831 4,877,165 AetherWorks Corporation net gain -- (1,350,000) Provision for losses on accounts receivable 420,000 707,992 Provision for inventory obsolescence 3,495,399 5,354,569 Loss on sale of fixed assets 14,215 183,057 Stock compensation 529,738 656,940 Changes in operating assets and liabilities 6,183,006 (3,695,118) ------------ ------------ Total adjustments 22,115,455 6,734,605 ------------ ------------ Net cash provided by operating activities 22,592,160 21,653,187 ------------ ------------ Investing activities: Purchase of property, equipment and improvements (3,008,585) (4,407,189) Investment in AetherWorks Corporation -- (2,000,000) Advance related to impending acquisition -- (5,000,000) ------------ ------------ Net cash used in investing activities (3,008,585) (11,407,189) ------------ ------------ Financing activities: Principal payments on borrowings (5,346,233) -- Stock benefit plan transactions, net 2,002,977 3,369,749 ------------ ------------ Net cash (used in) provided by financing activities (3,343,256) 3,369,749 ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (825,433) -- Net increase in cash and cash equivalents 15,414,886 13,615,747 Cash and cash equivalents, beginning of period 10,355,368 31,329,666 ------------ ------------ Cash and cash equivalents, end of period $ 25,770,254 $ 44,945,413 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of the condensed consolidated financial statements. 5

DIGI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The interim condensed consolidated financial statements included in this Form 10-Q have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted, pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's 1998 Annual Report on Form 10-K/A. The condensed consolidated financial statements presented herein as of June 30, 1999, and for the three months and nine months ended June 30, 1999, and 1998, reflect, in the opinion of management, all adjustments (which, other than adjustments to restructuring charges, consist only of normal, recurring adjustments) necessary for a fair presentation of the consolidated financial position and the consolidated results of operations and cash flows for the periods presented. The consolidated results of operations for any interim period are not necessarily indicative of results for the full year. After discussion with the staff of the Securities and Exchange Commission (the SEC) the condensed consolidated financial statements as of September 30, 1998, December 31, 1998 and March 31, 1999, and for the year ended September 30, 1998, the three month period ended December 31, 1998, and the three and six month periods ended March 31, 1999, have been restated to reflect a change in the measurement and allocations of the purchase prices related to the July 1998 acquisitions of ITK International, Inc. ("ITK") and Central Data Corporation ("CDC"). The Company allocated amounts to In Process Research & Development ("IPR&D") and intangible assets in the fourth quarter of 1998 in a manner consistent with widely recognized appraisal practices at the date of the acquisitions of ITK and CDC. Subsequent to the acquisitions, the SEC staff expressed broad views that took issue with certain appraisal practices generally employed by many public companies in determining the fair value of IPR&D. As a result of these developments, the Company has modified its valuation of IPR&D using the alternative income valuation approach. In addition, in response to questions raised by the SEC about the Company's measurement of the fair value of common stock and common stock options issued in the ITK and CDC acquisitions, the Company has modified its valuation of this portion of the purchase prices. 6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) As a result of valuing IPR&D using the alternative income valuation approach and adjusting the measurement of the purchase prices, the Company, in consultation with its independent accountants, has revised its measurement and allocations of the purchase prices, including the amounts allocated to IPR&D. The effect of these adjustments was to: reduce the aggregate amount originally allocated to IPR&D from $39.2 million to $16.1 million; increase the aggregate amount allocated to current technologies from $15.0 to $29.1 million; increase the amount of net deferred tax liabilities from $0 to $6.3 million; increase goodwill from $8.2 million to $27.4 million; increase additional paid in-capital from $68.7 million to $70.5 million; and reduce unearned stock compensation from $3.8 million to $1.7 million. These adjustments will also result in additional, annual amortization expense, related to identifiable intangibles and goodwill of approximately $5.0 million (assuming there are no future adjustments to reflect impairments of such intangibles and goodwill). The restatement does not affect previously reported net cash flows for the periods presented. The effect of this restatement on previously reported condensed consolidated financial statements included herein is as follows: September 30, 1998 ---------------------------------- As Previously Balance Sheet Data Reported As Restated - ------------------ ------------- ------------ Intangible assets, net $31,354,483 $63,602,435 Total assets 160,734,667 192,982,619 Net deferred income taxes - 5,817,933 Total liabilities 65,914,103 71,732,036 Additional paid-in capital 68,695,448 70,461,123 Retained earnings 52,455,031 75,042,806 Unearned stock compensation (3,777,204) (1,700,635) Total stockholders' equity $94,820,564 $121,250,583 2. RESTRUCTURING 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 relates to the closure of existing leased facilities rendered redundant by the acquisition of ITK. The charge of $1,020,000 ($647,000 net of tax benefits), consisted of $61,483 of noncancellable rent commitments the Company expects to incur following closure of the Cologne, Germany facility, $100,100 of contractual payment obligations for office furniture and other equipment the Company expects 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 7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RESTRUCTURING (CONTINUED) during December 1998. As of June 30, 1999, the Company paid $266,854 of termination costs relating to the elimination of two positions. During the third quarter of 1999, the Company reduced the restructuring accrual by $572,191 due to management's decision during the quarter to retain four employees previously notified that they would be terminated, a final settlement negotiated by the Company which reduced the remaining contractual rent commitments for office space and equipment in Cologne, Germany which was previously vacated and abandoned by the Company, and a decision by current management to utilize certain equipment which prior management had planned to abandon. Adjustments to the restructuring accrual are reflected as a reduction in the restructuring accrual and a corresponding increase to operating income. Management of the Company expects that remaining restructuring activities will be completed by June 1999. A summary of payments and adjustments is included in the table below. Balance at Change in September 30, Estimate Balance Description 1998 Payments Adjustments Junes30, 1999 - ----------- ------------- --------- ----------- ------------- Severance and termination costs $ 656,368 $(266,854) $ (355,324) $ 34,190 Rent committments 61,483 (25,005) (16,374) 20,104 Contractual pyaments for office equipment 100,110 (49,972) (50,138) - Write-offs of leasehold improvements 202,039 - (150,355) 51,684 ----------- ---------- ---------- --------- TOTAL $ 1,020,000 $ (341,831) $ (572,191) $ 105,978 ----------- ---------- ---------- --------- ----------- ---------- ---------- --------- In connection with the Company's acquisition of ITK, the Company has formulated a plan of reorganization and accordingly, has recognized a $3,484,000 restructuring liability which the Company has included as a component of total liabilities assumed in the acquisition. Components of this estimated liability include $1,844,000 of termination payments associated with 10 employees the Company expects to eliminate at the Chelmsford, Massachusetts ITK location and 20 employees the Company expects to eliminate at the Dortmund, Germany location and $1,640,000 of noncancellable rent obligations for facilities the Company expects 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. During the third quarter of fiscal 1999, the Company reduced the restructuring accrual by $1,451,882 as management determined during the quarter that the number of positions to be terminated was 26 rather than 30 due to unanticipated employee turnover and other changes in management of the Company during fiscal 1999. In addition, during the third quarter of 1999, the Company and the lessor of the Newbury facility reached a final, negotiated settlement which significantly reduced the Company's remaining contractual rent obligation. Adjustments to the restructuring accrual are reflected as a reduction in the restructuring accrual and a corresponding decrease in goodwill. Management of the Company expects that these restructuring activities will be completed by June 1999. A summary of payments and adjustments is included in the table below. 8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RESTRUCTURING (CONTINUED) Balance at Change in September 30, Estimate Balance Description 1998 Payments Adjustments June 30, 1999 - ----------- ----------- ----------- ----------- ------------- Severance and termination costs $ 1,844,000 $ (1,423,168) $ (378,792) $ 42,040 Facility closures 1,640,000 (236,910) (1,073,090) 330,000 ----------- ------------ ------------- ------------- TOTAL $ 3,484,000 $ (1,660,078) $ (1,451,882) $ 372,040 ----------- ------------ ------------- ------------- ----------- ------------ ------------- ------------- In connection with the Company's acquisition of CDC, the Company has formulated a plan of reorganization and accordingly, the Company has recognized a $750,000 restructuring liability which the Company has included as a component of total liabilities assumed in the acquisition. Components of this estimated liability include $675,000 of termination payments, associated with 22 employees the Company expects to eliminate when it closes the Champaign, Illinois facility in January 1999 and $75,000 related to facility closure costs the Company expects to incur following closure and sale of the Champaign, Illinois facility. During the third quarter of fiscal 1999, the Company reduced the restructuring accrual by $222,513 due to management's decision during the quarter to reduce the number of employees to be terminated from 22 to 20 due to unanticipated employee turnover and other changes in management. In addition, during the third quarter, management determined that it would not incur significant additional closure costs from the sale of the Champaign, Illinois facility. Adjustments to the restructuring accrual are reflected as a reduction in the restructuring accrual and a corresponding decrease in goodwill. Management of the Company expects that these restructuring activities will be completed by June 1999. A summary of payments and adjustments is included in the table below. Balance at Change in September 30, Estimate Balance Description 1998 Payments Adjustments June 30, 1999 - ----------- ----------- ----------- ----------- ------------- Severance and termination costs $ 675,000 $ (321,226) $ (147,513) $ 206,261 Facility closure 75,000 - (75,000) - ----------- ----------- ----------- ------------- TOTAL $ 750,000 $ (321,226) $ (222,513) $ 206,261 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ------------- 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 related charge of $1,452,909 ($493,989 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 Minneapolis, Minnesota. As of June 30, 1999, the Company paid $553,639 of termination costs relating to the elimination of 32 positions. During the third quarter of fiscal 1999, management of the 9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RESTRUCTURING (CONTINUED) Company determined that $33,100 of severance costs in Dortmund would not be payable due to a decision to retain two employees previously notified that they would be terminated. In addition, the Company reduced its estimated remaining rent commitment by $80,106 as it successfully sublet the vacated office space in Nurnberg, Germany. Adjustments to the restructuring accrual are reflected as a reduction in the restructuring accrual and a corresponding increase to operating income. Management of the Company expects that these restructuring activities will be completed by December 1999. A summary of payments and adjustments is included in the table below. Balance at Change in September 30, Estimate Balance at Description 1998 Payments Adjustments June 30, 1999 - ---------- ------------ --------- ----------- -------------- Severance and termination costs $ 1,301,871 $(553,639) $ (33,100) $715,132 Rent commitments 151,038 (8,000) (80,106) 62,932 ------------ --------- ----------- -------------- TOTAL $ 1,452,909 $(561,639) $ (113,206) $778,064 ------------ --------- ----------- -------------- ------------ --------- ----------- -------------- 3. INVENTORIES Inventories, net are stated at the lower of cost or market, with cost determined on the first-in, first-out method. Inventories at June 30, 1999 and September 30, 1998 consisted of the following: June 30, 1999 September 30, 1998 ------------- ------------------ Raw materials $15,036,070 $13,707,999 Work in process 1,992,117 2,922,442 Finished goods 4,939,937 10,735,483 ------------- ---------- $21,968,124 $27,365,924 ------------- ---------- ------------- ---------- 4. COMPREHENSIVE INCOME Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For the Company, comprehensive income includes net income and foreign currency translation adjustments that are charged or credited to stockholders' equity. 10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. COMPREHENSIVE INCOME (CONTINUED) Comprehensive income for the three months and nine months ended June 30, 1999 and 1998 was as follows: Three months ended Nine months ended June 30 June 30 ------------------------ ---------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $2,253,285 $6,410,907 $476,705 $14,918,582 Foreign currency translation adjustments 121,496 -- 674,991 -- ---------- ---------- ---------- ----------- Comprehensive income $2,374,781 $6,410,907 $1,151,696 $14,918,582 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- 5. NET INCOME PER SHARE Basic net income per share is calculated by dividing net income by the weighted average of common shares outstanding during the period. Net income per share, assuming dilution, is calculated by dividing net income by the weighted average number of common and common equivalent shares outstanding during each period. The Company's only common stock equivalents are those that result from dilutive common stock options. The calculation of dilutive earnings per share excludes 1,683,099 and 1,331,169 equivalent shares of the Company for the three months and nine months ended June 30, 1999, attributable to the common stock options issued by the Company because their effect was anti-dilutive. Shares used in the computations for the nine months ended June 30, 1999 and 1998 are as follows: 1999 1998 ---- ---- Weighted average shares used in basic computation 14,714,942 14,625,908 Common stock equivalents - stock options 57,373 141,933 ---------- ---------- Weighted average shares used in diluted computation 14,772,315 14,767,841 ---------- ---------- ---------- ---------- 6. LEGAL PROCEEDINGS Discussion of legal matters is incorporated by reference from Part II, Item I of this Form 10-Q "Legal Proceedings" and should be considered an integral part of these Condensed Consolidated Financial Statements. 11

REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Digi International Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Digi International Inc. and subsidiaries as of June 30, 1999, and the related condensed consolidated statements of operations for the three month and nine month periods ended June 30, 1999, and 1998, and cash flows for the nine month periods ended June 30, 1999, and 1998. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of September 30, 1998, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein); and in our report dated December 11, 1998, except as to Notes 2 and 3, for which the date is July 23, 1999, we expressed an unqualified opinion on those consolidated financial statements. Such financial statements have been restated as described in the following paragraph. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As more fully described in Note 1 to the accompanying condensed consolidated financial statements and Note 2 of the Company's consolidated financial statements as of and for the year ended September 30, 1998, the Company and the staff of the Securities and Exchange Commission have had discussions regarding the accounting treatment related to the July 1998 acquisitions of ITK International, Inc. and Central Data Corporation. As a result of these discussions, the Company has changed the method used to allocate the purchase price to in-process technologies. In connection with this modification, the Company has adjusted the measurement and allocations of the purchase prices recorded for the aforementioned acquisitions. Accordingly, the consolidated financial statements as of and for the year ended September 30, 1998 have been restated. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota July 23, 1999 12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth selected information derived from the Company's interim condensed consolidated statements of operations expressed as percentages of sales: THREE MONTHS % NINE MONTHS % ENDED INCREASE ENDED INCREASE JUNE 30 (DECREASE) JUNE 30 (DECREASE) ------------------ --------- ----------------- ---------- 1999 1998 1999 1998 ---- ---- ---- ---- Net sales 100.0 100.0 10.1% 100.0% 100.0% 8.2% Cost of sales 46.9 47.1 9.6 50.3 48.5 12.2 ---- ---- ---- ---- ---- ----- Gross margin 53.1 52.9 10.5 49.7 51.5 4.5 ---- ---- ---- ---- ---- ----- Operating expenses: Sales and marketing 18.3 19.5 3.2 22.2 19.7 22.7 Research and development 11.7 8.9 45.4 12.7 8.9 54.5 General and administrative 11.6 6.4 100.0 13.2 7.5 90.8 Restructuring (1.3) -- -- 0.5 -- -- ---- ----- ----- ----- ----- ----- Total operating expenses 40.3 34.7 27.6 48.6 36.0 46.3 ---- ---- ----- ---- ---- ----- Operating income 12.8 18.2 (22.1) 1.1 15.5 (92.4) Other income, net 0.2 1.4 (90.3) (0.1) 1.1 (112.3) AetherWorks Corporation loss - 2.9 (100.0) - 1.0 - ----- --- ----- ----- --- ----- Income before income taxes 13.0 22.5 (36.5) 1.0 17.6 (94.1) Provision for income taxes 8.6 8.7 8.7 0.7 6.5 (89.4) ----- --- ----- --- --- ----- Net income 4.4 13.8 (64.9)% 0.3% 11.1% (96.8)% ----- --- ----- --- --- ----- ----- --- ----- --- --- ----- NET SALES Net sales for the three months ended June 30, 1999, were higher than net sales for the corresponding three months ended June 30, 1998, by $4,695,238 or 10.1%. Net sales for the nine months ended June 30, 1999 were higher than net sales for the corresponding nine months ended June 30, 1998, by $11,072,716 or 8.3%. Sales of the products added in connection with the acquisitions of ITK and CDC in July 1998 generated revenues of $9,050,900 and $32,827,800 for the three months and nine months ended June 30, 1999, respectively. These revenue increases were mitigated by a decrease in demand for the Company's legacy asynchronous products resulting in reduced revenues of $1,791,800 and $10,710,000 for the three and nine months ended June 30, 1999 relative to comparable periods of 1998, and a decrease in demand for the Company's physical layer products resulting in a decrease in related revenues of $5,046,900 and $15,551,100 for the three and nine months ended June 30, 1999 relative to comparable periods of 1998. Net sales of the Company's new digital RAS products were approximately $2,483,000 and $4,506,000 for the three and nine months ended June 30, 1999, respectively. 13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) NET SALES (CONTINUED) The following table sets forth revenue by principal product group expressed as a percentage of net sales: Three months Nine months Ended June 30 Ended June 30 ------------------ ------------------ 1999 1998 1999 1998 ----- ----- ----- ------ Server Based 72.0% 65.3% 67.1% 62.4% Physical Layer 8.6% 16.6% 7.6% 16.0% OEM 19.4% 18.1% 25.3% 21.6% Total 100.0% 100.0% 100.0% 100.0% GROSS MARGIN Gross margin for the three months and nine months ended June 30, 1999 was 53.1% and 49.7%, as compared to 52.9% and 51.5% for the three months and nine months ended June 30, 1998. For the three months ended June 30, 1999, gross margin was positively impacted by the increased proportion of sales from higher gross margin server-based communication products. Gross margin for the three and nine months ended June 30, 1999, continues to be negatively impacted by sales of lower gross margin products related to ITK operations which accounted for 10% of total sales for the quarter ended June 30, 1999 and 14% of total sales for nine six-month period ended June 30, 1999. In addition, margins generated from physical layer LAN products have declined in fiscal 1999 due to market-driven reductions in selling prices. OPERATING EXPENSES Operating expenses for the three months ended June 30, 1999, increased approximately $4.4 million or 27.6% as compared to operating expenses for the three months ended June 30, 1998. The operations of ITK, which was acquired in the fourth quarter of fiscal 1998, accounted for $4.8 million or 94.1% of the increase in operating expenses. General and administrative expense also increased in the three months ended June 30, 1999, due to the approximately $2.5 million ($1.6 million included in ITK expenses of $4.8 million) increase in amortization expense resulting from identifiable intangible assets and goodwill acquired in the ITK and CDC transactions. Excluding ITK, research and development increased by $0.9 million due to development of new products released during the quarter ended June 30, 1999. Marketing expenses decreased by $2.0 million due to timing of major advertising campaigns. Research and development expense was $6,003,762, or 12% of net sales, compared with $4,127,946, or 9% of net sales, for the three months ended June 30, 1999 and 1998. The dollar increase is primarily due to new product development efforts in digital remote access technology and the addition of research and development costs related to ongoing development of in-process technologies acquired from ITK and CDC in July 1998. 14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) OPERATING EXPENSES (CONTINUED) Selling, general and administrative expense was $15,265,266, or 30% of net sales compared to $12,005,899, or 26% of net sales, for the three months ended June 30, 1999 and 1998. The expense increase relates primarily to increased operating expenses and increased amortization of intangible assets acquired in the acquisition of ITK and CDC. Included in operating income for the three and nine months ended June 30, 1999 are reversals of $572,191 of restructuring accruals originally established in the fourth quarter of 1998 and $113,206 of restructuring accruals originally established in the second quarter of 1999. (See Note 2 to the condensed consolidated financial statements). Operating expenses for the nine months ended June 30, 1999 increased by approximately $22.3 million, excluding second quarter restructuring charges, or 46.3% as compared to operating expenses for the nine months ended June 30, 1998. The operations of ITK accounted for approximately $16.5 million of this increase. General and administrative expenses increased due to the approximately $7.5 million increase in amortization expense resulting from identifiable intangible assets and goodwill acquired in the ITK and CDC transactions ($4.8 million included in ITK expenses of $16.5 million). Excluding ITK, selling, marketing and research and development costs increased $3.1 million due to development of new products and preparation for new product launches. The Company anticipated annual cost savings of approximately $5.2 million relating to restructuring plans implemented by the Company (see Footnote 2 of the condensed consolidated financial statements). These cost savings will principally reduce future selling, general and administrative expenses and were expected to begin during first quarter of fiscal 1999. As a result of changes in management during fiscal 1999, the execution of restructuring plans were delayed. As described in Note 2 to the condensed consolidated financial statements, the Company made certain changes to these restructuring plans during third quarter of fiscal 1999. These changes to the restructuring plans have reduced the aforementioned expected annual cost savings to approximately $4.2 million. The Company expects to begin to realize the full effect of the aforementioned cost savings by December of 1999. 15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT During July, 1998 the Company acquired ITK and CDC. These transactions were accounted for using the purchase method of accounting. The purchase prices were allocated to the net assets acquired based on their estimated fair market values at the date of acquisitions. After discussion with the staff of the Securities and Exchange Commission (the SEC) the condensed consolidated financial statements as of September 30, 1998 have been restated to reflect a change in the measurement and allocations of the purchase prices related to the July 1998 acquisitions of ITK and CDC. The Company allocated amounts to IPR&D and intangible assets in the fourth quarter of 1998 in a manner consistent with widely recognized appraisal practices at the date of the acquisitions of ITK and CDC. Subsequent to the acquisitions, the SEC staff expressed broad views that took issue with certain appraisal practices generally employed by many public companies in determining the fair value of IPR&D. As a result of these developments, the Company has modified its valuation of IPR&D using the alternative income valuation approach. As a result of valuing IPR&D using the alternative income valuation approach and adjusting the measurement of the purchase prices, the Company, in consultation with its independent accountants, has revised its measurement and allocations of the purchase prices, including the amounts allocated to IPR&D. The effect of these adjustments was to: reduce the aggregate amount originally allocated to IPR&D from $39.2 million to $16.1 million; increase the aggregate amount allocated to current technologies from $15.0 to $29.1 million; increase the amount of net deferred tax liabilities from $0 to $6.3 million; increase goodwill from $8.2 million to $27.4 million; increase additional paid in-capital from $68.7 million to $70.5 million; and reduce unearned stock compensation from $3.8 million to $1.7 million. The value assigned to purchased in-process technology was related to research projects for which technological feasibility had not been established, Internet Protocol (VoIP) technology ($11.3 million) and Universal Serial Bus (USB) technology ($4.8 million). The Company is continuing development of the acquired in-process VoIP technology and, as of June 30, 1999,7 believes that its development efforts are on schedule to meet the product release schedule referred to in the Company's Annual Report on Form 10-K/A without any significant changes in its research and development costs. However, these expectations are subject to change, given the uncertainties of the development process and changes in market expectations. 16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED) The Company is continuing development of the acquired in-process USB research and development and has developed and released USB products, with initial product revenues generated during November 1998. Included in revenues for the nine month period ended June 30, 1999 is approximately $225,000 of revenues from the first release of certain USB products. Actual revenues for the first nine months of fiscal 1999 are below original projections due to delays in the release and marketing of certain USB products. Development of the USB in-process research and development continues without significant changes in the estimated research and development costs or projected revenues. OTHER INCOME (EXPENSE) Other income for the three months ended June 30, 1999, resulted from interest earned on cash and cash equivalent balances. Other expense, principally interest expense for the nine months ended June 30, 1999, results from debt assumed in the acquisition of ITK, net of interest earned on cash and cash equivalents. INCOME TAXES Income taxes have been provided for at an estimated annual effective rate of 66% for the nine months ended June 30, 1999. This effective tax rate exceeds the U.S. statutory income tax rate and the effective tax rate of 36.8% in the nine months ended June 30, 1998 primarily due to the additional $10.0 million of annual amortization expense related to the Company's acquisitions of ITK and CDC which is not deductible for income tax reporting purposes. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations principally with funds generated from operations. The Company's working capital increased from $37.9 million at September 30, 1998, to $52.8 million at June 30, 1999. The increase was principally due to improved accounts receivable collections, paying down borrowings under line of credit agreements, accounts payable and accrued expenses. Net cash provided by operating activities was $22,592,160 for the nine months ended June 30, 1999, compared to $21,653,187 for the nine months ended June 30, 1998. The increase was primarily due to a decrease in accounts receivable balances, offset by reduced operating income. Net cash used in investing activities for the nine months ended June 30, 1999, consisted primarily of purchases of equipment and capital improvements totaling $3.0 million for engineering and office equipment and the expansion of the Company's enterprise software ystem into locations outside the Minneapolis headquarters. 17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Net cash used for financing activities for the nine months ended June 30, 1999, consisted primarily of payments on line of credit and debt obligations totaling approximately $5.3 million which was primarily offset by cash received from the exercise of $2.0 million of employee stock options. The Company is negotiating to extend the unsecured line of credit which expired May 31, 1999. The Company has no borrowings outstanding on this line of credit. The Company's management believes that current financial resources, cash generated from operations and the Company's potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements. During the quarter ended March 31, 1999, the Company used $815,000 of cash to repurchase 105,000 shares of the Company's stock at an average price of $7.76 per share. FOREIGN CURRENCY Effective January 1, 1999, eleven countries of the European Union converted to a common currency called the "Euro." This action will cause 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. For the nine months ended June 30, 1999, the Company had foreign transactions that were negotiated and invoiced amounting to approximately $37.7 million, of which $17.8 million were in U.S. dollars and $19.9 million were Deutschemark-denominated sales through the newly-acquired subsidiary ITK. In future periods, a significant portion of sales made through ITK 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, which management does not believe to be significant based on the scope of the Company's foreign operations as of June 30, 1999. YEAR 2000 ISSUES The Company began a comprehensive project in 1996 to prepare its products and its internal computer systems for the year 2000. Most of the Company's products are year 2000 compliant because there is very little or no date processing involved. Certain products, including end-of-life versions, do require customer action such as a patch or version upgrade to be compliant. These products are being identified, and the Company is in the process of notifying impacted customers. 18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) YEAR 2000 ISSUES (CONTINUED) The Company believes its implementation of a new enterprise-wide information management system, principally installed to improve operating efficiency, will address the Company's internal year 2000 compliance issues. Because of the acquisitions of ITK and CDC, the worldwide rollout of this system will not be completed until the end of fiscal 1999. If necessary conversions are not completed on a timely basis, the effects of being unable to adequately process year 2000 dated transactions could have a material adverse effect on the Company's operations. Overall, management believes the year 2000 will not have a significant impact on operations. The Company plans to continue with remediation and testing efforts with both its products and internal systems to further mitigate any risks associated with the year 2000. The costs associated with the year 2000 project are minimal and are not incremental to the Company, but include temporary reallocation of existing resources. Although the Company believes that the remaining cost of year 2000 modifications for both internal-use systems and the Company's products is not material, there can be no assurances that various factors relating to the year 2000 compliance issues, including litigation, will not have a material adverse effect on the Company's business, operating results, or financial position. INFLATION Management believes inflation has not had a material effect on the Company's operations or on its financial position. 19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED) FORWARD LOOKING STATEMENTS Certain statements made above, which are summarized below, are forward-looking statements that involve risks and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include those identified below: THE EXPECTATION THAT VARIOUS RESTRUCTURING ACTIVITIES IN CONNECTION WITH THE ACQUISITIONS OF ITK AND CDC AND THAT THE REORGANIZATION OF THE SALES AND MARKETING FUNCTIONS IN GERMANY, ENGLAND AND THE UNITED STATES WILL BE COMPLETED ACCORDING TO SCHEDULE AND WILL RESULT IN ANNUAL COST SAVINGS OF APPROXIMATELY $4.2 MILLION - This expectation may be impacted by presently unanticipated delays or expenses. THE EXPECTATION THAT THE COMPANY'S 1999 EFFECTIVE TAX RATE WILL BE 66 PERCENT - This expectation may be impacted by the changes in the Company's level of profitability. THE BELIEF THAT THE COMPANY'S 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 ANTICIPATED BUSINESS OPERATIONS - Changes in anticipated operating results, credit availability and equity market conditions may further enhance or inhibit the Company's ability to maintain or raise appropriate levels of cash. THE BELIEF THAT IMPLEMENTATION OF A NEW ENTERPRISE-WIDE INFORMATION MANAGEMENT SYSTEM WILL ADDRESS THE COMPANY'S INTERNAL YEAR 2000 COMPLIANCE ISSUES AND THE BELIEF THAT THE YEAR 2000 WILL NOT HAVE A SIGNIFICANT IMPACT ON OPERATIONS - These beliefs may be impacted by presently unanticipated delays in assessment or remediation, unanticipated increases in costs or non-compliance by third parties. THE BELIEF THAT THE PRODUCTS DEVELOPED UTILIZING ACQUIRED IN-PROCESS TECHNOLOGIES RELATED TO THE CDC ACQUISITION WILL BE SUCCESSFULLY RELEASED AND RESULTING REVENUE WILL MEET ORIGINAL PROJECTIONS - Delays in product releases and unanticipated changes in market demand may impact these expectations. THE BELIEF THAT THE CONTINUING DEVELOPMENT OF THE IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED FROM ITK WILL RESULT IN VIABLE PRODUCTS AND THAT SUCH DEVELOPMENT WILL BE COMPLETED ON SCHEDULE. Delays in product development and unanticipated changes in market demand may impact these expectations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have material exposure to market risk from market risk sensitive financial instruments. 20

PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Between January 3, 1997 and March 7, 1997, the Company and certain of its previous officers were named as defendants in five putative securities class action lawsuits filed in the United States District Court for the District of Minnesota on behalf of an alleged class of purchasers for its common stock during the period January 25, 1996, through December 23, 1996. The five putative class actions were thereafter consolidated, and on May 12, 1997, a consolidated amended class action complaint (the "Consolidated Amended Complaint") was filed in the actions, which are captioned IN RE DIGI INTERNATIONAL INC. SECURITIES LITIGATION (Master File No. 97-5 DWF/RLE). The Consolidated Amended Complaint alleges that the Company and its previous officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary L. Deaner violated the federal securities laws by, among other things, misrepresenting and/or omitting material information concerning the Company's operations and financial results. Plaintiffs seek compensatory damages of approximately $37.5 million plus interest against all defendants, jointly and severally, and an award of attorneys' fees, experts' fees and costs. 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, which is captioned LOUISIANA STATE EMPLOYEES RETIREMENT SYSTEM V. DIGI INTERNATIONAL INC., GARY L. DEANER, ERVIN F. KAMM, JR., GERALD A. WALL AND "JOHN DOE" AND "RICHARD ROE", DEFENDANTS (Civil File No. 97-440, Master File No. 97-5 DWF/RLE). On June 3, 1997, the Louisiana State Employees Retirement System filed an Amended Complaint (the "Louisiana Amended Complaint"). The Louisiana Amended Complaint alleges that the Company and its previous officers Ervin F. Kamm, Jr., Gerald A. Wall and Gary L. Deaner violated 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. The Louisiana Amended Complaint seeks compensatory damages in the amount of $718,404.70 plus interest against all defendants, jointly and severally, and an award of attorneys' fees, disbursements and costs. In a decision issued on May 22, 1998, the United States District Court for the District of Minnesota granted in part and denied in part defendants' motions to dismiss the Consolidated Amended Complaint and the Louisiana Amended Complaint. The Court dismissed without leave to replead all claims asserted in both cases, except for certain federal securities law claims based upon alleged misrepresentations and/or omissions relating to the accounting treatment applied to the Company's AetherWorks investment. The Court also limited the claims asserted in the Louisiana Amended Complaint to the 11,000 shares of the Company's stock held subsequent to November 14, 1996, for which the Louisiana Amended Complaint claims damages of $184,276.40. The claims in the two actions remain pending against the Company and its former officers Ervin F. Kamm, Jr. and Gerald A. Wall. 21

PART II. OTHER INFORMATION (CONTINUED) LEGAL PROCEEDINGS (CONTINUED) Plaintiffs in the consolidated putative class actions have moved for class certification; the Company and its former officers have not yet responded to the motion but intend to oppose it. No date has been set for a hearing on the class certification motion. On August 11, 1999, defendants filed a motion to dismiss the Louisiana Amended Complaint on the ground that the Louisiana Retirement System has failed to prosecute the action and comply with the court orders and applicable discover rules. Discovery in the actions is proceeding. Because the lawsuits are in preliminary stages, the ultimate outcomes cannot be determined at this time, and no potential assessment of their effect, if any, on the Company's financial position, liquidity or future operations can be made. 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 22

PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. Description 3(a) Restated Certificate of Incorporation of the Registrant, As Amended* 3(b) Amended and Restated By-Laws of the Registrant** 4(a) Form of Rights Agreement, dated as of June 10, 1998 between Digi International Inc. and Norwest Bank Minnesota, National Association, as Rights Agent*** 4(b) Amendment dated January 26, 1998, to Share Rights Agreement, dated as of June 10, 1998 between Digi International Inc. and Norwest Bank Minnesota, National Association, as Rights Agent**** 15 Letter Re: Unaudited Interim Financial Information 27 Financial Data Schedule (b) Reports on Form 8-K: None. - ------------ *Incorporated by reference to the corresponding exhibit number to 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 to the Company's Registration Statement on Form S-1 (File No. 33-42384) ***Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A dated June 24, 1998 (File No. 0-17972) ****Incorporated by reference 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) 23

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: August 16, 1999 By: /s/ S. Krishnan ---------------------------- S. Krishnan Chief Financial Officer (duly authorized officer and Principal Financial Officer) 24

EXHIBIT 15 UNAUDITED INTERIM FINANCIAL INFORMATION LETTER

EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated July 23, 1999 on our reviews of interim condensed consolidated financial information of Digi International Inc. and subsidiaries (the Company) for the three month and nine month periods ended June 30, 1999 and 1998, and included in the Company's Form 10-Q for the quarter ended June 30, 1999, is incorporated by reference in the Company's registration statements on Form S-8 (Registration Nos. 33-32956, 33-38898, 333-99, 333-1821, 333-23857 and 333-57869). PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota August 16, 1999

5 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 25770254 0 35330537 0 21968124 88196938 30376062 0 173447054 35413504 0 0 0 161706 124773121 173447054 0 145171035 73055761 70532150 (181050) 0 0 1402075 925370 0 0 0 0 476705 .03 .03