SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended September 30, 1995 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 No.) 6400 Flying Cloud Drive Eden Prairie, Minnesota 55344 ---------------------------------------- ---------- (Address of principal executive officers) (Zip Code) Registrant's telephone number, including area code: (612) 943-9020 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of each class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days. YES X NO ----- ------- The aggregate market value of voting stock held by nonaffiliates of the Registrant, based on a closing price of $23.00 per share as reported on the National Association of Securities dealers Automated Quotation System - National Market System on December 13, 1994 was $258,986,141. Shares of common stock outstanding as of December 13, 1995: 13,228,442.
DOCUMENTS INCORPORATED BY REFERENCE The following table shows, except as otherwise noted, the location of information, required in this Form 10-K, in the Registrant's Annual Report to Stockholders for the year ended September 30, 1995 and Proxy Statement for the Registrant's Annual Meeting of Stockholders scheduled for January 31, 1996, a definitive copy of which was filed on December 27, 1995. All such information set forth below under the heading "Reference" is incorporated herein by reference. <TABLE> <CAPTION> PART I ITEM IN FORM 10-K REFERENCE - ------ ----------------- ---------- <S> <C> <C> Item 1. Business Business, pages 4 through 7, this document Item 2. Properties Properties, page 7 this document Item 3. Legal Proceedings Legal Proceedings, page 8 this document Item 4. Submission of Matters to a Submission of Matters to Vote of Security Holders a Vote of Security Holders, page 8, this document PART II - ------- Item 5. Market for Registrant's Stock Listing; Dividend Common Equity and Related Policy, page 32, Annual Stockholder Matters Report to Stockholders Item 6. Selected Financial Data Financial Highlights, and Selected Financial Information, pages 3 & 4, Annual Report to Stockholders Item 7. Management's Discussion Management's Discussion And Analysis of Financial and Analysis of Financial Condition and Results of Condition and Results of Operations Operations, pages 20 and 21, Annual Report to Stockholders Item 8. Financial Statements and Annual Report to Stock- Supplementary Data holders, pages 22 through 31 </TABLE>
<TABLE> <CAPTION> <S> <C> <C> Item 9. Changes in and Disagree- Changes in and Dis- ments with Accountants on agreements with Accounting and Financial Accountants on Accounting and Financial Disclosure, Disclosure page 8, this document PART III ITEM IN FORM 10-K REFERENCE - -------- ----------------- ---------- Item 10. Directors of the Registrant Election of Directors, Proxy Statement Executive Officers of Executive Officers of the the Registrant Registrant, pages 8 through 10,this document Compliance with Section Section 16(a) Reporting, 16(a) of the Exchange Act Proxy Statement Item 11. Executive Compensation Executive Compensation; Election of Directors, Summary Compensation Table; Option Grants in Last Fiscal Year; Aggregated Option Exercises in the Last Fiscal Year and Year-end Option Values, Employment Contracts; Severance, Termination of Employment and Change-in-Control Arrangements; Performance Evaluation, Proxy Statement Item 12. Security Ownership of Security Ownership of Certain Beneficial Owners Principal Stockholders and Management and Management, Proxy Statement Item 13. Certain Relationships and Certain Relationships and Related TransactionsRelated Transactions, Proxy Statement PART IV - ------- Item 14. Exhibits, Financial Exhibits, Financial State Statement Schedules and ment Schedules and Reports on Form 8-K Reports on Form 8-K, pages 10 through 12, this document </TABLE>
DIGI INTERNATIONAL INC. FORM 10-K Year ended September 30, 1995 PART I ITEM 1. BUSINESS Digi International Inc. (the "Company") was formed in 1985 and is a leading producer of data communications hardware and software products that deliver solutions for multiuser environments, remote access markets both LAN and WAN, and the LAN connect market. The Company's multiuser products connect terminals, PCs running terminal emulation software, and other serial devices, to a PC-based host. This pathway enables users to share the processing power of a single host computer. These products are ideal for companies-or workgroups within companies-that need easy, low-cost system management and high performance at the lowest cost per user. These products are ideal for point-of-sale applications, on-line transaction processing, factory automation, dial- in/dial-out connections and data dissemination. The Company's multiuser solutions support from one to 224 high-speed serial ports through a single expansion slot or as many as 1,792 ports through a single host (eight expansion slots). In addition to maximizing the capabilities of a multiuser system by enabling hundreds of users to be connected to a system, an equally important benefit is the product's ability to quickly and accurately transmit data, eliminating the information bottlenecks that result when multiple users or devices share one processing unit. The Company's remote access products address the need to connect telecomuters and branch offices to corporate LANs, other branches, other individuals through server-centric and standalone product solutions. Only the Company has solutions for each portion of this large and fast growing market. The Company entered the standalone solution market with the acquisition of Lan Access Corporation in September 1995 in a cash transaction of approximately $5.5 million. The Company's ISDN products address the need for high-speed remote access which is necessary for LAN-to-LAN (WAN) internetworking and for accessing the Internet. The Company entered the LAN Connect market with its acquisition of MiLAN Technology Corporation in November 1993.
The Company's LAN connect group provides cost-effective and power- efficient Ethernet and Token Ring networking products through three groups: 1) The original "physical layer" line of products that allow users to easily build and expand networks using single and multiport transceivers, converters, modular microhubs and modular repeaters. 2) Products based on the innovative FastPort line, which makes print sharing convenient and affordable. The FastPort line includes the industry's first multiprotocol network print server providing access to any printer on an Ethernet or Token Ring network without the inconvenience and expense of spooling through a workstation or server. 3) Network performance enhancement products, including the first comprehensive family of physical layer connectivity solutions for Fast Ethernet. The Company's products are sold through a network of more than 109 distributors in the United States, Canada and 56 countries worldwide. Committed to the development and evolution of innovative connectivity and networking solutions, the Company works closely with customers and marketing partners to meet the changing needs of the communications and networking marketplace. The Company markets its products to a broad range of customers, including major domestic and international distributors, system integrators, VARs and OEMs. In July 1991, the Company opened a sales support office in Germany to increase sales support to the European distribution network for its DigiBoard products. In October 1993, the Company opened a sales support office in Singapore to increase sales support to the Pacific Rim distribution network for its products. To serve these markets, the Company (i) offers products that, in the opinion of management, provide superior performance relative to current standards and application requirements, (ii) provides products that are compatible with a broad array of operating systems and microcomputer and workstation architectures, and (iii) provides, in the opinion of management, superior technical support, including frequent and timely product updates and ready access to the Company's support staff. The microcomputer industry is characterized by rapid technological advances and evolving industry standards. The market can be significantly affected by new product
introductions and marketing activities of industry participants. The Company competes for customers on the basis of product performance in relation to compatibility, support, quality and reliability, product development capabilities, price and availability. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing and personnel resources than the Company. The Company believes that it is the market leader in the multiuser market segment of the computer industry and is the leader in the server centric portion of the remote access portion of that market. With respect to the standalone portion of the remote access market and the LAN connect market, the Company believes it commands less than a 5% market share. The Company's manufacturing operations procure all parts and certain services involved in the production of products. The Company subcontracts most of its product manufacturing to outside firms that specialize in providing such services. The Company believes that this approach to manufacturing is beneficial because it permits the Company to reduce its fixed costs, maintain production flexibility and maximize its profit margins. The Company's products are manufactured to its designs with standard and semi-custom components. Virtually all of these components are available from multiple vendors. During fiscal years 1993, 1994 and 1995, the Company's research and development expenditures were $5,187,337, $9,833,859, and $14,676,683 respectively. Due to the rapidly changing technology in the computer industry, the Company believes that its success depends primarily upon the engineering, marketing, manufacturing and support skills of its personnel, rather than upon patent protection. Although the Company may seek patents where appropriate and has certain patent applications pending for proprietary technology, the Company's proprietary technology or products are generally not patented. The Company relies primarily on the copyright, trademark and trade secret laws to protect its proprietary rights in its products. The Company has established common law and registered trademark rights on a family of marks for a number of its products. At September 30, 1995, the Company had 605 full-time employees. During the year ended September 30, 1995, two customers comprised more than 10% of net sales; Ingram Micro at 12.5% and IBM at 11.7%. During 1994, one company (Ingram Micro) accounted for 11.8% of net sales. During 1993, two
customers comprised more than 10% of net sales; Ingram Micro at 10.3% and IBM at 10.8%. As of November 30, 1995, the Company had backlog orders which management believed to be firm in the amount of $11,314,685. All of these orders are expected to be filled in the current fiscal year. Backlog at November 30, 1994 was $9,390,100. During fiscal years 1993, 1994 and 1995, the Company's net sales to customers outside the United States, primarily in Europe, amounted to approximately $20,000,000, $28,000,000, and $33,000,000, respectively. ITEM 2. PROPERTIES The Company's headquarters and research facilities are currently located in a 30,000 square foot office building in Eden Prairie, Minnesota which the Company acquired in December 1990 and has occupied since January 1991. The Company purchased a 133,000 square foot building in September 1995 which will become the corporate office and the primary research site in February 1996. The Company's primary manufacturing facilities are currently located in a 58,000 square foot building in Eden Prairie, Minnesota, which the Company purchased in May 1993 and has occupied since August 1993. Additional office and research facilities are located in a 17,000 square foot facility in Nashville, Tennessee, the lease for which expires in September 2000; a 22,000 square foot facility in Solon, Ohio, the lease for which expires in January 1996; a 46,000 square foot facility in Sunnyvale, California, the lease for which expires in April 2003, with additional temporary office space in a 10,000 square foot building, located in Sunnyvale, California the lease for which expires in December 1995 and; a 10,525 square foot building in Torrance, California the lease for which expires in January 1997. The Company's sales support office in Germany is located in a 3,400 square foot office in Cologne, Germany, the lease for which expires in November 1998. The Company's sales support office in Asia is located in a 1,600 square foot office in Singapore, the lease for which expires in October 1997. Management believes that the Company's facilities are suitable and adequate for current office, research and warehouse requirements, and that its manufacturing facilities provide sufficient productive capacity to meet the Company's currently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS There are no material pending or threatened legal, governmental, administrative or other proceedings to which the Company or any of its subsidiaries is a party or to which any of its or its subsidiaries' property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended September 30, 1995. PART II ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- John P. Schinas 58 Chairman of the Board of Directors Ervin F. Kamm, Jr. 56 President and Chief Executive Officer Mykola Moroz 58 Former President and Chief Executive Officer Gary L. Deaner 55 Vice President of the Company and General Manager of LAN Connect PMU Gerald A. Wall 49 Vice President, Chief Financial Officer and Treasurer Ray D. Wymer, Jr. 39 Vice President of the Company and General Manager of the Multi Connect PMU Keith C. Rericha 40 Vice President of Support Services
Joseph A. Diodati 53 Vice President of Marketing and Strategic Planning Douglas J. Glader 52 Vice President of Operations Dana R. Nelson 47 Vice President of Sales James R. Baker 50 Vice President of Technology and Standards Mr. Schinas, founder of the Company, retired as Chief Executive Officer effective January 27, 1992. He has been a member of the Board of Directors since the Company's inception in July 1985 and was elected Chairman of the Board of Directors in July 1991. From July 1985 to July 1991, Mr. Schinas also served the Company as President and Treasurer. Mr. Kamm has been a member of the Board of Directors since December 1994 and President and Chief Executive Officer of the Company since November 30, 1994. From May 1988 to November 1994, he served as President and Chief Operating Officer of Norstan Inc., a distributor of telecommunications products. From February 1988 to May 1988, he was President of Norstan Communications, Inc. Mr. Kamm is also a director of Aequitron Medical Inc., Micromedics Inc. and the Institute for Advanced Technology. Mr. Moroz, a founder of the Company, has been a member of the Board of Directors since July 1991 and a consultant to the Company on manufacturing operations since December 1994. He was President of the Company from July 1991 to November 1994 and Chief Executive Officer from January 1992 to November 1994. Mr. Moroz was Chief Operating Officer of the Company from July 1991 to January 1992. From October 1985 to July 1991, he occupied various management positions with the Company, including Senior Vice President, Vice President and irector of Manufacturing Operations. Mr. Moroz is also a director of Parts 1, Inc., a privately held corporation that is a supplier to the Company. Mr. Deaner has been Vice President of the Company since October 1990. Since March 1991, to September 30, 1995, he has also served as President of the Company's Arnet and MiLAN subsidiaries. Currently, he is General Manager of the Remote Access PMU. From August 1985 to October 1990, Mr. Deaner was employed by the Company as Director of Marketing. Mr. Wall has been Vice President, Chief Financial Officer and Treasurer of the Company since July 1991. He joined
the Company as Chief Financial Officer/Director of Finance and Administration in August 1989. Mr. Wymer has been Vice President of the Company since April 1993 when Star Gate was acquired. From 1984 to September 30, 1995, he has served as President of Star Gate and currently is General manager of Multi-Connect PMU. Mr. Rericha has been Vice President of the Company since April 1993 when Star Gate was acquired. From 1984 to September 30, 1995, he has served as Executive Vice President of Star Gate and currently is Vice President of Support Services. Mr. Diodati, 52, was named Vice President of Marketing in March 1995. Since joining the company in April 1992, he has served as Director of Marketing and Strategic Planning and Divisional Vice President of Marketing and Strategic Planning. Prior to joining Digi International Inc., he served as Vice President of Marketing and Sales at Saratoga Group and served in a similar capacity at Viewport Technology. Mr. Glader, 52, was named Vice President of Operations in February 1995. Before that, he was formerly Director of Manufacturing and Operations for MiLAN Technology Corporation. He began his career with Memorex Corporation and also worked for Measurex Corporation, Altus Corporation and Direct Incorporated. He founded and was vice president of operations for Greyhawk Systems, Inc., a manufacturer of electronic imaging hardware and software. Mr. Nelson, 47, was named to the position of Vice President of Sales for Digi International effective June 1, 1995. From 1983 to 1995, Nelson was with Ascom Timeplex, most recently as Vice President of Worldwide Sales. Ascom Timplex is a worldwide leader in LAN and WAN networking solutions. Mr. Baker, 50, joined the Company in October 1995 as Vice President of Technology and Standards. From 1991 to 1995, Baker was Senior Vice President, Telecommunications, for Loral Corporation where he managed the synchronous transfer mode (ATM) switching products business. Before that, Baker held a variety of positions, including tenures at GTE and Harris Corporation. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedules 1. Incorporated by reference to pages 22 through 31 of the Company's 1995 Annual Report to Stockholders: Consolidated Statements of Operations for the fiscal years ended 1995, 1994 and 1993 Consolidated Balance Sheets as of September 30, 1995 and 1994 Consolidated Statements of Cash Flows for the fiscal years ended 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity for the fiscal years ended 1995, 1994 and 1993 Notes to Consolidated Financial Statements Report of Independent Accountants 2. Included in Part II: Report of Independent Accountants on Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or are not required. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended September 30, 1995. (c) 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(f) 401-(K) Savings and Profit Sharing Plan of Digi International Inc.**** 10(g) Amended and Restated Employment Agreement between the Company and Ervin F. Kamm, Jr. 10(n) Employment Agreement with Ray D.Wymer, as amended by Amendment No. 1 to Employment Agreement 10(o) Employment Agreement with Keith C.Rericha, as amended by Amendment No. 1 to Employment Agreement 10(p) Employment arrangement between the Registrant and Douglas Glader for fiscal 1995 10(q) Employment arrangement between the Registrant and Dana R. Nelson for fiscal 1995 and 1996 11 Detail computation of earnings per share 13 1995 Annual Report to Stockholders (only those portions specifically incorporated by reference herein shall be deemed filed with the Securities and Exchange Commission). 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule * 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 scheduled for January 31, 1996 (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.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGI INTERNATIONAL INC. December 28, 1995 By:/s/ Ervin F. Kamm, Jr. - ------------------------------- ------------------------------- Date Ervin F. Kamm, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. December 28, 1995 By:/s/ Ervin F. Kamm, Jr. - ------------------------------- ------------------------------- Date Ervin F. Kamm, Jr. President and Chief Executive Officer (Principal Executive Officer) December 28, 1995 By:/s/ Gerald A. Wall - ------------------------------- ------------------------------- Date Gerald A. Wall Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) December 28, 1995 /s/ Willis K. Drake - ------------------------------- ---------------------------------- Date Willis K. Drake December 28, 1995 /s/ Richard E. Eichhorn - ------------------------------- ---------------------------------- Date Richard E. Eichhorn December 28, 1995 /s/ Ervin F. Kamm, Jr. - ------------------------------- ---------------------------------- Date Ervin F. Kamm, Jr. December 28, 1995 /s/ Mykola Moroz - ------------------------------- ---------------------------------- Date Mykola Moroz December 28, 1995 - ------------------------------- ---------------------------------- Date Richard E. Offerdahl December 28, 1995 - ------------------------------- ---------------------------------- Date John P. Schinas
December 28, 1995 /s/ Dr. Jagdish Sheth - ------------------------------- ---------------------------------- Date Dr. Jagdish Sheth December 28, 1995 /s/ David Stanley - ------------------------------- ---------------------------------- Date David Stanley
REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Digi International Inc.: Our report on the consolidated financial statements of Digi International Inc. has been incorporated by reference in this Form 10-K from page 31 of the 1995 Annual Report to Stockholders of Digi International Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)2 on page 11 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota November 15, 1995
DIGI INTERNATIONAL INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> CHARGED TO BALANCE AT CHARGED TO OTHER DEDUCTIONS BALANCE AT DESCRIPTION OF YEAR EXPENSE ACCOUNTS FROM ALLOWANCE END OF YEAR - ----------------------------------------- ----------- ------------- ------------- -------------- ----------- <S> <C> <C> <C> <C> <C> Deducted from Accounts Receivable: Year ended September 30, 1993 Allowance for doubtful accounts........ 391,000 397,358 429,358(1) 359,000 Year ended September 30, 1994 Allowance for doubtful accounts........ 359,000 608,001 84,581(2) 410,082(1) 641,500 Year ended September 30, 1995 Allowance for doubtful accounts........ 641,500 243,895 228,895(1) 656,500 Deducted from Inventory: Year ended September 30, 1993 Allowance for inventory obsolesence.... 81,000 274,000 355,000 Year ended September 30, 1994 Allowance for inventory obsolesence.... $ 355,000 $ 1,071,741 $ 72,441(2) $ 817,182(3) $ 682,000 Year ended September 30, 1995 Allowance for inventory obsolesence.... $ 682,000 $ 716,300 $ 586,300(3) $ 812,000 </TABLE> - ------------------------ (1) Uncollectible accounts charged against allowance. (2) Balance of MiLAN Technology Corporation at date of acquisition. (3) Scraped inventory charged against allowance.