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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: September 30, 2006
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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)
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| Delaware
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41-1532464 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
11001 Bren Road East
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(952) 912-3444
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class |
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Name of each exchange on which registered |
| Common Stock, par value $.01 per share
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The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the last
business day of the Registrant’s most recently completed second fiscal quarter was $268,876,777,
based on a closing price of $11.67 per common share as reported on the NASDAQ Global Select Market
(formerly the NASDAQ National Market).
Shares of common stock outstanding as of November 24, 2006: 25,085,451
INDEX
DOCUMENTS INCORPORATED BY REFERENCE
The following table shows, except as otherwise noted, the location of information required in this
Form 10-K, in the Registrant’s Annual Report to Stockholders for the year ended September 30, 2006
and Proxy Statement for the Registrant’s Annual Meeting of Stockholders scheduled for January 22,
2007, a definitive copy of which will be filed on or about December 6, 2006. All such information
set forth below under the heading “Page/Reference” is incorporated herein by reference, or included
in this Form 10-K on the pages indicated.
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ITEM IN FORM 10-K |
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PAGE/REFERENCE |
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Directors of the Registrant |
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Election of Directors, Proxy Statement |
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Executive Officers of the Registrant |
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Compliance with Section 16(a) of the Exchange Act |
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Section 16(a) Beneficial Ownership Reporting Compliance, Proxy Statement |
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Code of Ethics |
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ITEM 11. |
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Executive Compensation |
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Executive Compensation; Election of
Directors — Director Compensation; Summary Compensation Table; Option Grants in Last Fiscal
Year; Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values; Employment Contracts;
Severance, Termination of Employment and Change-in-Control Arrangements; Performance Evaluation, Proxy Statement
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ITEM 12. |
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Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters |
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Security Ownership of Principal Stockholders and Management;
Equity Compensation Plan Information, Proxy Statement |
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Certain Relationships and Related Transactions |
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ITEM 14. |
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Principal Accounting Fees and Services |
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Audit and Non-Audit Fees, Proxy Statement |
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Exhibits and Financial Statement Schedules |
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain statements that are “forward-looking statements” as that term
is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
The words “believe,” “anticipate,” “intend,” “estimate,” “target,” “may,” “will,” “expect,” “plan,”
“project,” “should,” or “continue” or the negative thereof or other expressions, which are
predictions of or indicate future events and trends and which do not relate to historical matters,
identify forward-looking statements. Such statements are based on information available to
management as of the time of such statements and relate to, among other things, expectations of the
business environment in which the Company operates, projections of future performance, perceived
opportunities in the market and statements regarding the Company’s mission and vision.
Forward-looking statements involve known and unknown risks, uncertainties and other factors, which
may cause the actual results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events or otherwise.
The future operating results and performance trends of the Company may be affected by a number of
factors, including, without limitation, those described in Item 1A, Risk Factors, of this Form
10-K. Those risk factors, and other risks, uncertainties and assumptions identified from time to
time in the Company’s filings with the Securities and Exchange Commission, including without
limitation, its quarterly reports on Form 10-Q and its registration statements, could cause the
Company’s actual future results to differ materially from those projected in the forward-looking
statements as a result of the factors set forth in the Company’s various filings with the
Securities and Exchange Commission and of changes in general economic conditions, changes in
interest rates and/or exchange rates and changes in the assumptions used in making such
forward-looking statements.
ITEM 1. BUSINESS
During fiscal 2005 and 2004, the Company operated in two reportable segments. Effective
October 1, 2005, the Company changed its organizational structure to functional reporting to
eliminate redundancies in management and infrastructure. In addition, certain intellectual
property that was previously utilized primarily in products that comprised the Device
Networking Solutions segment has now been integrated throughout the Company’s products in
order to provide more functionality and allow for ease of migration to next generation
technologies for the Company’s customers. As a result of these changes in organizational
structure and use of the Company’s product technology, the Chief Executive Officer, as the
chief operating decision maker, now reviews and assesses financial information, operating
results, and performance of the Company’s business in the aggregate. Accordingly, effective
October 1, 2005, the Company has a single operating and reporting segment and all periods
presented have been reclassified to conform to the single reportable segment.
COMPANY OVERVIEW
Digi International Inc. was formed in 1985 as a Minnesota corporation and reorganized as a Delaware
corporation in 1989 in conjunction with its initial public offering. The common stock of Digi is
traded on the NASDAQ Global Select Market under the symbol DGII. The Company has its worldwide
headquarters in Minnetonka, Minnesota, with regional sales offices throughout North America,
Europe, and Asia Pacific, and engineering offices in North America and Europe. The Company has
sales offices located throughout North America, Europe and Asia Pacific. Digi products are
available through approximately 225 distributors in more
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ITEM 1. BUSINESS (CONTINUED)
COMPANY OVERVIEW (CONTINUED)
than 55 countries. The terms “Digi” or “the Company” mean Digi International Inc. and all of the
subsidiaries included in the consolidated financial statements unless the context indicates
otherwise.
As a leader in device networking for business, Digi develops reliable products and technologies to
connect and securely manage local or remote electronic devices over the network or via the
Internet. Businesses use Digi products to create, customize and control retail operations,
industrial automation and other applications. Digi’s products are sold globally through
distributors, systems integrators, solution providers and direct marketers as well as direct to
strategic OEMs, government and commercial partners.
Digi’s revenues consist of products that are in embedded and non-embedded product groupings.
Embedded products include microprocessors and development tools, which are used by customers’
engineers to build electronic devices with fully integrated networking functionality, embedded
modules, core modules and single board computers and MaxStream wireless products. The non-embedded
(or external) products consist of network connected products for access to serial devices over
Ethernet networks, multi-port serial adapters, Universal Serial Bus (USB) connected products and
cellular gateways. Non-embedded products can be used to connect one or many standalone devices or
to connect devices as part of a larger solution (e.g., self-checkout systems, ATMs, medical
systems, factory equipment).
Digi’s first products were box and board-level serial port adapters (sold under the DigiBoard®
brand) that were used to directly connect multiple peripherals, such as standalone computer
terminals, to personal computer servers or a host computer system. During the 1990s, Digi employed
Ethernet technology to provide the connectivity infrastructure for businesses. This trend began in
the head and branch offices of businesses and in the late 1990s began to extend to the factory,
retail stores, restaurants, and many other environments such as medical, traffic control, and
building controls. During the same time, the semiconductor industry was also advancing rapidly.
Complete systems were being built on single integrated circuits (chips). These chips, as part of a
box or board product, could be used to build a network interface for virtually any device for which
network connectivity was required. Digi recognized the developing opportunities for device
connectivity and in early 2000 implemented a strategy to leverage the brand strength that it had
established with the DigiBoard product line by organically developing or acquiring next-generation
connectivity products and technologies that would extend the value of the brand into an array of
commercial-grade device networking applications. In the past several years, Digi has augmented the
strategy with an increasing emphasis on wireless solutions. Since 2000, Digi has made several
acquisitions that provide complimentary products and technologies.
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In October 2000, Digi acquired privately held Inside Out Networks Inc. (Inside Out
Networks), a developer and marketer of “out of the box” external data connection
technologies that utilize USB. |
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In June 2001, Digi acquired INXTECH, a French designer and manufacturer of Ethernet
connectivity solutions sold under the Xcell technology brand. This acquisition provided
technology and market knowledge to accelerate Digi’s introduction of its device server
product line. Device servers are both embedded and non-embedded products and are
intelligent, easy-to-use network devices that convert serial data into network data. |
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In February 2002, Digi acquired NetSilicon®, Inc. (NetSilicon), a developer and marketer
of network attached processors and device connectivity software. NetSilicon’s advanced
microprocessors and software allowed customers to build intelligent, network-enabled
solutions for manufacturers, mostly original equipment manufacturers (OEMs). With the
acquisition of NetSilicon, Digi began offering embedded networking solutions used by design
engineers as building blocks in the creation of devices. |
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ITEM 1. BUSINESS (CONTINUED)
COMPANY OVERVIEW (CONTINUED)
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In April 1, 2005, Digi acquired FS Forth-Systeme GmbH/Sistemas Embebidos S.A. (FS
Forth), leading providers of embedded modules based on Digi processors and Net+OS software
as well as other microprocessors with supporting embedded software. The acquisition
enhanced Digi’s embedded portfolio and also added expertise in a wide range of popular
operating systems such as Linux, Microsoft Windows CE and VxWorks. |
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In May 2005, Digi acquired Rabbit Semiconductor® Inc. (formerly Z-World™, Inc. and
hereinafter referred to as Rabbit). Rabbit manufactured the Rabbit line of microprocessors
and microprocessor-based core modules and Z-World single board computers (now all sold
under the Rabbit brand). Rabbit’s products facilitate quick time-to-market for device
manufacturers who need to add network connectivity to endpoint devices such as sensors,
meters, vending machines, card readers, and scales. Similar to Digi, Rabbit bundles
hardware and software together, creating an engineer-friendly development environment. |
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In July 2006, Digi acquired MaxStream®, Inc. (MaxStream), a leader in the wireless
device networking market. MaxStream supplies device manufacturers and integrators with
reliable wireless modules and box products that are easy to use and allow customers to
wirelessly monitor and control electronic devices. Typical applications include automated
utility meter reading, oil and gas monitoring, remote control and monitoring of commercial
heating and air conditioning systems, vehicle information access for fleet management,
industrial controls, wireless sensors, and electronic signals. MaxStream wireless
technologies and products significantly expand Digi’s wireless offering — covering both
short and medium range using embedded modules and boxed/packaged solutions. Additionally,
MaxStream is a pioneer in the field of ZigBee™/802.15.4 wireless communications. |
Digi continues to leverage a common core technology base to develop and provide innovative
connectivity solutions to its customers. Core technology is being migrated across product lines to
provide additional functionality for customers, allowing them to get to market with network-enabled
devices faster and improve their return on capital spending investments. Digi has positioned
itself in the growing market of integrated hardware and software connectivity solutions to
network-enable the coming generation of intelligent devices in commercial applications.
APPLICATION MARKETS AND PRODUCTS
Digi believes it is a worldwide leader in commercial grade device connectivity, through
network-enabling devices in stores, factories, office buildings, banks, gas stations, oil rigs,
hospitals, and many other vertical environments. The Company’s products are compatible with many
computing platforms, including IBM, Hewlett Packard and Sun Microsystems, as well as popular
operating systems, such as Microsoft Windows NT/98/2000/XP/2003/CE, Linux, and UNIX.
Application markets where these products are prominently used include industrial automation,
retail/Point-of-Sale (POS), building automation/security, medical/healthcare, out-of-band
management, and office networking.
The Company’s products include multi-port serial cards, network connected products, USB connected
products, cellular gateways, wireless non-embedded products, and wired and wireless embedded
networking products, including microprocessors, embedded modules, core modules and single-board
computers, and networking software.
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ITEM 1. BUSINESS (CONTINUED)
APPLICATION MARKETS AND PRODUCTS (CONTINUED)
Application Markets
Industrial Automation — Digi offers solutions for common challenges found in virtually every
manufacturing facility today. These challenges include productivity improvements, inventory
management and quality control. Digi provides solutions for attaching essential devices, including
process and quality control equipment, pump controllers, bar-code readers/scanners, scales and
weighing stations, printers, machine vision systems, programmable logic controllers (PLCs) and many
other types of manufacturing equipment.
Retail/Point-of-Sale (POS) — Digi products solve the challenges associated with enabling POS
devices to effectively share information across the network. They can be used to easily connect
network devices like card swipe readers, bar-code scanners, scales, receipt printers and cash
register display poles.
Building Automation/Security — Digi products automate and control buildings’ heating, ventilation
and air conditioning (HVAC) and security systems, and solve the problem of standalone control
systems that are unable to talk to each other and share important data. Digi solutions can be used
to centrally manage equipment and improve the comfort, safety and productivity of building
occupants.
Medical/Healthcare — Digi network-enables medical equipment and devices to receive, monitor and
access patient information quickly, easily, and accurately, utilizing the hospital’s existing
Ethernet or wireless network to improve patient care and reduce operating costs.
Out-of-Band Management — Digi’s out-of-band management solutions enable immediate response when a
network fails or in other critical situations, providing connectivity to servers and network
equipment when the primary network is down and eliminating costly travel to remote sites.
Office Networking — Each business day billions of images are created, moved and then output in
some form over networks and the Internet in a process called image communication. This demanding
process has driven the need for a new generation of network attached devices to manage the ever
increasing load of network media. Digi provides core solutions for connecting, enabling and
managing this process for office, industrial and POS printers, as well as MFP’s, network cameras,
network LCD’s, information displays and network projectors.
Products
Non-Embedded Products
Multi-Port Serial Adapters — The Company is a market leader in this product category and offers one
of the most comprehensive multi-port serial adapter product families in the market. The Company’s
products support a wide range of operating systems, port-densities, bus types, expansion options,
and applications.
As Ethernet connections extend beyond current applications, the multi-port serial adapter products
are gradually transitioning to network-attached and/or USB-attached devices. While the Company
will continue to fully support this mature product line, it has strengthened its product offering
to meet customer needs and is working to seamlessly transition customers to newer technologies.
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ITEM 1. BUSINESS (CONTINUED)
APPLICATION MARKETS AND PRODUCTS (CONTINUED)
Network Connected Products — Digi offers flexible, powerful and easy solutions (wired and
wireless) to provide access to serial, USB and display devices over Ethernet networks.
External Serial Servers (formerly called device servers and terminal servers) quickly and easily
turn a previously isolated device with a serial port into a fully collaborative component of the
network. Digi believes that External Serial Servers will continue to be an important product
category as Ethernet-based serial connections continue to extend beyond their current applications
into new markets such as building automation, healthcare, process control and secure console port
management on servers, routers, switches, and other network equipment.
Digi’s intelligent Console Servers are used in data center management applications, where companies
need to access, monitor and manage network devices and servers across multiple sites, both over the
network or via their console ports, even when the network is unavailable. Digi’s Console Servers
are compatible with virtually any network equipment with a serial port including Sun, Cisco, IBM,
Hewlett Packard, UNIX, Linux and Microsoft Windows Server 2003 systems.
In 2005, Digi introduced the Zero-Client category, a next generation client architecture that
redirects USB, serial and display data over Internet Protocol (IP). The ConnectPort Display™
eliminates locally-attached, dedicated PCs from restaurant kitchens, retail checkouts and digital
signage, such as airport status displays and stadium scoreboards, allowing customers to connect
peripheral devices and video displays at each service point, with all processing happening across
the network for increased security and lower total cost of ownership.
USB Connected Products — The Company has one of the most comprehensive and sophisticated USB
product lines in the industry. Furthermore, the Company’s EPIC software provides seamless
transition between legacy software/systems and next generation USB attached devices, supporting
hardware and software flow control signaling. This software provides ease of use and integration
while protecting technology investments.
Cellular Gateways — Digi introduced the first intelligent high-speed cellular gateways in 2005 and
2006 to address the growing need for customers to connect remote site and devices. These products
utilize GSM (GPRS/EDGE/UMTS/HSDPA) or CDMA (1xRTT/EV-DO) cellular data networks as an alternative
to landlines for cost-effective primary or backup connectivity to previously hard-to-reach sites
and devices. The products have been certified by major wireless service providers in the U.S. and
abroad, including Cingular Wireless, Verizon Wireless and Sprint. All of Digi’s cellular gateway
products include Digi Connectware® Manager, a unique enterprise software platform that provides
secure management of devices across remote networks.
Embedded Networking Products
Microprocessors and Development Tools — Digi designs and manufactures integrated network centric
silicon-based solutions for manufacturers who want to build intelligence and network connectivity
into their products. The platforms integrate high performance microprocessors and advanced
networking software to provide fully integrated networking solutions.
Embedded Modules — In 2003, Digi extended its line of embedded networking products to include the
Digi Connect ME® and Digi Connect® EM embedded modules, which are ideal for network and
web-enabling a device. In 2004, the Company expanded its product offering to include wireless
embedded modules that are pin-compatible and interchangeable with the Digi Connect wired embedded
modules- the Digi Connect® Wi-ME and Digi Connect® Wi-EM. These products enable customers
to easily accommodate both wired and
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ITEM 1. BUSINESS (CONTINUED)
APPLICATION MARKETS AND PRODUCTS (CONTINUED)
wireless functionality in one product design and are typically used as co-processors that manage a
device’s communications system.
Core Modules and Single Board Computers — In 2005, Digi extended its embedded product families
into core modules by introducing the Digi ConnectCore™ line of products. Digi ConnectCore is the
industry’s first network-optimized series of 32-bit core modules targeted as the main processor for
products including access control systems, POS systems, RFID readers, medical devices and
instrumentation and networked displays.
Core modules provide customers with a networked platform for uses as the main processor in an
embedded system and the flexibility to allow them to add features and functionality to get to
market very quickly with a network-enabled device. In addition, the Rabbit acquisition also added
a family of single board computers (SBCs). While SBCs offer the same benefits as core modules,
they also obviate the need for additional interface circuitry because they include all of the key
device interface components on one circuit board.
MaxStream Wireless Products — MaxStream provides wireless modem modules, standalone radio modems
(now part of Digi’s network connected products), RF design services, and supporting software. The
products are easy-to-use and allow customers to wirelessly monitor and control electronic devices.
Typical applications include automated utility meter reading, oil and gas monitoring, remote
control and monitoring of commercial heating and air conditioning systems, vehicle information
access for fleet management, industrial controls, wireless sensors, and electronic signals.
DISTRIBUTION AND PARTNERSHIPS
Digi sells its products through a global network of distributors, systems integrators, value added
resellers (VARs) and original equipment manufacturers (OEMs).
The Company’s larger U.S. distributors include Tech Data Corporation, Arrow Distributing, Ingram
Micro, Synnex, Future Electronics and NuHorizons. Digi also maintains relationships with many
other distributors in the U.S., Canada, Europe, Asia Pacific, and Latin America. Additionally,
Digi maintains strong relationships with catalog distributors CDW, Insight, Digi-Key and Mouser
Electronics.
Digi maintains strategic alliances with other industry leaders to develop and market technology
solutions. These include most major communications hardware and software vendors, operating system
suppliers, computer hardware manufacturers, and cellular carriers. Key partners include:
Microsoft, Citrix Systems, Hewlett Packard, IBM, Motorola, Dell, Santa Cruz Operation, Sun
Microsystems, Toshiba, Atmel, Green Hills Software, Cingular, Sprint, Verizon, and several other
cellular carriers. Furthermore, Digi maintains a worldwide network of authorized developers that
extends the Company’s reach into certain technology applications or geographical regions.
The Company’s customer base includes many of the world’s largest companies. The Company has
strategic sales relationships with leading vendors, allowing them to ship the Company’s board and
network products as component parts of their overall networking solutions. These vendors include
IBM, NCR, Sun Microsystems, Fujitsu Transaction Solutions, Abbott Labs and Hewlett Packard, among
others. Many of the world’s leading telecommunications companies and Internet service providers
also rely on the Company’s products, including Lucent, AT&T, Cingular, Sprint, Verizon and Siemens.
The Company has also established relationships with customers such as Hirschmann, Sauter, Pro
Control, Bizerba, AFT Atlas, Ikusi and Metso Automation and many authorized resellers and OEMs.
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ITEM 1. BUSINESS (CONTINUED)
DISTRIBUTION AND PARTNERSHIPS (CONTINUED)
One distributor, Tech Data, comprised 5.8%, 12.9% and 15.6% of the Company’s net sales for the
years ended September 30, 2006, 2005 and 2004, respectively.
COMPETITIVE CONDITIONS
The Company competes in the communications technology industry, which 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 existing and planned product features, company reputation, brand
recognition, technical support, relationships with partners, quality and reliability, product
development capabilities, price and availability.
The Company is a global market leader in multi-port serial adapters. As this market continues to
mature, the Company is focusing on key applications, customers, and markets to manage applications
as they transition to other technologies such as Ethernet, USB, and wireless connectivity products.
The Company also is a leader in connecting commercial devices to LANs with its terminal server and
device server product lines, to PCs or servers via USB technology with its USB product line, and to
WANs with its cellular product line. The complementary nature of its embedded product lines will
provide an expanded range of products and technology. The recent acquisition of MaxStream makes it
a market leader in North America for proprietary wireless and Zigbee/Mesh networking wireless
products.
OPERATIONS
The Company’s manufacturing operations procure all parts and perform certain services involved in
production. Most of the Company’s product manufacturing is subcontracted to outside firms that
specialize in such services. Digi relies on third party foundries for its semiconductor devices.
This approach is beneficial because the Company can reduce its fixed costs, maintain production
flexibility and maximize its profits.
The Company’s products are manufactured to their designs with standard and semi-custom components.
Most of these components are available from multiple vendors. The Company has several
single-sourced supplier relationships, either because alternative sources are not available or
because the relationship is advantageous to the Company. If these suppliers are unable to provide
a timely and reliable supply of components, the Company could experience manufacturing delays that
would adversely affect its consolidated results of operations.
During fiscal years 2006, 2005 and 2004, the Company’s research and development expenditures were
$20.9 million, $16.5 million and $17.2 million, respectively. Due to rapidly changing technology
in the communications technology industry, the Company believes that its success depends primarily
upon the engineering, marketing, manufacturing and support skills of its personnel. Digi’s
proprietary rights and technology are protected by a combination of copyrights, trademarks, trade
secrets and patents. The Company has established common law and registered trademark rights on a
family of marks for a number of its products.
As of September 30, 2006, the Company had backlog orders in the amount of $12.4 million. All of
these orders are expected to be shipped in fiscal 2007. Backlog as of September 30, 2005 was $9.0
million and $7.0 million as of September 30, 2004. Backlog as of any particular date is not
necessarily indicative of the Company’s future sales trends.
The Company had 549 employees on September 30, 2006 compared to 481 on September 30, 2005. The
increase in the number of employees in fiscal 2006 is primarily due to the addition of 47 employees
as a result of the acquisition of MaxStream.
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ITEM 1. BUSINESS (CONTINUED)
DIGI INTERNATIONAL WEBSITE
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available through the Company’s website (www.digi.com) under the “About us —
Investor Relations” caption or by writing to Digi International Inc. This information is available
free of charge as soon as reasonably practicable after the Company electronically files such
material with the Securities and Exchange Commission. These reports can also be accessed via the
SEC website, www.sec.gov, or via the SEC’s Public Reference Room located at 150 F Street,
N.E., Room 1580, Washington, D.C. 20549. Information concerning the operation of the SEC’s Public
Reference Room can be obtained by calling 1-800-SEC-0330.
The Company is not including the information on its website as part of, or incorporating it by
reference into, its Form 10-K.
ITEM 1A. RISK FACTORS
Multiple risk factors exist which could have a material effect on our operations, results of
operations, profitability, financial position, liquidity, capital resources and common stock.
Risks Relating to Our Business
Our dependence on new product development and the rapid technological change that characterizes our
industry make us susceptible to loss of market share resulting from competitors’ product
introductions and similar risks.
The communications technology industry is characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions, short product life cycles and rapidly
changing customer requirements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and unmarketable. Our
future success will depend on our ability to enhance our existing products, to introduce new
products to meet changing customer requirements and emerging technologies, and to demonstrate the
performance advantages and cost-effectiveness of our products over competing products. Failure by
us to modify our products to support new alternative technologies or failure to achieve widespread
customer acceptance of such modified products could cause us to lose market share and cause our
revenues to decline.
We may experience delays in developing and marketing product enhancements or new products that
respond to technological change, evolving industry standards and changing customer requirements.
There can be no assurance that we will not experience difficulties that could delay or prevent the
successful development, introduction, and marketing of these products or product enhancements, or
that our new products and product enhancements will adequately meet the requirements of the
marketplace and achieve any significant or sustainable degree of market acceptance in existing or
additional markets. In addition, the future introductions or announcements of products by us or
one of our competitors embodying new technologies or changes in industry standards or customer
requirements could render our then-existing products obsolete or unmarketable. There can be no
assurance that the introduction or announcement of new product offerings by us or one or more of
our competitors will not cause customers to defer the purchase of our existing products, which
could cause our revenues to decline.
11
ITEM 1A. RISK FACTORS (CONTINUED)
We intend to continue to devote significant resources to our research and development, which, if
not successful, could cause a decline in our revenues and harm our business.
We intend to continue to devote significant resources to research and development in the coming
years to enhance and develop additional products. For the fiscal years ended 2006, 2005 and 2004,
our research and development expenses comprised 14.4%, 13.2% and 15.4%, respectively, of our net
sales. If we are unable to develop new products as a result of our research and development
efforts, or if the products we develop are not successful, our business could be harmed. Even if
we develop new products that are accepted by our target markets, the net revenues from these
products may not be sufficient to justify our investment in research and development.
A substantial portion of our recent development efforts have been directed toward the development
of new products targeted to manufacturers of intelligent, network-enabled devices and other
embedded systems in various markets, including markets in which networking solutions for embedded
systems have not historically been sold, such as markets for industrial automation equipment,
security equipment and medical equipment. Our financial performance is dependent upon the
development of the intelligent device markets that we are targeting, and our ability to
successfully compete and sell our products to manufacturers of these intelligent devices.
Certain of our products are sold into mature markets, which could limit our ability to continue to
generate revenue from these products.
Certain of our products provide asynchronous and synchronous data transmissions via add-on cards.
The market for add-on asynchronous and synchronous data communications cards is mature.
Furthermore, certain applications of our embedded network interface cards are also considered
mature. As the overall market for these products decreases due to the adoption of new
technologies, we expect that our revenues from these products will continue to decline. As a
result, our future prospects depend in large part on our ability to acquire or develop and
successfully market additional products that address growth markets.
Our failure to effectively manage product transitions could have a material adverse effect on our
revenues and profitability.
From time to time, we or our competitors may announce new products, capabilities, or technologies
that may replace or shorten the life cycles of our existing products. Announcements of currently
planned or other new products may cause customers to defer or stop purchasing our products until
new products become available. Furthermore, the introduction of new or enhanced products requires
us to manage the transition from older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. Our failure to effectively manage transitions
from older products could have a material adverse effect on our revenues and profitability.
Our failure to compete successfully in our highly competitive market could result in reduced prices
and loss of market share.
The market in which we operate 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. We compete for customers on the basis of existing
and planned product features, company reputation, brand recognition, technical support,
relationships with partners, quality and reliability, product development capabilities, price, and
availability. Certain of our competitors and potential competitors may have greater financial,
technological, manufacturing, marketing, and personnel resources than us. Present and future
competitors may be able to identify new markets and develop products more quickly, which are
superior to those developed by us. They may also adapt new technologies faster, devote greater
resources to
12
ITEM 1A. RISK FACTORS (CONTINUED)
research and development, promote products more aggressively, and price products more competitively
than us. There are no assurances that competition will not intensify or that we will be able to
compete effectively in the markets in which we compete.
Our inability to obtain the appropriate telecommunications carrier certifications or approvals from
other governmental regulatory bodies could impede our ability to grow revenues in our wireless
products.
The sale of our wireless products in certain geographical markets is sometimes dependent on the
ability to gain telecommunications carrier certifications and/or approvals by certain governmental
bodies. The inability of us to obtain these approvals, or delays in receiving the approvals, could
impact our ability to enter our targeted markets or to compete effectively or at all in these
markets and could have an adverse impact on our revenues.
The cyclicality of the semiconductor industry may result in substantial period-to-period
fluctuations in operating results.
Our semiconductor products provide networking capabilities for intelligent, network-enabled devices
and other embedded systems. The semiconductor industry is highly cyclical and subject to rapid
technological change and has been subject to significant economic downturns at various times,
characterized by diminished product demand, accelerated erosion of average selling prices and
production overcapacity. The semiconductor industry also periodically experiences increased demand
and production capacity constraints. As a result, we may experience substantial period-to-period
fluctuations in operating results due to general semiconductor industry conditions.
Loss of one or more of our key customers could have an adverse effect on our revenues.
Our sales are primarily made on the basis of purchase orders rather than under long-term
agreements, and therefore, any customer could cease purchasing our products at any time without
penalty. The decision of any key customer, including our distributors, to cease using our products
or a material decline in the number of units purchased by a significant customer could have a
material adverse effect on our revenues.
The long and variable sales cycle for certain of our products makes it more difficult for us to
predict our operating results and manage our business.
The sale of our products typically involves a significant technical evaluation and commitment of
capital and other resources by potential customers and end users, as well as delays frequently
associated with end users’ internal procedures to deploy new technologies within their products and
to test and accept new technologies. For these and other reasons, the sales cycle associated with
certain of our products is typically lengthy and is subject to a number of significant risks,
including end users’ internal purchasing reviews, that are beyond our control. Because of the
lengthy sales cycle and the large size of certain customer orders, if orders forecasted for a
specific customer are not realized, our operating results could be materially adversely affected.
We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in
these relationships may cause damage to our customer relationships.
We procure all parts and certain services involved in the production of our products and
subcontract most of our product manufacturing to outside firms that specialize in such services.
Although most of the components of our products are available from multiple vendors, we have
several single-source supplier relationships, either because alternative sources are not available
or because the relationship is advantageous to us. There can be no assurance that our suppliers
will be able to meet our future requirements for products and components in a timely fashion. In
addition, the availability of many of these components to us is dependent in part on our ability to
provide our suppliers with accurate forecasts of our future requirements. Delays or lost sales
could be
13
ITEM 1A. RISK FACTORS (CONTINUED)
caused by other factors beyond our control, including late deliveries by vendors of components. If
we are required to identify alternative suppliers for any of our required components, qualification
and pre-production periods could be lengthy and may cause an increase in component costs and delays
in providing products to customers. Any extended interruption in the supply of any of the key
components currently obtained from limited sources could disrupt our operations and have a material
adverse effect on our customer relationships and profitability.
Our use of suppliers in Southeast Asia involves risks that could negatively impact us.
We use suppliers in Southeast Asia. Product delivery times may be extended due to the distances
involved, requiring more lead time in ordering. In addition, ocean freight delays may occur as a
result of labor problems, weather delays or expediting and customs issues. Any extended delay in
receipt of the component parts could eliminate anticipated cost savings and have a material adverse
effect on our customer relationships and profitability.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property
rights.
Our ability to compete depends in part on our proprietary rights and technology. Our proprietary
rights and technology are protected by a combination of copyrights, trademarks, trade secrets and
patents.
We enter into confidentiality agreements with all employees, and sometimes with our customers and
potential customers, and limit access to the distribution of our proprietary information. There
can be no assurance that the steps taken by us in this regard will be adequate to prevent the
misappropriation of our technology. Our pending patent applications may be denied and any patents,
once issued, may be circumvented by our competitors. Furthermore, there can be no assurance that
others will not develop technologies that are superior to our technologies. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or
to obtain and use information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in the United States
or abroad will be adequate or that competing companies will not independently develop similar
technology. Our failure to adequately protect our proprietary rights could have a material adverse
effect on our competitive position and result in loss of revenue.
From time to time, we are subject to claims and litigation regarding intellectual property rights
or other claims, which could seriously harm us and require us to incur significant costs.
The communications technology industry is characterized by frequent litigation regarding patent and
other intellectual property rights. From time to time, we receive notification of a third-party
claim that our products infringe other intellectual property rights. Any litigation to determine
the validity of third-party infringement claims, whether or not determined in our favor or settled
by us, may be costly and divert the efforts and attention of our management and technical personnel
from productive tasks, which could have a material adverse effect on our ability to operate our
business and service the needs of our customers. There can be no assurance that any infringement
claims by third parties, if proven to have merit, will not materially adversely affect our business
or financial condition. In the event of an adverse ruling in any such matter, we may be required
to pay substantial damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certain processes or be required to obtain a license under the intellectual property
rights of the third party claiming infringement. There can be no assurance that a license would be
available on reasonable terms or at all. Any limitations on our ability to market our products, or
delays and costs associated with redesigning our products or payments of license fees to third
parties, or any failure by us to develop or license a substitute technology on commercially
reasonable terms could have a material adverse effect on our business and financial condition.
14
ITEM 1A. RISK FACTORS (CONTINUED)
We face risks associated with our international operations and expansion that could impair our
ability to grow our revenues abroad.
We believe that our future growth is dependent in part upon its ability to increase sales in
international markets. These sales are subject to a variety of risks, including fluctuations in
currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes
in regulatory requirements, longer accounts receivable payment cycles and potentially adverse tax
consequences, and export license requirements. In addition, we are subject to the risks inherent
in conducting business internationally, including political and economic instability and unexpected
changes in diplomatic and trade relationships. There can be no assurance that one or more of these
factors will not have a material adverse effect on our business strategy and financial condition.
The loss of key personnel could prevent us from executing our business strategy.
Our business and prospects depend to a significant degree upon the continuing contributions of our
executive officers and our key technical personnel. Competition for such personnel is intense, and
there can be no assurance that we will be successful in attracting and retaining qualified
personnel. Failure to attract and retain key personnel could result in our failure to execute our
business strategy.
Unanticipated changes in our tax rates could affect our future results.
Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes
in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of
our deferred tax assets and liabilities, or by changes in tax laws or our interpretation. In
addition, we may be subject to the examination of our income tax returns by the Internal Revenue
Service and other U.S. and international tax authorities. We regularly assess the potential
outcomes resulting from these examinations to determine the adequacy of our provision for income
taxes. There can be no assurance that the outcomes from these examinations will not have an effect
on our consolidated operating results and financial condition.
Any acquisitions we have made or will make could disrupt our business and seriously harm our
financial condition.
We will continue to consider acquisitions of complementary businesses, products or technologies.
In the event of any future purchases, we could issue stock that would dilute our current
stockholders’ percentage ownership, incur debt, assume liabilities, or incur large and immediate
write-offs.
Our operation of any acquired business may also involve numerous risks, including:
| • |
|
problems combining the purchased operations, technologies, or products; |
| |
| • |
|
unanticipated costs; |
| |
| • |
|
diversion of management’s attention from our core business; |
| |
| • |
|
difficulties integrating businesses in different countries and cultures; |
| |
| • |
|
adverse effects on existing business relationships with suppliers and customers; |
| |
| • |
|
risks associated with entering markets in which we have no or limited prior experience; and |
| |
| • |
|
potential loss of key employees, particularly those of the purchased organization. |
We cannot assure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we have acquired or that we might acquire in the future and any
failure to do so could disrupt our business and have a material adverse effect on our financial
condition and results of operations. Moreover, from time to time, we may enter into negotiations
for a proposed acquisition, but be unable or unwilling to consummate the acquisition under
consideration. This could cause significant diversion of management’s attention and out-of-pocket
expenses for us. We could also be exposed to litigation as a result of an
15
ITEM 1A. RISK FACTORS (CONTINUED)
unconsummated acquisition, including claims that we failed to negotiate in good faith or
misappropriated confidential information.
Our failure to effectively comply with the requirements of applicable environmental legislation and
regulation could have a material adverse effect on our revenues and profitability.
Production and marketing of products in certain states and countries may subject us to
environmental and other regulations. In addition, certain states and countries may pass
regulations requiring our products to meet certain requirements to use environmentally friendly
components. Such laws and regulations have recently been passed in jurisdictions in which we
operate. The European Union has issued two directives relating to chemical substances in
electronic products. The Waste Electrical and Electronic Equipment Directive (WEEE) makes
producers of certain electrical and electronic equipment financially responsible for collection,
reuse, recycling, treatment and disposal of equipment placed in the European Union market after
August 13, 2005. The Restrictions of Hazardous Substances Directive (RoHS) bans the use of certain
hazardous materials in electric and electrical equipment which are put on the market in the
European Union after July 1, 2006. In the future, China and other countries including the United
States are expected to adopt environmental compliance programs. If we fail to comply with these
regulations, we may not be able to sell our products in jurisdictions where these regulations
apply, which could have a material adverse effect on our revenues and profitability.
Risks Related to Our Common Stock
The price of our common stock has been volatile and could continue to fluctuate in the future.
The market price of our common stock, like that of many other high-technology companies, has
fluctuated significantly and is likely to continue to fluctuate in the future. During fiscal year
2006, the closing price of our common stock on the NASDAQ Global Select Market ranged from $9.84 to
$14.33 per share. Our closing sale price on November 24, 2006 was $13.85 per share. Announcements
by us or others regarding the receipt of customer orders, quarterly variations in operating
results, acquisitions or divestitures, additional equity or debt financings, results of customer
field trials, scientific discoveries, technological innovations, litigation, product developments,
patent or proprietary rights, government regulation and general market conditions may have a
significant impact on the market price of our common stock.
Certain provisions of the Delaware General Corporation Law and our charter documents have an
anti-takeover effect.
There exist certain mechanisms under the Delaware General Corporation Law and our charter documents
that may delay, defer or prevent a change of control. For instance, under Delaware law, we are
prohibited from engaging in certain business combinations with interested stockholders for a period
of three years after the date of the transaction in which the person became an interested
stockholder unless certain requirements are met, and majority stockholder approval is required for
certain business combination transactions with interested parties. Our Certificate of
Incorporation contains a “fair price” provision requiring majority stockholder approval for certain
business combination transactions with interested parties, and this provision may not be changed
without the vote of at least 80% of the outstanding shares of our voting stock. Other mechanisms
in our charter documents may also delay, defer or prevent a change of control. For instance, our
Certificate of Incorporation provides that our Board of Directors has authority to issue series of
our preferred stock with such voting rights and other powers as the Board of Directors may
determine. Furthermore, we have a classified board of directors, which means that our directors
are divided into three classes that are elected to three-year terms on a staggered basis. Since
the three-year terms of each class overlap the terms of the other classes of directors, the entire
board of directors cannot be replaced in any one year. In addition, under Delaware law, directors
serving on a classified board may not be removed by shareholders except for cause. Pursuant to the
terms of a shareholder rights plan adopted in 1998, each outstanding share of common stock has one
attached right. The
16
ITEM 1A. RISK FACTORS (CONTINUED)
rights will cause substantial dilution of the ownership of a person or group that attempts to
acquire Digi on terms not approved by the Board of Directors and may have the effect of deterring
hostile takeover attempts. The effect of these anti-takeover provisions may be to deter business
combination transactions not approved by our Board of Directors, including acquisitions that may
offer a premium over the market price to some or all stockholders.
We have not paid cash dividends on our common stock and do not expect to do so.
We have never declared or paid a cash dividend on our common stock. We do not anticipate paying
any cash dividends on our common stock in the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
The following table contains a listing of the Company’s current property locations:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Ownership or |
| |
|
|
|
Approximate |
|
Lease |
| Location of |
|
|
|
Square |
|
Expiration |
| Property |
|
Use of Facility |
|
Footage |
|
Date |
Minnetonka, MN
(Corporate headquarters)
|
|
Research & development, sales, sales support,
marketing, and administration
|
|
|
130,000 |
|
|
Owned |
Eden Prairie, MN
|
|
Manufacturing and warehousing
|
|
|
58,000 |
|
|
Owned |
Waltham, MA
|
|
Research & development, sales and sales support
|
|
|
21,759 |
|
|
September 2007 |
Austin, TX
|
|
Sales, sales support, marketing,
and administration
|
|
|
6,563 |
|
|
February 2009 |
Davis, CA
|
|
Sales, sales support, manufacturing and warehousing
|
|
|
24,000 |
|
|
December 2012 |
Davis, CA
|
|
Marketing, research & development, and administration
|
|
|
11,200 |
|
|
September 2008 |
Lindon, UT
|
|
Sales, marketing, research & development,
and administration
|
|
|
10,686 |
|
|
December 2007 |
Hong Kong, China
|
|
Sales, marketing, and administration
|
|
|
3,413 |
|
|
August 2007 |
Beijing, China
|
|
Sales, marketing, and administration
|
|
|
2,372 |
|
|
December 2006 |
Shanghai, China
|
|
Sales, marketing, and administration
|
|
|
1,251 |
|
|
June 2008 |
Dortmund, Germany
|
|
Sales, sales support, marketing, and
administration
|
|
|
65,348 |
|
|
Owned |
Breisach, Germany
|
|
Sales, marketing, research & development, manufacturing,
warehousing and administration
|
|
|
8,748 |
|
|
December 2008 |
Logrono, Spain
|
|
Sales, research & development, and administration
|
|
|
1,291 |
|
|
September 2007 |
In addition to the above locations, the Company performs research and development activities
in various other locations in the United States and sales activities in various other locations in
Europe which are not deemed to be principal locations. Management believes that the Company’s
facilities are adequate for its needs. The Company is attempting to sell the Dortmund, Germany
facility.
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS |
On April 19, 2002, a consolidated amended class action complaint was filed in the United
States District Court for the Southern District of New York asserting claims relating to the
initial public offering (IPO) of NetSilicon and approximately 300 other public companies. The
complaint names as defendants the Company, NetSilicon, certain of its officers and certain
underwriters involved in NetSilicon’s IPO, among numerous others, and asserts, among other
things, that NetSilicon’s IPO prospectus and registration statement violated federal
securities laws because they contained material misrepresentations and/or omissions regarding
the conduct of NetSilicon’s IPO underwriters in allocating shares in NetSilicon’s IPO to the underwriters’ customers. The Company believes that the claims against the NetSilicon
defendants are without merit and has defended the litigation vigorously. Pursuant to a
stipulation between the parties, the two named officers were dismissed from the lawsuit,
without prejudice, on October 9, 2002.
18
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS (CONTINUED) |
In June 2003, the Company elected to participate in a proposed settlement agreement with the
plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would
result in a dismissal, with prejudice, of all claims in the litigation against the Company and
against any of the other issuer defendants who elect to participate in the proposed settlement,
together with the current or former officers and directors of participating issuers who were named
as individual defendants.
Consummation of the proposed settlement remains conditioned upon obtaining approval by the Court.
On September 1, 2005, the Court preliminarily approved the proposed settlement and directed that
notice of the terms of the proposed settlement be provided to class members. Thereafter, the Court
held a fairness hearing on April 24, 2006, at which objections to the proposed settlement were
heard. After the fairness hearing, the Court took under advisement whether to grant final approval
to the proposed settlement.
If the proposed settlement is not consummated, the Company intends to continue to defend the
litigation vigorously. The litigation process is inherently uncertain and unpredictable,
however, there can be no guarantee as to the ultimate outcome of this pending lawsuit. The
Company maintains liability insurance for such matters and expects that the liability
insurance will be adequate to cover any potential unfavorable outcome, less the applicable
deductible amount of $250,000 per claim. As of September 30, 2006, the Company has accrued a
liability for the deductible amount of $250,000 which the Company believes reflects the amount
of loss that is probable. In the event the Company has losses that exceed the limits of the
liability insurance, such losses could have a material effect on the business, or consolidated
results of operations or financial condition of the Company.
In the normal course of business, the Company is subject to various claims and litigation,
including patent infringement and intellectual property claims. Management of the Company expects
that these various claims and litigation will not have a material adverse effect on the
consolidated results of operations or financial condition of the Company.
|
|
|
| ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to the vote of security holders during the fourth quarter of the
fiscal year ended September 30, 2006.
19
PART II
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |
Stock Listing
The Company’s Common Stock trades under the symbol “DGII.” Since July 3, 2006 the Company’s Common
Stock has traded on the NASDAQ Global Select Market tier of the NASDAQ Stock Market and prior to
that time was traded on the NASDAQ National Market tier. On November 24, 2006, the number of
holders of the Company’s Common Stock was approximately 8,181, consisting of 240 record holders and
approximately 7,941 stockholders whose stock is held by a bank, broker or other nominee.
High and low sale prices for each quarter during the years ended September 30, 2006 and 2005, as
reported on the NASDAQ Stock Market, were as follows:
Stock Prices
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
13.41 |
|
|
$ |
11.81 |
|
|
$ |
13.94 |
|
|
$ |
14.35 |
|
Low |
|
$ |
9.63 |
|
|
$ |
10.18 |
|
|
$ |
10.91 |
|
|
$ |
10.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
17.53 |
|
|
$ |
17.25 |
|
|
$ |
13.89 |
|
|
$ |
14.79 |
|
Low |
|
$ |
11.59 |
|
|
$ |
13.24 |
|
|
$ |
10.11 |
|
|
$ |
9.75 |
|
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The Board of Directors presently
intends to retain all earnings for use in the Company’s business and does not anticipate paying
cash dividends in the foreseeable future.
The Company does not have a Dividend Reinvestment Plan or a Direct Stock Purchase Plan.
Issuer Repurchases of Equity Securities
The Company did not repurchase any of its equity securities in the fourth quarter of the fiscal
year ended September 30, 2006.
20
|
|
|
| ITEM 6. |
|
SELECTED FINANCIAL DATA |
(In thousands except per common share amounts and number of employees)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the fiscal years ended September 30 |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Net sales |
|
$ |
144,663 |
|
|
$ |
125,198 |
|
|
$ |
111,226 |
|
|
$ |
102,926 |
|
|
$ |
101,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (1) |
|
$ |
77,505 |
|
|
$ |
71,491 |
|
|
$ |
63,469 |
|
|
$ |
55,766 |
|
|
$ |
50,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (1) |
|
|
28,591 |
|
|
|
26,339 |
|
|
|
25,556 |
|
|
|
24,734 |
|
|
|
28,808 |
|
Research and development (1) |
|
|
20,861 |
|
|
|
16,531 |
|
|
|
17,159 |
|
|
|
15,968 |
|
|
|
19,530 |
|
General and administrative (1) |
|
|
12,830 |
|
|
|
11,364 |
|
|
|
8,973 |
|
|
|
9,944 |
|
|
|
14,664 |
|
Restructuring |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(600 |
) |
|
|
2,696 |
|
Acquired in-process research and development |
|
|
2,000 |
|
|
|
300 |
|
|
|
— |
|
|
|
— |
|
|
|
3,100 |
|
Loss on sale of MiLAN assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,617 |
|
Gain from forgiveness of grant payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(553 |
) |
|
|
(1,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
13,223 |
|
|
|
16,957 |
|
|
|
11,781 |
|
|
|
6,273 |
|
|
|
(20,715 |
) |
Total other income, net |
|
|
2,044 |
|
|
|
1,026 |
|
|
|
369 |
|
|
|
296 |
|
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative
effect of accounting change |
|
|
15,267 |
|
|
|
17,983 |
|
|
|
12,150 |
|
|
|
6,569 |
|
|
|
(19,460 |
) |
Income tax provision (benefit) (2) |
|
|
4,154 |
|
|
|
318 |
|
|
|
3,487 |
|
|
|
(23 |
) |
|
|
(6,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of accounting change |
|
|
11,113 |
|
|
|
17,665 |
|
|
|
8,663 |
|
|
|
6,592 |
|
|
|
(12,785 |
) |
Cumulative effect of accounting change (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43,866 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,113 |
|
|
$ |
17,665 |
|
|
$ |
8,663 |
|
|
$ |
(37,274 |
) |
|
$ |
(12,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of
accounting change |
|
$ |
0.48 |
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
$ |
0.31 |
|
|
$ |
(0.65 |
) |
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.08 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
$ |
0.48 |
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
$ |
(1.77 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of
accounting change |
|
$ |
0.46 |
|
|
$ |
0.76 |
|
|
$ |
0.39 |
|
|
$ |
0.31 |
|
|
$ |
(0.65 |
) |
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.07 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
$ |
0.46 |
|
|
$ |
0.76 |
|
|
$ |
0.39 |
|
|
$ |
(1.76 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data as of September 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (total current assets less
total current liabilities) |
|
$ |
83,341 |
|
|
$ |
69,995 |
|
|
$ |
82,090 |
|
|
$ |
57,793 |
|
|
$ |
62,662 |
|
Total assets |
|
$ |
225,321 |
|
|
$ |
177,631 |
|
|
$ |
150,465 |
|
|
$ |
132,540 |
|
|
$ |
180,828 |
|
Long-term debt and capital lease obligations |
|
$ |
725 |
|
|
$ |
1,181 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,989 |
|
Stockholders’ equity |
|
$ |
193,830 |
|
|
$ |
153,537 |
|
|
$ |
127,079 |
|
|
$ |
105,863 |
|
|
$ |
151,180 |
|
Book value per common share |
|
$ |
7.74 |
|
|
$ |
6.78 |
|
|
$ |
5.83 |
|
|
$ |
5.23 |
|
|
$ |
6.80 |
|
Number of employees as of September 30 |
|
|
549 |
|
|
|
481 |
|
|
|
341 |
|
|
|
358 |
|
|
|
407 |
|
|
|
|
| (1) |
|
Effective October 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123R), using the modified prospective method of application. Total compensation cost for stock-based payment
arrangements totaled $2.3 million ($1.5 million after tax) during fiscal year 2006. Prior to the adoption of this Statement, no
compensation cost for stock-based payment arrangements was recognized in earnings. Refer to Note 9 to the Consolidated
Financial Statements for further discussion. |
| |
| (2) |
|
During 2006 and 2005, the Company reversed income tax reserves of $1.6 million and $5.7
million, respectively, which were no longer required primarily as a result of the settlement of tax
audits with the French government in 2006 and the Internal Revenue Service in 2005. In 2003, the
Company reversed a valuation allowance, resulting in an income tax benefit of $1.4 million, based
on anticipated future taxable income generated by the Company’s German operations. |
| |
| (3) |
|
The Company adopted the provisions of FAS 142 as of October 1, 2002 at which time it was
determined that there was a total goodwill impairment of $43.9 million. The charge was attributable primarily to an impairment
of the carrying value of goodwill related to the acquisition of NetSilicon of $38.4 million and goodwill related to the CDC and
INXTECH acquisitions of $3.5 million and $2.0 million, respectively. |
21
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
OVERVIEW
During fiscal 2005 and 2004, the Company operated in two reportable segments. Effective
October 1, 2005, the Company changed its organizational structure to functional reporting to
eliminate redundancies in management and infrastructure. In addition, certain intellectual
property that was previously utilized primarily in products that comprised the Device
Networking Solutions segment has now been integrated throughout the Company’s products in
order to provide more functionality and allow for ease of migration to next generation
technologies for the Company’s customers. As a result of these changes in organizational
structure and use of the Company’s product technology, the Chief Executive Officer, as the
chief operating decision maker, now reviews and assesses financial information, operating
results, and performance of the Company’s business in the aggregate. Accordingly, effective
October 1, 2005, the Company has a single operating and reporting segment and all periods
presented have been reclassified to conform to the single reportable segment (see Note 4 to
the Company’s Consolidated Financial Statements).
Digi operates in the communications technology industry, which 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. Digi provides
device connectivity solutions by providing products that connect devices to networks in various
commercial environments. Digi believes that its products and technologies are cost-effective and
easy to use, and Digi places a high priority on development of innovative products that provide
differentiated features and functions and allow for ease of integration with customers’
applications. Core technology is being migrated across product lines to provide additional
functionality for customers and allow them to get to market with networked-enabled devices faster.
Digi’s revenues consist of products that are in non-embedded and embedded product groupings. The
non-embedded products include multi-port serial adapters, network connected products, USB connected
products, and cellular gateway products. Embedded products include microprocessors and development
tools, embedded modules, core modules and single-board computers and MaxStream wireless products.
Digi’s non-embedded multi-port serial adapter products and its embedded network interface cards are
in the mature phase of their product life cycles. Digi’s strategy is to focus on key applications,
customers and markets to efficiently manage the migration from products that are in the mature
phase of their product life cycles to other newer technologies.
During fiscal 2006, the Company released many new products, including cellular products,
ConnectPort Display, and Rabbit-branded chips and core modules. Digi also acquired MaxStream
in July 2006, providing an expanded wireless technology and product portfolio.
We anticipate that the Company’s growth in the future will result from both products that are
developed internally as well as from products that are acquired, and that the growth rate from
products developed internally will increase as the multi-port serial adapters and the network
interface cards near the end of their product life cycles. The Company intends to continue to
extend its current product lines with next generation commercial grade device networking
products and technologies targeted for selected vertical markets, including but not limited to
point of sale, industrial automation, office automation, medical and building controls. The
Company believes that there is a market trend of device connectivity in these vertical
commercial applications that will require communications intelligence or connectivity to the
network or the Internet. These devices will be used for basic data communications,
management, monitoring and control, and maintenance. The Company believes that it is well
positioned to leverage its current products and technologies to take advantage of this market
trend.
22
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information from the Company’s Consolidated Statements of
Operations, expressed as a percentage of net sales and as a percentage of change from year-to-year
for the years indicated.
($ in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (decrease) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
| |
|
Year ended September 30, |
|
|
Compared |
|
|
Compared |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
to 2005 |
|
|
to 2004 |
|
Net sales |
|
$ |
144,663 |
|
|
|
100.0 |
% |
|
$ |
125,198 |
|
|
|
100.0 |
% |
|
$ |
111,226 |
|
|
|
100.0 |
% |
|
|
15.5 |
% |
|
|
12.6 |
% |
Cost of sales (exclusive of amortization of purchased
and core technology shown separately below) (1) |
|
|
62,322 |
|
|
|
43.1 |
|
|
|
49,516 |
|
|
|
39.6 |
|
|
|
43,443 |
|
|
|
39.1 |
|
|
|
25.9 |
|
|
|
14.0 |
|
Amortization of purchased and core technology |
|
|
4,836 |
|
|
|
3.3 |
|
|
|
4,191 |
|
|
|
3.3 |
|
|
|
4,314 |
|
|
|
3.8 |
|
|
|
15.4 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
77,505 |
|
|
|
53.6 |
|
|
|
71,491 |
|
|
|
57.1 |
|
|
|
63,469 |
|
|
|
57.1 |
|
|
|
8.4 |
|
|
|
12.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing (1) |
|
|
28,591 |
|
|
|
19.8 |
|
|
|
26,339 |
|
|
|
21.1 |
|
|
|
25,556 |
|
|
|
23.0 |
|
|
|
8.6 |
|
|
|
3.1 |
|
Research and development (1) |
|
|
20,861 |
|
|
|
14.4 |
|
|
|
16,531 |
|
|
|
13.2 |
|
|
|
17,159 |
|
|
|
15.4 |
|
|
|
26.2 |
|
|
|
(3.7 |
) |
General and administrative (1) |
|
|
12,830 |
|
|
|
8.9 |
|
|
|
11,364 |
|
|
|
9.1 |
|
|
|
8,973 |
|
|
|
8.1 |
|
|
|
12.9 |
|
|
|
26.6 |
|
In-process research and development |
|
|
2,000 |
|
|
|
1.4 |
|
|
|
300 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
64,282 |
|
|
|
44.5 |
|
|
|
54,534 |
|
|
|
43.6 |
|
|
|
51,688 |
|
|
|
46.5 |
|
|
|
17.9 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
13,223 |
|
|
|
9.1 |
|
|
|
16,957 |
|
|
|
13.5 |
|
|
|
11,781 |
|
|
|
10.6 |
|
|
|
(22.0 |
) |
|
|
43.9 |
|
Total other income, net |
|
|
2,044 |
|
|
|
1.4 |
|
|
|
1,026 |
|
|
|
0.9 |
|
|
|
369 |
|
|
|
0.3 |
|
|
|
99.2 |
|
|
|
178.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,267 |
|
|
|
10.5 |
|
|
|
17,983 |
|
|
|
14.4 |
|
|
|
12,150 |
|
|
|
10.9 |
|
|
|
(15.1 |
) |
|
|
48.0 |
|
Income tax provision |
|
|
4,154 |
|
|
|
2.8 |
|
|
|
318 |
|
|
|
0.3 |
|
|
|
3,487 |
|
|
|
3.1 |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,113 |
|
|
|
7.7 |
% |
|
$ |
17,665 |
|
|
|
14.1 |
% |
|
$ |
8,663 |
|
|
|
7.8 |
% |
|
|
(37.1) |
% |
|
|
103.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M means not meaningful
|
|
|
| (1) |
|
As a result of adopting FAS No. 123R as of October 1, 2005 on a modified prospective basis, stock-based compensation expense (pre-tax)
is included in the consolidated results of operations for the twelve months ended September 30, 2006 as follows (in thousands): |
| |
|
|
|
|
| |
|
Twelve months ended |
|
| |
|
September 30, 2006 |
|
Cost of sales |
|
$ |
89 |
|
Sales and marketing |
|
|
694 |
|
Research and development |
|
|
530 |
|
General and administrative |
|
|
976 |
|
|
|
|
|
Total |
|
$ |
2,289 |
|
|
|
|
|
As of September 30, 2006 the total unrecognized compensation cost related to non-vested stock-based compensation arrangements net of
expected forfeitures was $4.8 million and the related weighted average period over which it is expected to be recognized is approximately 2.6 years.
NET SALES
Net sales were $144.7 million in fiscal 2006 compared to $125.2 million in fiscal 2005, an increase
in net sales of $19.5 million, or 15.5%. Net sales of products acquired as a result of the FS
Forth, Rabbit, and MaxStream acquisitions, which are primarily embedded products, increased $27.5
million in fiscal 2006 compared to fiscal 2005. Net sales of products other than those acquired
through acquisitions, comprised of both non-embedded and embedded products, resulted in a net sales
increase of $7.8 million in fiscal 2006, offset by a decline in net sales of multi-port serial
adapters and network interface cards of $15.8 million as they approach the ends of their respective
product life cycles. Due to customer and product mix changes, the Company has experienced a slight
decrease in the average selling price of its products. Fluctuation in foreign currency rates
compared to the prior year’s rates had an unfavorable impact on net sales of $0.6 million in fiscal
2006 and a favorable impact on net sales of $0.7 million in fiscal 2005. The net sales increase
from 2004 to 2005 was $14.0 million, or 12.6%.
23
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
NET SALES (CONTINUED)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales |
|
|
% of Net Sales |
|
| ($ in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Non-embedded |
|
$ |
86.7 |
|
|
$ |
87.5 |
|
|
$ |
82.9 |
|
|
|
59.9 |
% |
|
|
69.9 |
% |
|
|
74.6 |
% |
Embedded |
|
|
58.0 |
|
|
|
37.7 |
|
|
|
28.3 |
|
|
|
40.1 |
% |
|
|
30.1 |
% |
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144.7 |
|
|
$ |
125.2 |
|
|
$ |
111.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Compared to 2005
The Company’s non-embedded products net sales decreased $0.8 million in fiscal 2006 compared to
fiscal 2005. Product introductions generated an increase in net sales of network connected
products, USB and cellular gateways, partially offsetting the decline of the multi-port serial
adapter products.
Embedded products net sales increased $20.3 million in fiscal 2006 compared to fiscal 2005. Net
sales of the Rabbit, FS Forth, and MaxStream branded embedded products increased $25.9 million in
fiscal 2006 compared to fiscal 2005. Introduction of new embedded modules and microprocessors, as
well as new customers reaching production volumes, partially offset the continued decline of the
NIC sales in fiscal 2006.
2005 Compared to 2004
Digi improved its competitive position in fiscal 2005 with two acquisitions and product
introductions creating an increase in net sales of $14.0 million or 12.6% compared to fiscal 2004.
The Company’s non-embedded products net sales increased $4.6 million in fiscal 2005 compared to
fiscal 2004 due to an increase in sales of network connected products, USB and cellular gateways,
offset by the continuing market decline of the multi-port serial adapter products.
Embedded products net sales increased $9.4 million in fiscal 2005 compared to fiscal 2004. Net
sales of Rabbit-branded products, consisting primarily of microprocessors, embedded modules and
single-board computers, were $10.6 million from the date of acquisition of May 26, 2005, through
the end of fiscal 2005. OEM customers migrating from network interface cards to software only
solutions, resulted in a net sales decline of the NIC sales during fiscal 2005 compared to fiscal
2004, partially offset by the introduction of new embedded modules and new customers reaching
production volumes.
Distribution Channels
The Company’s revenue is generated from these distribution channels: Direct / OEMs and
distributors. The following tables present the Company’s revenue by channel and by geographic
location of the customers:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales |
|
|
% of Net Sales |
|
| ($ in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct / OEM Channel |
|
$ |
70.3 |
|
|
$ |
62.7 |
|
|
$ |
54.8 |
|
|
|
48.6 |
% |
|
|
50.1 |
% |
|
|
49.3 |
% |
Distribution Channel |
|
|
74.4 |
|
|
|
62.5 |
|
|
|
56.4 |
|
|
|
51.4 |
% |
|
|
49.9 |
% |
|
|
50.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
144.7 |
|
|
$ |
125.2 |
|
|
$ |
111.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Direct / OEM channel net sales during the last three fiscal years was
primarily due to the Company’s continued enhancement of its product offerings through the
acquisitions of Rabbit and MaxStream, whose customers are primarily OEMs, and the Company’s
decision to sell directly to certain customers rather than through the distribution channel.
24
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
NET SALES (CONTINUED)
The increase in the distribution channel net sales over the last three fiscal years was primarily
due to the Company’s continued focus on maintaining its channel strategy, which includes employing
additional channel partners and releasing complimentary products.
Net Sales by Geographic Area
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales |
|
|
% of Net Sales |
|
| ($ in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
$ |
55.9 |
|
|
$ |
53.2 |
|
|
$ |
49.2 |
|
|
|
38.6 |
% |
|
|
42.5 |
% |
|
|
44.2 |
% |
Domestic |
|
|
88.8 |
|
|
|
72.0 |
|
|
|
62.0 |
|
|
|
61.4 |
% |
|
|
57.5 |
% |
|
|
55.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
144.7 |
|
|
$ |
125.2 |
|
|
$ |
111.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in international net sales for the three years was primarily due to incremental
international sales resulting from the acquisitions of Rabbit and FS Forth as well as a focus on
expansion in the Asia Pacific market which offset the decline in international sales of NICs.
The increase in domestic net sales was primarily due to continued market penetration, new customers
reaching production volumes and introduction of new products as a result of acquiring complementary
product lines.
GROSS PROFIT
2006 Compared to 2005
Gross profit margin for 2006 was 53.6% compared to 57.1% in 2005. The decrease in gross profit
margin was primarily due to product mix changes among products within both the embedded and
non-embedded product groups, as well as higher manufacturing expenses.
2005 Compared to 2004
Gross profit margin was 57.1% for both 2005 and 2004, as sales of Rabbit products with lower gross
profit margins were offset by an increase in gross profit margin due to reduced amortization of
core and purchased technology resulting from certain purchased technology becoming fully amortized
during fiscal 2005.
OPERATING EXPENSES
2006 Compared to 2005
Operating expenses were $64.3 million in 2006, an increase of $9.8 million or 17.9%, compared to
operating expenses of $54.5 million in 2005. The acquisition of MaxStream resulted in $3.1 million
of additional operating expenses of which $2.0 million is related to in-process research and
development. Fiscal 2006 also includes twelve months of operating expenses for Rabbit and FS
Forth, acquired in the third quarter of fiscal 2005, resulting in incremental operating expenses of
$7.5 million (of which $0.7 million is related to identifiable intangibles amortization expense) in
2006. As a result of the adoption of FAS 123R on October 1, 2005, the Company recorded $2.2
million in stock-based compensation expense in fiscal 2006. Operating
expense savings of $3.0 million were realized in fiscal 2006 compared to fiscal 2005, primarily due
to savings in compensation-related expenses, contract labor and professional fees.
25
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
OPERATING EXPENSES (CONTINUED)
Sales and marketing expenses were $28.6 million in 2006, an increase of $2.3 million or 8.6%,
compared to sales and marketing expenses of $26.3 million in 2005. Sales and marketing expenses
increased by an incremental $2.9 million due to the acquisitions of MaxStream, Rabbit and FS Forth
and by an incremental $0.7 million due to stock-based compensation expense. These increases were
offset by an incremental decrease in compensation-related expenses of $1.1 million due to open
positions and decreased commissions in fiscal 2006 compared to fiscal 2005.
Research and development expenses were $20.9 million in 2006, an increase of $4.4 million or 26.2%,
compared to research and development expenses of $16.5 million in 2005. Research and development
expenses increased in fiscal 2006 compared to fiscal 2005 primarily due to incremental research and
development expenses of $3.8 million due to the acquisitions of MaxStream, Rabbit and FS Forth and
by an incremental $0.5 million due to stock-based compensation expense.
General and administrative expenses were $12.8 million in 2006, an increase of $1.4 million or
12.9%, compared to general and administrative expenses of $11.4 million in 2005. The increase was
due to incremental expenses of $1.9 million (of which $0.7 million is related to identifiable
intangibles amortization expense) related to the acquisitions of MaxStream, Rabbit and FS Forth and
by an incremental $1.0 million due to stock-based compensation expense. The aforementioned
increases in expenses were offset by savings of $1.2 million in compensation related expenses,
professional fees and depreciation expense due to certain assets becoming fully depreciated.
Intellectual property associated with a prior acquisition was sold for $0.2 million and was
recorded as a contra expense in general and administrative expenses in fiscal 2006.
In-process research and development expenses associated with the acquisition of MaxStream were $2.0
million in 2006, compared to in-process research and development expenses of $0.3 million in 2005
associated with the acquisition of Rabbit in 2005 (see Note 2 to the Company’s Consolidated
Financial Statements).
2005 Compared to 2004
Operating expenses were $54.5 million in 2005, an increase of $2.8 million or 5.5%, compared to
operating expenses of $51.7 million in 2004. Incremental operating expenses of $4.9 million were
incurred as a result of the acquisitions of Rabbit and FS Forth, during the third quarter of fiscal
2005, of which $0.3 million related to in-process research and development associated with the
Rabbit 4000 microprocessor. These increases were offset in part by the Company’s continued focus
on general cost containment in an effort to lower operating expenses as a percent of net sales.
Although operating expenses increased $4.9 million as a result of the acquisitions of Rabbit and FS
Forth, operating expenses as a percent of net sales improved to 43.6% in fiscal 2005 from 46.5% in
fiscal 2004.
Sales and marketing expenses were $26.3 million in 2005, an increase of $0.8 million or 3.1%,
compared to sales and marketing expenses of $25.5 million in 2004. The acquisitions of Rabbit and
FS Forth during the third quarter of fiscal 2005, resulted in incremental sales and marketing
expenses of $1.6 million in 2005. This increase was partially offset by a decline in variable
sales and marketing expense related to a decline in net sales in certain other product categories,
primarily in the network interface card product line.
Research and development expenses were $16.5 million in 2005, a decrease of $0.6 million or 3.7%,
compared to research and development expenses of $17.1 million in 2004. The acquisitions of Rabbit
and FS Forth resulted in incremental research and development expenses of $1.9 million. This
increase was offset by a decline in chip fabrication and testing expense due to the timing of chip
development. During fiscal 2004,
fabrication and testing expenses were incurred for chip projects that were in development. During
fiscal 2005, the development phase of these chips ended and the chips were released into volume
production.
26
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
OPERATING EXPENSES (CONTINUED)
General and administrative expenses were $11.4 million in 2005, an increase of $2.4 million or
26.6%, compared to general and administrative expenses of $9.0 million in 2004. Incremental
general and administrative expenses were $0.6 million (of which $0.5 million is related to
identifiable intangibles amortization) as a result of the acquisitions of Rabbit and FS Forth. In
addition, general and administrative expenses increased due to increased professional service
expense including legal and Section 404 Sarbanes-Oxley related expenses.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
MaxStream, Inc.
On July 27, 2006, the Company acquired MaxStream, Inc. (MaxStream), a privately held corporation
and a leader in the wireless device networking market. The total purchase price of $40.5 million
included $19.8 million in cash (excluding cash acquired of $3.7 million) and $20.7 million in
common stock, in exchange for all outstanding shares of MaxStream’s preferred and common stock and
outstanding stock options. The Company did not replace MaxStream’s outstanding options with Digi
options.
At the time of acquisition, MaxStream had development projects in process associated with the
XStream Gen. 2, X. Eleven, Mesh Firmware, Xbee Zigbee Firmware and Xplore products. Management
estimated that $2.0 million of the purchase price represented the fair value of acquired in-process
research and development related to the products listed below (in thousands) that were under
development, had a measurable percentage completed and a documented expected life, had not yet
reached technological feasibility, and had no alternative future uses. This amount was expensed as
a non-tax-deductible charge upon consummation of the acquisition.
| |
|
|
|
|
XStream Gen. 2 |
|
$ |
900 |
|
X. Eleven |
|
|
500 |
|
Mesh Firmware |
|
|
400 |
|
Xbee Zigbee Firmware |
|
|
100 |
|
Xplore |
|
|
100 |
|
|
|
|
|
Total in-process research and development |
|
$ |
2,000 |
|
|
|
|
|
The Company utilized the income valuation approach to determine the estimated fair value of
the acquired in-process research and development. These estimates were based on the following
assumptions:
| |
• |
|
The estimated revenues were based upon the Company’s estimate of revenue growth for each
of the products over the next five fiscal years, using the assumption that all revenue
recorded after that date will be generated from future technologies. |
| |
| |
• |
|
The estimated gross margin was based upon historical gross margin for MaxStream’s
products, with an increase over time attributable to production synergies. |
| |
| |
• |
|
The estimated operating expenses were based on consideration of historical selling,
general and administrative expenses as a percentage of sales and MaxStream’s projected
operating expenses. |
| |
| |
• |
|
Maintenance research and development, defined as the research and development necessary
to sustain the existing technology and its revenue stream, was also included as an
operating expense. The estimated remaining cost to complete each in-process research and
development technology was also included in operating expenses. |
27
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
| |
• |
|
When applying the income valuation approach, the cash flows expected to be generated by
an asset are discounted to their present value equivalent using a rate of return that
reflects the relative risk of the investment, as well as the time value of money. This
return, known as the weighted average cost of capital (“WACC”), is an overall rate based
upon the individual rates of return for invested capital (equity and interest-bearing
debt). The discount rate used in the income valuation approach was 25%. Premiums were
added to the WACC to account for the inherent risks in the development of the products, the
risks of the products being completed on schedule, and the risk of the eventual sales of
the product meeting the expectations of the Company. The Company used a 40% rate of return
for the in-process research and development projects. |
The Company anticipates that the XStream Gen. 2, X. Eleven, Mesh Firmware and Xbee Zigbee Firmware
projects will be released in calendar year 2007 and the Xplore product will be completed at the end
of calendar year 2006. These estimates described above are subject to change, given the
uncertainties of the development process, and no assurance can be given that deviations from these
estimates will not occur.
Rabbit Semiconductor Inc.
On May 26, 2005, the Company acquired Rabbit, formerly Z-World, Inc., a privately held corporation
for a purchase price of $49.3 million in cash (excluding cash acquired of $0.4 million and
assumption of $1.3 million in debt).
At the time of acquisition, Rabbit had a development project in process for the Rabbit 4000
microprocessor. The project involved the design and development of a next-generation
microprocessor that would have increased code execution speed, reduced code size, added security
features, and integrated Ethernet capabilities.
Management estimated that $0.3 million of the purchase price represented the fair value of acquired
in-process research and development related to the Rabbit 4000 microprocessor that had not yet
reached technological feasibility and had no alternative future uses. This amount was expensed as
a non-tax-deductible charge upon consummation of the acquisition.
The Company utilized the income valuation approach to determine the estimated fair value of the
acquired in-process research and development. These estimates were based on the following
assumptions:
| |
• |
|
The estimated revenues were based upon the Company’s estimate of revenue growth over the
next six fiscal years, or the estimated life cycle of the Rabbit 4000 microprocessor, using
the assumption that all revenue recorded after that date will be generated from future
technologies. |
| |
| |
• |
|
The estimated gross margin was based upon historical gross margin for Rabbit’s products,
with an increase over time attributable to production synergies. |
| |
| |
• |
|
The estimated selling, general and administrative expenses were based on consideration
of historical operating expenses as a percentage of sales and Rabbit’s projected operating
expenses. |
When applying the income valuation approach, the cash flows expected to be generated by an
asset are discounted to their present value equivalent using a rate of return that reflects
the relative risk of the investment, as well as the time value of money. This return, known
as the WACC, is an overall rate based upon the individual rates of return for invested
capital (equity and interest-bearing debt). The discount rate used in the income valuation
approach was 23%. Premiums were added to the WACC to account for the inherent risks in the
development of the products, the risks of the products being completed on schedule, and the
risk of the eventual sales of the product meeting the expectations of the Company. The
Company used a 40% rate of return for the in-process research and development projects.
28
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
The Company released the Rabbit 4000 microprocessor in March 2006. The Company anticipates that
the projected revenue from the Rabbit 4000 microprocessor will be in line with original
projections. These estimates are subject to change and no assurance can be given that deviations
from these estimates will not occur.
OTHER INCOME (EXPENSE)
Total other income, net was $2.0 million in fiscal 2006 compared to $1.0 million in fiscal 2005.
The Company realized interest income on marketable securities and cash and cash equivalents of $2.4
million in fiscal 2006 compared to $1.6 million in fiscal 2005. The increase in interest income
was primarily due to higher average interest rates in fiscal 2006 compared to fiscal 2005, which
was partially offset by a decrease in the average investment balance. The Company earned an
average interest rate of approximately 4.3% during fiscal 2006 compared to approximately 2.5% for
fiscal 2005. The invested balance averaged $52.6 million during fiscal 2006 compared to $64.8
million during fiscal 2005. Interest expense was $0.2 million in fiscal 2006 primarily related to
interest expense on the $5.0 million short-term loan that was used to finance the MaxStream
acquisition and interest on capital leases. The short-term loan was paid in full in August 2006.
Other expense was $0.2 million in fiscal 2006 and $0.5 million in fiscal 2005.
Total other income, net was $1.0 million in fiscal 2005 compared to $0.4 million in fiscal 2004.
The Company realized interest income on marketable securities and cash and cash equivalents of $1.6
million in fiscal 2005 compared to $0.9 million in fiscal 2004. The increase in interest income
was due to higher average interest rates in fiscal 2005 compared to fiscal 2004 and average cash
and marketable securities balances were comparable between years. Interest expense was $0.1
million in fiscal 2005 related to interest expense on the $21.0 million short-term loan that was
used to finance the Rabbit acquisition and interest on capital leases and a revolving line of
credit held by Rabbit. The short-term loan was paid in full in July 2005. Other expense was $0.5
million in both fiscal 2005 and fiscal 2004.
INCOME TAXES
The Company’s effective income tax rate was 27.2% in fiscal 2006 compared to 1.8% in fiscal 2005.
During fiscal 2006, the Company recorded $1.6 million in discrete tax benefits, primarily related
to an audit of prior fiscal years which was settled with the French government in 2006. The
Company had established tax reserves that were no longer required as a result of the settlement.
The Company recorded an income tax benefit as a result of the reversal of the tax reserves related
to this settlement. The aforementioned discrete income tax benefits reduced the effective tax rate
by 10.4 percentage points in fiscal 2006. These tax benefits were partially offset by
non-deductible MaxStream acquired in-process research and development
expense, which increased the
effective tax rate in fiscal 2006 by 4.6 percentage points (see reconciliation of the statutory
income tax rate to the effective tax rate in Note 8 to the Company’s Consolidated Financial
Statements). In February 2005, the Congressional Joint Committee on Taxation approved a settlement
with the Internal Revenue Service on an audit of certain of the Company’s prior fiscal years income
tax returns. The Company had established tax reserves in excess of the ultimate settled amounts.
As a result, the Company recorded an income tax benefit of $5.7 million in fiscal 2005 representing
the excess of its income tax reserves over the amount paid. The income tax benefit of $5.7 million
reduced the effective tax rate by 31.6 percentage points in fiscal 2005. The effective tax rates
for both fiscal 2006 and fiscal 2005 are lower than the U.S. statutory rate of 35.0% primarily due
to the aforementioned income tax benefits and the utilization of income tax credits and exclusions
for extraterritorial income in both years and the domestic production activities deduction in
fiscal 2006.
29
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
INCOME TAXES (CONTINUED)
The Company’s effective income tax rate was 28.7% in fiscal 2004. The effective tax rate for
fiscal 2004 is lower than the U.S. statutory rate of 35.0% primarily due to the utilization of
income tax credits and exclusions for extraterritorial income.
As of September 30, 2006, the Company had United States federal net operating loss carryforwards
and tax credit carryforwards of $2.6 million and $2.9 million, respectively, which expire at
various dates through 2026. The Company also had foreign net operating loss carryforwards and tax
credit carryforwards at September 30, 2006, of $2.0 million and $0.2 million, respectively, the
majority of which carry forward indefinitely.
The Company is required to assess the realizability of its deferred tax assets and the need for a
valuation allowance against those assets in accordance with Statement of Financial Accounting
Standards No. 109 “Accounting for Income Taxes” (FAS 109). The Company has concluded that it is
more likely than not that the remaining deferred tax assets will be realized based on future
projected taxable income and the anticipated future reversal of deferred tax liabilities, and
therefore no valuation allowance has been established at September 30, 2006. The amount of the net
deferred tax assets realized, however, could vary if there are differences in the timing or amount
of future reversals of existing deferred tax liabilities or changes in the amounts of future
taxable income. If the Company’s future taxable income projections are not realized, a valuation
allowance would be required, and would be reflected as income tax expense at the time that any such
change in future taxable income is determined.
INFLATION
Management believes inflation has not had a material effect on the Company’s operations or on its
financial position.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated from operations. At
September 30, 2006, the Company had cash, cash equivalents and short-term marketable securities of
$58.9 million compared to $50.2 million at September 30, 2005. The Company’s working capital
increased $13.3 million to $83.3 million at September 30, 2006, compared to $70.0 million at
September 30, 2005. Working capital decreased $12.1 million in fiscal 2005 from $82.1 million at
September 30, 2004 to $70.0 million at September 30, 2005.
Net cash provided by operating activities was $20.4 million during fiscal 2006 compared to net cash
provided by operating activities of $18.1 million during fiscal 2005, an increase of $2.3 million.
Changes in working capital generated a $4.7 million increase in net cash provided by operating
activities, resulting from changes in income taxes payable and accounts receivable, partially
offset by reductions resulting from inventory and account payable. Changes in tax benefits related
to stock-based compensation reduced cash provided by operating activities by $2.8 million. Net
cash provided by operating activities was $18.1 million during fiscal 2005 compared to net cash
provided by operating activities of $19.3 million during fiscal 2004. The decline in net cash
provided by operating activities of $1.2 million between comparable fiscal years ended September
30, 2005 and 2004 is primarily the result of a payment of $3.2 million to the IRS in November 2004
due to the settlement on an audit of certain of the Company’s income tax returns for prior fiscal
years.
Fiscal 2004 net income of $8.7 million along with non-cash charges including depreciation and
amortization expense of $8.6 million and a $2.3 million tax benefit related to stock option
exercises were the primary factors that resulted in net cash provided by operating activities of
$19.3 million.
30
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Fiscal 2004 net income of $8.7 million along with non-cash charges including depreciation and
amortization expense of $8.6 million and a $2.3 million tax benefit related to stock option
exercises were the primary factors that resulted in net cash provided by operating activities of
$19.3 million.
Net cash used in investing activities was $23.2 million during fiscal 2006 compared to net cash
used in investing activities of $30.1 million and $25.0 million during fiscal 2005 and fiscal 2004,
respectively. During fiscal 2006, the Company paid $16.1 million in cash (net of cash acquired of
$3.7 million) for the acquisition of MaxStream and during fiscal 2005, the Company paid $48.9
million (net of cash acquired of $0.4 million) and $4.8 million for the acquisitions of Rabbit and
FS Forth, respectively. Purchases of marketable securities were $6.0 million in fiscal 2006.
Proceeds from the sale of intellectual property were $0.2 million in fiscal 2006. Net settlements
from marketable securities were $25.0 million in fiscal 2005 compared to net purchases of $21.7
million in fiscal 2004. Purchases of property, equipment, improvements and certain other
intangible assets were $1.3 million in each of the fiscal years ended 2006, 2005 and 2004. The
Company also used $2.0 million in fiscal 2004 for contingent purchase price payments related to
acquisitions.
During fiscal 2006, the Company generated $5.6 million from financing activities primarily due to
$6.1 million of cash received from the exercise of stock options and employee stock purchase plan
transactions. This was offset by $0.5 million of cash used for capital lease obligations. The
Company entered into a $5.0 million short-term loan agreement during the fourth quarter of fiscal
2006 to finance the MaxStream acquisition and repaid the loan in the same quarter. The Company
generated $4.9 million from financing activities in fiscal 2005, compared to $7.1 million in fiscal
2004, primarily due to cash received from the exercise of stock options and employee stock purchase
plans of $6.3 million and $9.3 million in fiscal 2005 and 2004, respectively. The Company entered
into a $21.0 million short-term loan during the third quarter of fiscal 2005 to finance the Rabbit
acquisition. The Company determined that it was more economical to borrow funds to finance the
Rabbit acquisition than to liquidate marketable securities prior to their scheduled maturities.
This short-term loan was repaid in fiscal 2005. In January 2004, the short-term borrowing
agreement with Sparkasse Dortmund in the amount of $2.0 million was repaid.
The Company’s management believes that current financial resources, cash generated from operations
and the Company’s potential capacity for debt and/or equity financing will be sufficient to fund
its business operations for the foreseeable future.
The following summarizes the Company’s contractual obligations at September 30, 2006. However,
this table excludes a potential $1.2 million installment on October 1, 2007 if FS Forth achieves
certain future milestones. The Company paid $0.8 million in October 2006 as contingent
consideration related to the FS Forth transaction based on the achievement of the milestones
identified in the merger agreement.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by fiscal period |
| (in thousands) |
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
Thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
6,538 |
|
|
$ |
2,400 |
|
|
$ |
2,075 |
|
|
$ |
1,105 |
|
|
$ |
958 |
|
Capital leases |
|
|
1,311 |
|
|
|
472 |
|
|
|
775 |
|
|
|
64 |
|
|
|
— |
|
| |
|
|
Total contractual
cash obligations |
|
$ |
7,849 |
|
|
$ |
2,872 |
|
|
$ |
2,850 |
|
|
$ |
1,169 |
|
|
$ |
958 |
|
| |
|
|
The lease obligations summarized above relate to various operating lease agreements for office
space and equipment and have not been reduced by minimum sublease rentals of $0.2 million due in
the future under noncancellable subleases.
31
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
FOREIGN CURRENCY
The majority of the Company’s foreign currency transactions are executed in the U.S. Dollar, Euro
or Japanese Yen. As a result, the Company is exposed to foreign currency transaction risk
associated with certain sales transactions being denominated in Euros or Japanese Yen and foreign
currency translation risk as the financial position and operating results of the Company’s foreign
subsidiaries are translated into U.S. Dollars for consolidation. The Company has not implemented a
hedging strategy to reduce foreign currency risk.
During 2006, the Company had approximately $55.9 million of net sales related to foreign customers
including export sales, of which $23.3 million was denominated in foreign currency, predominately
the Euro. During 2005 and 2004, the Company had approximately $53.2 million and $49.2 million,
respectively, of net sales to foreign customers including export sales, of which $18.6 million and
$15.8 million, respectively, were denominated in foreign currency, predominately the Euro. In
future periods, a significant portion of sales will continue to be made in Euros.
RECENT ACCOUNTING DEVELOPMENTS
In May 2005, the Financial Accounting Standards Board (“FASB”) issued FAS No. 154, “Accounting
Changes and Error Corrections: A Replacement of APB Opinion No. 20 and SFAS No. 3.” This statement
changes the requirements for the accounting for and reporting of a voluntary change in accounting
principle, and also applies to instances when an accounting pronouncement does not include specific
transition provisions. The statement replaces the previous requirement that voluntary changes be
recognized by including the cumulative effect of the change in net income of the period of the
change. The statement requires retrospective application of a new accounting principle to prior
periods’ financial statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The statement is effective for changes and
corrections made in fiscal years beginning after December 15, 2005. The Company does not expect
the adoption of the statement at October 1, 2006 to have a material effect on its consolidated
financial statements.
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement.” This standard allows companies to present in their statements of income any taxes
assessed by a governmental authority that are directly imposed on revenue-producing transactions
between a seller and a customer, such as sales, use, value-added and some excise taxes, on either a
gross (included in revenue and costs) or a net (excluded from revenue) basis. This standard will
be effective for the Company in interim periods and fiscal years beginning after December 15, 2006.
The Company presents these transactions on a net basis, and therefore the adoption of this
standard will have no impact on our consolidated financial statements.
In July, 2006 the FASB issued Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition
threshold and measurement process for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides
guidance on the derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48 will be
effective for the Company beginning October 1, 2007. The Company is in the process of
determining the effect, if any, that the adoption of FIN 48 will have on its consolidated
financial statements. However, the Company does expect to reclassify a portion of its
unrecognized tax benefits from current to non-current liabilities because payment of cash is
not anticipated within one year of the balance sheet date.
32
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements
should be taken into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial statements are
materially misstated. SAB 108 requires registrants to apply the new guidance for the first time
that it identifies material errors in existence at the beginning of the first fiscal year ending
after November 15, 2006 by correcting those errors through a one-time cumulative effect adjustment
to beginning-of-year retained earnings. The Company does not expect SAB 108 to have a material
impact on its consolidated results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of FAS 157 are effective for the fiscal year beginning October 1, 2008. The Company is
currently evaluating the impact of the provisions of FAS 157 on its consolidated financial
statements and does not believe the impact of the adoption will be material.
In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R),”
(“FAS 158”). FAS 158 requires an employer to recognize the over-funded or under-funded status of a
defined benefit pension and other postretirement plan (other than a multiemployer plan) as an asset
or liability in its statement of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income of a business entity. FAS 158
is effective for fiscal years ending after December 15, 2006. Since the Company does not have a
defined benefit or other postretirement plans, FAS 158 will not impact its consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES
The Company’s discussion and analysis of its financial condition and results of operations are
based upon the Company’s consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets
and liabilities and the values of purchased assets and assumed liabilities in acquisitions. The
Company bases its estimates on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
The Company believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements.
REVENUE RECOGNITION
The Company’s revenues are derived primarily from the sale of embedded and non-embedded products to
its distributors and Direct (end-user) / OEM customers, and to a lesser extent from the sale of
software licenses, fees associated with technical support, training, professional and engineering
services, and royalties. The Company recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has
33
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
CRITICAL ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
occurred, the sales price is fixed or determinable, collectibility is reasonably assured and there
are no post-delivery obligations other than warranty. Under these criteria, product revenue is
generally recognized upon shipment of product to customers. Sales to authorized domestic
distributors and Direct / OEMs are made with certain rights of return and price adjustment
provisions. Estimated reserves for future returns and pricing adjustments are established by the
Company based on an analysis of historical patterns of returns and price adjustments as well as an
analysis of authorized returns compared to received returns, current on-hand inventory at
distributors, and distribution sales for the current period. Estimated reserves for future returns
and price adjustments are charged against revenues in the same period as the corresponding sales
are recorded. Material differences between the historical trends used to determine estimated
reserves and actual returns and pricing adjustments could result in a material change to the
Company’s consolidated results of operations or financial position. The Company has applied
consistent methodologies for estimating reserves for future returns and pricing adjustments for all
years presented. The reserve for future returns and pricing adjustments was $1.8 million at
September 30, 2006 compared to $1.8 million at September 30, 2005.
The Company also generates revenue from the sale of software licenses, post-contract customer
support, fees associated with technical support, training, professional and engineering services,
and royalties. Revenue recognized resulting from such non-product sales represented 1.3% of net
sales in fiscal 2006, 1.3% of net sales in fiscal 2005, and 2.6% of net sales in fiscal 2004. The
Company’s software development tools and development boards often include multiple elements,
including hardware, software licenses, post-contract customer support, limited training and basic
hardware design review. The Company’s customers purchase these products and services during their
product development process in which they use the tools to build network connectivity into the
devices they are manufacturing. Revenue for software licenses, professional and engineering
services and training is recognized upon performance, which includes delivery of a final product
version and acceptance by the customer. For post-contract customer support and fees associated
with technical support, revenue is deferred and recognized over the life of the contract as service
is performed. Royalty revenue is recognized when cash is received from the customer. Unearned
post-contract customer support and unearned nonrecurring engineering services revenue is included
in deferred revenue on the balance sheet.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts, which reflects the estimate of losses
that may result from the inability of some of the Company’s customers to make required payments.
The estimate for the allowance for doubtful accounts is based on known circumstances regarding
collectibility of customer accounts and historical collections experience. If the financial
condition of one or more of the Company’s customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required. Material differences
between the historical trends used to estimate the allowance for doubtful accounts and actual
collection experience could result in a material change to the Company’s consolidated results of
operations or financial position. As of September 30, 2006 the allowance for doubtful accounts was
$0.5 million compared to $0.9 million at September 30, 2005.
INVENTORY
Inventories are stated at the lower of cost or fair market value, with cost determined using the
first-in, first-out method. The Company reduces the carrying value of its inventories for estimated
excess and obsolete inventories equal to the difference between the cost of inventory and its
estimated realizable value based upon assumptions about future product demand and market
conditions. If actual product demand or market
34
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
CRITICAL ACCOUNTING POLICIES (CONTINUED)
INVENTORY (CONTINUED)
conditions are less favorable than those projected by management, additional inventory write-downs
may be required that could result in a material change to the Company’s consolidated results of
operations or financial position. The Company has applied consistent methodologies for the net
realizable value of inventories. The reserve for excess and obsolete inventory was $2.6 million
and $1.6 million at September 30, 2006 and 2005, respectively.
IDENTIFIABLE INTANGIBLE ASSETS
Purchased proven technology, customer relationships, license agreements, covenants not to compete
and other identifiable intangible assets are recorded at fair value when acquired in a business
acquisition, or at cost when not purchased in a business combination. Purchased in-process
research and development costs (IPR&D) are expensed upon consummation of the related business
acquisition. All other identifiable intangible assets are amortized on a straight-line basis over
their estimated useful lives of three to thirteen years. Useful lives for identifiable intangible
assets are estimated at the time of acquisition based on the periods of time from which the Company
expects to derive benefits from the identifiable intangible assets. Methods of amortization
reflect the pattern in which the asset is consumed. To date, all of the Company’s identifiable
intangible assets are being amortized on a straight-line basis. Amortization of purchased and core
technology is presented as a separate component of cost of sales in the Consolidated Statement of
Operations. Amortization of all other acquired identifiable intangible assets is charged to
operating expenses as a component of general and administrative expense.
In accordance with FAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(FAS 144), identifiable intangible assets are reviewed at least annually for impairment, or
whenever events or circumstances indicate that the asset’s undiscounted expected future cash flows
are not sufficient to recover the carrying value amount. The Company measures impairment loss by
utilizing an undiscounted cash flow valuation technique using fair values indicated by the income
approach. Impairment losses, if any, are recorded currently. To the extent that the Company’s
undiscounted future cash flows were to decline substantially, such an impairment charge could
result. No impairment was identified during fiscal 2006. There are certain assumptions inherent in
projecting the recoverability of the Company’s identifiable intangible assets. If actual
experience differs from the assumptions made, the consolidated results of operations or financial
position of the Company could be materially impacted.
GOODWILL
Goodwill represents the excess of cost over the fair value of identifiable assets acquired and is
not amortized. However, in accordance with FAS No. 142, goodwill is subject to an impairment
assessment at least annually which may result in a charge to operations if the fair value of the
reporting unit in which the goodwill is reported declines. There are certain assumptions inherent
in projecting the fair value of goodwill. Significant assumptions include the Company’s estimates
of future cash flows and the cost of capital. These and other estimates are based upon information
that the Company uses to prepare its annual and five year business plan projections. If actual
experience differs from the assumptions made, the consolidated results of operations or financial
position of the Company could be materially impacted.
The Company performed its annual goodwill impairment assessment as of June 30, 2006 utilizing a
discounted cash flow technique and determined that there was no impairment. Goodwill of $65.8
million is recorded on the
35
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
CRITICAL ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
Company’s consolidated balance sheet as of September 30, 2006. (See Note 3 to the Company’s
Consolidated Financial Statements).
INCOME TAXES
Deferred tax assets and liabilities are recorded based on FAS 109. The amount of deferred tax
assets and liabilities actually realized could be impacted by differences in the timing or amount
of future reversals of existing deferred tax liabilities or changes in the amounts of future
taxable income. If management determines that it is more likely than not that a deferred tax asset
will not be realized, a valuation allowance would be required, and would be reflected as income tax
expense at the time that any such change in estimated future taxable income is determined. The
Company has determined that a valuation allowance is not required as of September 30, 2006.
The Company operates in multiple tax jurisdictions both in the U.S. and outside of the U.S.
Accordingly, the Company must determine the appropriate allocation of income to each of these
jurisdictions. This determination requires the Company to make several estimates and assumptions.
Tax audits associated with the allocation of this income, and other complex issues, may require an
extended period of time to resolve and could result in adjustments to the Company’s income tax
balances that are material to the consolidated financial position and results of operations. During
fiscal 2006 and 2005, the Company adjusted its income tax reserves by $1.6 million and $5.7
million, respectively, primarily resulting from settlements with the French government and the
Internal Revenue Service related to audits of prior fiscal years. (See Note 8 to the Company’s
Consolidated Financial Statements). Certain open tax years are expected to close during fiscal
year 2007 and future years that may result in adjustments to the Company’s income tax balances in
those years that are material to its consolidated financial position and results of operations.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (FAS
123R) which revises FAS 123 and supersedes APB 25. This standard requires the recognition of
the cost of employee services received in exchange for an award of equity instruments based on
the grant date fair value of the award. Under this statement, the Company must measure the
cost of employee services received in exchange for an award of equity instruments based upon
the fair value of the award on the date of grant. This cost must be recognized over the
period during which an employee is required to provide the service (usually the vesting
period). In April 2005 the SEC delayed the effective date of FAS 123R and as a result, the
Company has adopted the provisions of this standard beginning October 1, 2005. The adoption
of this standard resulted in an increase in compensation expense of $2.3 million and a
reduction to net income of $1.5 million and net income per diluted common share of $0.06 for
fiscal 2006. The consolidated financial statements for the prior periods have not been
restated to reflect, and do not include, the impact of FAS123R. (See Note 9 to the Company’s
Consolidated Financial Statements). Compensation expense for stock-based compensation is
estimated on the grant date using the Black-Scholes model. The Company’s specific assumptions
for the risk free interest rate, expected term, expected volatility and expected dividend
yield are documented in Note 9 to the Consolidated Financial Statements. Additionally, under
FAS 123R, the Company is required to estimate pre-vesting forfeitures for purposes of
determining compensation expense to be recognized.
36
|
|
|
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
INTEREST RATE RISK
The Company’s exposure to interest rate risk relates primarily to the Company’s investment
portfolio. Investments are made in accordance with the Company’s investment policy and consist of
high grade commercial paper and corporate bonds. The Company does not use derivative financial
instruments to hedge against interest rate risk as all investments are held to maturity and the
majority of the Company’s investments mature in less than a year.
FOREIGN CURRENCY RISK
The Company is exposed to foreign currency transaction risk associated with certain sales
transactions being denominated in Euros or Japanese Yen and foreign currency translation risk as
the financial position and operating results of the Company’s foreign subsidiaries are translated
into U.S. Dollars for consolidation. The Company has not implemented a hedging strategy to reduce
foreign currency risk.
During 2006, the average monthly exchange rate for the Euro to the U.S. Dollar decreased by
approximately 3.2% from 1.2724 to 1.2312 and the average monthly exchange rate for the Japanese Yen
to the U.S. Dollar increased by approximately 7.7% from .0093 to .0086. A 10.0% change from the
2006 average exchange rate for the Euro and Yen to the U.S. Dollar would have resulted in a 1.6%
increase or decrease in annual net sales and a 1.3% increase or decrease in stockholders’ equity.
The above analysis does not take into consideration any pricing adjustments the Company may need to
consider in response to changes in the exchange rate.
CREDIT RISK
The Company has some exposure to credit risk related to its accounts receivable portfolio.
Exposure to credit risk is controlled through regular monitoring of customer financial status,
credit limits and collaboration with sales management on customer contacts to facilitate payment.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF DIGI INTERNATIONAL INC.
We have completed integrated audits of Digi International Inc.’s 2006 and 2005 consolidated
financial statements and of its internal control over financial reporting as of September 30, 2006
and an audit of its 2004 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of cash flows, and of stockholders’ equity and comprehensive income
present fairly, in all material respects, the financial position of Digi International Inc. and its
subsidiaries at September 30, 2006 and 2005 and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2006 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 9, the Company adopted the provisions of Financial Accounting Standards Board
No. 123 (revised 2004), “Share-Based Payment,” (FAS 123R) beginning October 1, 2005.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control
over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of September 30, 2006 based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2006, based on criteria established in
Internal Control — Integrated Framework issued by the COSO. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal
control and performing such other procedures as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded MaxStream, Inc. (MaxStream) from its assessment of internal control over financial
reporting as of September 30, 2006 because it was acquired by the Company in a purchase business
combination during 2006. We have also excluded MaxStream from our audit of internal control over
financial reporting. MaxStream’s total assets represented 2.8% of total consolidated assets as of
September 30, 2006 and MaxStream’s total net sales represented 2.2% of the total consolidated net
sales for the year ended September 30, 2006.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 4, 2006
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per common share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the fiscal years ended September 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
144,663 |
|
|
$ |
125,198 |
|
|
$ |
111,226 |
|
Cost of sales (exclusive of amortization of purchased
and core technology shown separately below) |
|
|
62,322 |
|
|
|
49,516 |
|
|
|
43,443 |
|
Amortization of purchased and core technology |
|
|
4,836 |
|
|
|
4,191 |
|
|
|
4,314 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
77,505 |
|
|
|
71,491 |
|
|
|
63,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
28,591 |
|
|
|
26,339 |
|
|
|
25,556 |
|
Research and development |
|
|
20,861 |
|
|
|
16,531 |
|
|
|
17,159 |
|
General and administrative |
|
|
12,830 |
|
|
|
11,364 |
|
|
|
8,973 |
|
Acquired in-process research & development |
|
|
2,000 |
|
|
|
300 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
64,282 |
|
|
|
54,534 |
|
|
|
51,688 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
13,223 |
|
|
|
16,957 |
|
|
|
11,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,426 |
|
|
|
1,581 |
|
|
|
856 |
|
Interest expense |
|
|
(213 |
) |
|
|
(104 |
) |
|
|
(19 |
) |
Other expense |
|
|
(169 |
) |
|
|
(451 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
2,044 |
|
|
|
1,026 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,267 |
|
|
|
17,983 |
|
|
|
12,150 |
|
Income tax provision |
|
|
4,154 |
|
|
|
318 |
|
|
|
3,487 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,113 |
|
|
$ |
17,665 |
|
|
$ |
8,663 |
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.48 |
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.46 |
|
|
$ |
0.76 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares, basic |
|
|
23,338 |
|
|
|
22,450 |
|
|
|
21,196 |
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares, diluted |
|
|
24,080 |
|
|
|
23,371 |
|
|
|
22,031 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| |
|
|
|
|
|
|
|
|
| As of September 30, |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,674 |
|
|
$ |
12,990 |
|
Marketable securities |
|
|
43,207 |
|
|
|
37,184 |
|
Accounts receivable, net |
|
|
20,305 |
|
|
|
16,897 |
|
Inventories |
|
|
21,911 |
|
|
|
18,527 |
|
Net deferred tax assets |
|
|
2,667 |
|
|
|
2,892 |
|
Other |
|
|
2,861 |
|
|
|
2,223 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
106,625 |
|
|
|
90,713 |
|
Property, equipment and improvements, net |
|
|
19,488 |
|
|
|
20,808 |
|
Identifiable intangible assets, net |
|
|
31,341 |
|
|
|
26,342 |
|
Goodwill |
|
|
65,841 |
|
|
|
38,675 |
|
Net deferred tax assets |
|
|
1,366 |
|
|
|
— |
|
Other |
|
|
660 |
|
|
|
1,093 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
225,321 |
|
|
$ |
177,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Capital lease obligations, current portion, and short-term borrowings |
|
$ |
381 |
|
|
$ |
414 |
|
Accounts payable |
|
|
6,748 |
|
|
|
6,272 |
|
Income taxes payable |
|
|
4,712 |
|
|
|
3,306 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
5,851 |
|
|
|
5,308 |
|
Other |
|
|
5,318 |
|
|
|
5,048 |
|
Deferred revenue |
|
|
274 |
|
|
|
370 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
23,284 |
|
|
|
20,718 |
|
Capital lease obligations, net of current portion |
|
|
725 |
|
|
|
1,181 |
|
Net deferred tax liabilities |
|
|
7,482 |
|
|
|
2,195 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
31,491 |
|
|
|
24,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 2,000,000 shares authorized; none
issued and outstanding |
|
|
— |
|
|
|
— |
|
Common stock, $.01 par value; 60,000,000 shares authorized;
27,748,640 and 25,456,755 shares issued and outstanding |
|
|
277 |
|
|
|
255 |
|
Additional paid-in capital |
|
|
164,782 |
|
|
|
136,513 |
|
Retained earnings |
|
|
47,009 |
|
|
|
35,896 |
|
Accumulated other comprehensive income |
|
|
940 |
|
|
|
639 |
|
Treasury stock, at cost, 2,711,496 and 2,794,562 shares |
|
|
(19,178 |
) |
|
|
(19,766 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
193,830 |
|
|
|
153,537 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
225,321 |
|
|
$ |
177,631 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
41
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) |
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the fiscal years ended September 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,113 |
|
|
$ |
17,665 |
|
|
$ |
8,663 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, equipment and improvements |
|
|
2,711 |
|
|
|
2,295 |
|
|
|
2,432 |
|
Amortization of identifiable intangible assets and other assets |
|
|
7,855 |
|
|
|
6,575 |
|
|
|
6,165 |
|
Bad debt and product return recoveries |
|
|
(368 |
) |
|
|
(820 |
) |
|
|
(453 |
) |
Gain on sale of intellectual property |
|
|
(247 |
) |
|
|
— |
|
|
|
— |
|
Provision for inventory obsolescence |
|
|
542 |
|
|
|
76 |
|
|
|
— |
|
Excess tax benefits from stock-based compensation |
|
|
(726 |
) |
|
|
— |
|
|
|
— |
|
Tax benefit related to the exercise of stock options |
|
|
— |
|
|
|
2,113 |
|
|
|
2,274 |
|
Stock-based compensation |
|
|
2,289 |
|
|
|
53 |
|
|
|
125 |
|
Deferred income taxes |
|
|
1,700 |
|
|
|
1,052 |
|
|
|
1,448 |
|
Acquired in-process research & development |
|
|
2,000 |
|
|
|
300 |
|
|
|
— |
|
Other |
|
|
82 |
|
|
|
1 |
|
|
|
9 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(818 |
) |
|
|
(2,730 |
) |
|
|
926 |
|
Inventories |
|
|
(2,883 |
) |
|
|
(602 |
) |
|
|
(790 |
) |
Other assets |
|
|
(195 |
) |
|
|
(736 |
) |
|
|
(286 |
) |
Income taxes payable |
|
|
(631 |
) |
|
|
(7,039 |
) |
|
|
(510 |
) |
Accounts payable |
|
|
(1,174 |
) |
|
|
863 |
|
|
|
(1,326 |
) |
Accrued expenses |
|
|
(814 |
) |
|
|
(1,010 |
) |
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
9,323 |
|
|
|
391 |
|
|
|
10,658 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
20,436 |
|
|
|
18,056 |
|
|
|
19,321 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of held-to-maturity marketable securities |
|
|
(48,881 |
) |
|
|
(48,943 |
) |
|
|
(129,983 |
) |
Proceeds from maturities of held-to-maturity marketable securities |
|
|
42,858 |
|
|
|
73,898 |
|
|
|
108,249 |
|
Proceeds from sale of intellectual property |
|
|
247 |
|
|
|
— |
|
|
|
— |
|
Purchase of property, equipment, improvements and certain
other intangible assets |
|
|
(1,331 |
) |
|
|
(1,329 |
) |
|
|
(1,293 |
) |
Contingent purchase price payments related to business acquisitions |
|
|
— |
|
|
|
— |
|
|
|
(1,961 |
) |
Acquisition of MaxStream, Inc., net of cash acquired |
|
|
(16,096 |
) |
|
|
— |
|
|
|
— |
|
Acquisition of Rabbit Semiconductor, Inc., net of cash acquired |
|
|
— |
|
|
|
(48,934 |
) |
|
|
— |
|
Acquisition of FS Forth-Systeme GmbH and Sistemas Embebidos S.A.,
net of cash acquired |
|
|
— |
|
|
|
(4,759 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(23,203 |
) |
|
|
(30,067 |
) |
|
|
(24,988 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on short-term borrowing and line of credit |
|
|
— |
|
|
|
(1,274 |
) |
|
|
(2,149 |
) |
Payments on capital lease obligations and long-term debt |
|
|
(490 |
) |
|
|
(152 |
) |
|
|
— |
|
Borrowing on note payable |
|
|
5,000 |
|
|
|
21,000 |
|
|
|
— |
|
Payment on note payable |
|
|
(5,000 |
) |
|
|
(21,000 |
) |
|
|
— |
|
Proceeds from stock option plan transactions |
|
|
4,558 |
|
|
|
5,600 |
|
|
|
8,587 |
|
Proceeds from employee stock purchase plan transactions |
|
|
764 |
|
|
|
721 |
|
|
|
668 |
|
Excess tax benefits from stock-based compensation |
|
|
726 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
5,558 |
|
|
|
4,895 |
|
|
|
7,106 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates changes on cash and cash equivalents |
|
|
(107 |
) |
|
|
578 |
|
|
|
861 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,684 |
|
|
|
(6,538 |
) |
|
|
2,300 |
|
Cash and cash equivalents, beginning of period |
|
|
12,990 |
|
|
|
19,528 |
|
|
|
17,228 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
15,674 |
|
|
$ |
12,990 |
|
|
$ |
19,528 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
213 |
|
|
$ |
104 |
|
|
$ |
19 |
|
Income taxes paid |
|
$ |
3,384 |
|
|
$ |
4,314 |
|
|
$ |
347 |
|
Income taxes refunded |
|
$ |
(513 |
) |
|
$ |
(2 |
) |
|
$ |
(163 |
) |
Other non-cash financing items: |
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of line of credit related to acquisition |
|
$ |
— |
|
|
$ |
1,275 |
|
|
$ |
— |
|
Assumption of capital leases related to acquisition |
|
$ |
— |
|
|
$ |
1,747 |
|
|
$ |
— |
|
Accrual for FS Forth-Systeme GmbH contingent purchase price payment |
|
$ |
800 |
|
|
$ |
— |
|
|
$ |
— |
|
Issuance of common stock for MaxStream acquisition |
|
$ |
20,704 |
|
|
$ |
— |
|
|
$ |
— |
|
The accompanying notes are an integral part of the consolidated financial statements.
42
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED) |
DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands)
For the years ended September 30, 2006, 2005 and 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Stock |
|
|
Other |
|
|
Total |
|
| |
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Compen- |
|
|
Comprehensive |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Par Value |
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Earnings |
|
|
sation |
|
|
Income (Loss) |
|
|
Equity |
|
Balances, September 30, 2003 |
|
|
23,212 |
|
|
$ |
232 |
|
|
|
2,970 |
|
|
$ |
(21,005 |
) |
|
$ |
117,720 |
|
|
$ |
9,568 |
|
|
$ |
(86 |
) |
|
$ |
(566 |
) |
|
$ |
105,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,663 |
|
|
|
|
|
|
|
|
|
|
|
8,663 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899 |
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase issuances |
|
|
|
|
|
|
|
|
|
|
(104 |
) |
|
|
735 |
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668 |
|
Stock compensation expensed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
Issuance of stock upon exercise of
stock options |
|
|
1,466 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
8,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,587 |
|
Tax benefit realized upon exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,274 |
|
Forfeiture of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
— |
|
Stock options issued to non-employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2004 |
|
|
24,678 |
|
|
|
247 |
|
|
|
2,866 |
|
|
|
(20,270 |
) |
|
|
128,538 |
|
|
|
18,231 |
|
|
|
— |
|
|
|
333 |
|
|
|
127,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,665 |
|
|
|
|
|
|
|
|
|
|
|
17,665 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase issuances |
|
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
504 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721 |
|
Issuance of stock upon exercise of
stock options |
|
|
779 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
5,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600 |
|
Tax benefit realized upon exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,113 |
|
Stock options issued to non-employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2005 |
|
|
25,457 |
|
|
|
255 |
|
|
|
2,795 |
|
|
|
(19,766 |
) |
|
|
136,513 |
|
|
|
35,896 |
|
|
|
— |
|
|
|
639 |
|
|
$ |
153,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,113 |
|
|
|
|
|
|
|
|
|
|
|
11,113 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase issuances |
|
|
|
|
|
|
|
|
|
|
(83 |
) |
|
|
588 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764 |
|
Issuance of stock upon exercise of
stock options |
|
|
615 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
4,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,558 |
|
Tax benefit realized upon exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,289 |
|
Issuance of stock — MaxStream
acquisition |
|
|
1,677 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
20,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,704 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2006 |
|
|
27,749 |
|
|
$ |
277 |
|
|
|
2,712 |
|
|
$ |
(19,178 |
) |
|
$ |
164,782 |
|
|
$ |
47,009 |
|
|
$ |
— |
|
|
$ |
940 |
|
|
$ |
193,830 |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Digi is a worldwide leader in device networking for business, developing reliable products and
technologies to connect and securely manage local or remote electronic devices over the network or
via the Internet. Businesses use Digi products to create, customize and control retail operations,
industrial automation and other applications.
Digi’s products are sold globally through distributors, systems integrators, solution providers and
direct marketers as well as direct to strategic OEMs, government and commercial partners.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Investments with original maturities in excess of three
months are classified as marketable securities. Marketable securities consist of high-grade
commercial paper and corporate bonds. All marketable securities are classified as held-to-maturity
and are carried at amortized cost. Gross unrealized holding losses were $55,145 and $144,312 as of
September 30, 2006 and 2005, respectively. Because the Company intends to hold all marketable
securities until maturity, realization of the unrealized holding loss at September 30, 2006 is not
likely, and therefore not recorded.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Financial instruments that may subject the Company to significant concentrations of credit risk
consist primarily of trade receivables. Creditworthiness and account payment status are routinely
monitored and collateral is not required. The Company maintains an allowance for doubtful accounts,
which reflects the estimate of losses that may result from the inability of some of the Company’s
customers to make required payments. The estimate for the allowance for doubtful accounts is based
on known circumstances regarding collectibility of customer accounts and historical collections
experience.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist primarily of cash equivalents, marketable securities,
trade accounts receivable and accounts payable for which current carrying amounts approximate fair
market value.
INVENTORIES
Inventories are stated at the lower of cost or fair market value, with cost determined using the
first-in, first-out method. Appropriate consideration is given to deterioration, obsolescence and
other factors in evaluating fair market value.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost, net of accumulated depreciation.
Depreciation is provided by charges to operations using the straight-line method over their
estimated useful lives. Furniture and
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, EQUIPMENT AND IMPROVEMENTS (CONTINUED)
fixtures and other equipment are depreciated over a period of three to five years. Building
improvements and buildings are depreciated over ten and thirty-nine years, respectively. Equipment
under capital lease is depreciated over the lease term. The Company owns and occupies three
buildings located in Minnetonka and Eden Prairie, Minnesota and Dortmund, Germany. The Company is
attempting to sell the building in Dortmund, Germany.
Expenditures for maintenance and repairs are charged to operations as incurred, while major
renewals and betterments are capitalized. The assets and related accumulated depreciation accounts
are adjusted for asset retirements and disposals with the resulting gain or loss included in
operations.
IDENTIFIABLE INTANGIBLE ASSETS
Purchased proven technology, license agreements, covenants not to compete and other identifiable
intangible assets are recorded at fair value when acquired in a business acquisition, or at cost
when not purchased in a business acquisition. Purchased in-process research and development costs
(IPR&D) are expensed upon consummation of the related business acquisition. Useful lives for
identifiable intangible assets are estimated at the time of acquisition based on the periods of
time from which the Company expects to derive benefits from the identifiable intangible assets and
range from three to thirteen years. Methods of amortization reflect the pattern in which the asset
is consumed. To date, all of the Company’s identifiable intangible assets are being amortized on a
straight-line basis. Amortization of purchased and core technology is presented as a separate
component of cost of sales in the Consolidated Statement of Operations. Amortization of all other
acquired identifiable intangible assets is charged to operating expense as a component of general
and administrative expense.
In accordance with Statement of Financial Accounting Standard No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets” (FAS 144), identifiable intangible assets are reviewed
at least annually for impairment, or whenever events or circumstances indicate that undiscounted
expected future cash flows are not sufficient to recover the carrying value amount. The Company
measures impairment loss by utilizing an undiscounted cash flow valuation technique using fair
values indicated by the income approach. Impairment losses, if any, are recorded currently. No
impairments were identified during fiscal 2006, 2005 or 2004.
GOODWILL
Goodwill represents the excess of cost over the fair value of identifiable assets acquired.
Goodwill is subject to an impairment assessment, using a discounted cash flow technique by
reporting unit, at least annually which may result in a charge to operations if the fair value of
the reporting unit in which the goodwill is reported declines. The Company performed its annual
goodwill impairment assessment as of June 30, 2006 utilizing a discounted cash flow technique.
Since the calculated fair value of each reporting unit exceeded book value, there was no impairment
identified.
STOCK REPURCHASES
From time to time, the Board of Directors authorizes the Company to repurchase common stock when
market conditions are favorable or when a strategic opportunity exists. The Company has
outstanding a Board of Directors authorization to repurchase up to 1,000,000 shares of its common
stock. As of September 30, 2006, no common stock has been repurchased under this authorization.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue
Recognition in Financial Statements” (SAB 104), Statement of Financial Accounting Standards No. 48
“Revenue Recognition when the Right of Return Exists” (FAS 48), Statement of Position No. 97-2
“Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-4 “Deferral of the Effective Date
of Certain Provisions of SOP No. 97-2”, SOP 81-1 “Accounting for Performance of Construction-Type
and Certain Production-Type Contracts”, and Emerging Issues Task Force (EITF) 00-21 “Revenue
Arrangements with Multiple Deliverables”.
Revenue recognized for hardware product sales was 98.7% of net sales in fiscal 2006 and fiscal 2005
and 97.4% of net sales in fiscal 2004. The Company recognizes product revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable,
collectibility is reasonably assured and there are no post-delivery obligations, other than
warranty. Under these criteria, product revenue is generally recognized upon shipment of product
to customers, including Direct (end-user) / OEMs and distributors. Sales to authorized domestic
distributors and Direct / OEMs are made with certain rights of return and price adjustment
provisions. Estimated reserves for future returns and pricing adjustments are established by the
Company based on an analysis of historical patterns of returns and price adjustments as well as an
analysis of authorized returns compared to received returns, current on-hand inventory at
distributors, and distribution sales for the current period. Estimated reserves for future returns
and price adjustments are charged against revenues in the same period as the corresponding sales
are recorded.
The Company also generates revenue from the sale of software licenses, post-contract customer
support, fees associated with technical support, training, professional and engineering services,
and royalties. Revenue recognized resulting from such non-product sales represented 1.3% of net
sales in fiscal 2006, 1.3% of net sales in fiscal 2005, and 2.6% of net sales in fiscal 2004. The
Company’s software development tools and development boards often include multiple elements,
including hardware, software licenses, post-contract customer support, limited training and basic
hardware design review. The Company’s customers purchase these products and services during their
product development process in which they use the tools to build network connectivity into the
devices they are manufacturing. Revenue for software licenses, professional and engineering
services and training is recognized upon performance, which includes delivery of a final product
version and acceptance by the customer. For post-contract customer support and fees associated
with technical support, revenue is deferred and recognized over the life of the contract as service
is performed. Royalty revenue is recognized when cash is received from the customer. Unearned
post-contract customer support and unearned nonrecurring engineering services revenue is included
in deferred revenue on the balance sheet.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Research and development costs include
compensation, allocation of corporate costs, depreciation, professional services and prototypes.
Software development costs are expensed as incurred until the point that technological feasibility
and proven marketability of the product are established. To date, the time period between the
establishment of technological feasibility and completion of software development has been short,
and no significant development costs have been incurred during that period. Accordingly, the
Company has not capitalized any software development costs to date.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting amounts at each year
end based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
NET INCOME PER COMMON SHARE
Basic net income per common share is calculated based on the weighted average number of common
shares outstanding during the period. Diluted net income per common share is computed by dividing
net income by the weighted average number of common and common equivalent shares outstanding during
the period. The Company’s only potentially dilutive common shares are those that result from
dilutive common stock options and shares purchased through the employee stock purchase plan.
The following table is a reconciliation of the numerators and denominators in the net income per
common share calculations (in thousands, except per common share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended September 30, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,113 |
|
|
$ |
17,665 |
|
|
$ |
8,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common
share — weighted average shares outstanding |
|
|
23,338 |
|
|
|
22,450 |
|
|
|
21,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and employee stock purchase plan |
|
|
742 |
|
|
|
921 |
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per common
share — adjusted weighted average shares |
|
|
24,080 |
|
|
|
23,371 |
|
|
|
22,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.48 |
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.46 |
|
|
$ |
0.76 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
Stock options to purchase 1,327,000, 720,875 and 2,053,609 common shares at September 30,
2006, 2005 and 2004, respectively, were not included in the computation of diluted earnings per
common share because the options’ exercise prices were greater than the average market price of
common shares and, therefore, their effect would be antidilutive whether or not the Company
generated net income.
STOCK-BASED COMPENSATION
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standard No.
123 (revised 2004), “Share-Based Payment” (FAS No. 123R), as amended by FASB Staff Position
No. FAS 123(R)-4 (FSP FAS 123(R)-4), using the modified prospective method of application.
This standard requires the recognition of the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the award. Under
this statement, the Company must measure the cost of employee services received in exchange for an award of equity instruments
based upon the fair value of the award on the date of grant. This cost must be recognized
over the period during which
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
an employee is required to provide the service (usually the vesting period). Under the
modified prospective method, compensation expense is recognized both for (i) awards granted,
modified or settled subsequent to September 30, 2005 and (ii) the non-vested portion of awards
granted prior to October 1, 2005. The consolidated financial statements for the prior periods
have not been restated to reflect, and do not include, the impact of FAS123R. See Note 9 —
Stock-Based Compensation for pro forma disclosure of stock-based compensation for fiscal 2005
and fiscal 2004.
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the Company’s international subsidiaries are
measured using local currencies as the functional currency. Assets and liabilities of these
operations are translated at the exchange rates in effect at each fiscal year-end. Statements of
operations accounts are translated at the weighted average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from period to period are
included in accumulated other comprehensive income (loss) in stockholders’ equity. The Company
has not implemented a hedging strategy to reduce the risk of foreign currency translation
exposures.
USE OF ESTIMATES AND RISKS AND UNCERTAINTIES
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
For the Company, comprehensive income is comprised of net income and foreign currency translation
adjustments. Foreign currency translation adjustments are charged or credited to the accumulated
other comprehensive income account in stockholders’ equity.
RECENT ACCOUNTING DEVELOPMENTS
In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting
Changes and Error Corrections: A Replacement of APB Opinion No. 20 and SFAS No. 3.” This statement
changes the requirements for the accounting for and reporting of a voluntary change in accounting
principle, and also applies to instances when an accounting pronouncement does not include specific
transition provisions. The statement replaces the previous requirement that voluntary changes be
recognized by including the cumulative effect of the change in net income of the period of the
change. The statement requires retrospective application of a new accounting principle to prior
periods’ financial statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The statement is effective for changes and
corrections made in fiscal years beginning after December 15, 2005. The Company does not expect
the adoption of the statement at October 1, 2006 to have a material effect on its consolidated
financial statements.
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement.”
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
This standard allows companies to present in their statements of income any taxes assessed by a
governmental authority that are directly imposed on revenue-producing transactions between a seller
and a customer, such as sales, use, value-added and some excise taxes, on either a gross (included
in revenue and costs) or a net (excluded from revenue) basis. This standard will be effective for
the Company in interim periods and fiscal years beginning after December 15, 2006. The Company
presents these transactions on a net basis, and therefore the adoption of this standard will have
no impact on its consolidated financial statements.
In July, 2006 the FASB issued Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition
threshold and measurement process for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides
guidance on the derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48 will be
effective for the Company beginning October 1, 2007. The Company is in the process of
determining the effect, if any, that the adoption of FIN 48 will have on its consolidated
financial statements. However, the Company does expect to reclassify a portion of its
unrecognized tax benefits from current to non-current liabilities because payment of cash is
not anticipated within one year of the balance sheet date.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements
should be taken into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial statements are
materially misstated. SAB 108 requires registrants to apply the new guidance for the first time
that it identifies material errors in existence at the beginning of the first fiscal year ending
after November 15, 2006 by correcting those errors through a one-time cumulative effect adjustment
to beginning-of-year retained earnings. The Company does not expect SAB 108 to have a material
impact on its consolidated results of operations or financial position.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of FAS 157 are effective for the fiscal year beginning October 1, 2008. The Company is
currently evaluating the impact of the provisions of FAS 157 on its consolidated financial
statements and does not believe the impact of the adoption will be material.
In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R),”
(“FAS 158”). FAS 158 requires an employer to recognize the over-funded or under-funded status of a
defined benefit pension and other postretirement plan (other than a multiemployer plan) as an asset
or liability in its statement of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income of a business entity. FAS 158
is effective for fiscal years ending after December 15, 2006. Since the Company does not have a
defined benefit or other postretirement plans, FAS 158 will not impact its consolidated financial
statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
MaxStream, Inc.
On July 27, 2006, the Company acquired MaxStream, Inc. (MaxStream), a privately held corporation
and a leader in the wireless device networking market. The total purchase price of $40.5 million
included $19.8 million in cash (excluding cash acquired of $3.7 million) and $20.7 million in
common stock, in exchange for all outstanding shares of MaxStream’s preferred and common stock and
outstanding stock options. The Company did not replace MaxStream’s outstanding options with Digi
options. The value of the Company’s common stock was based on a per share value of $12.35,
calculated as the average market price of the common stock during the two business days immediately
preceding July 27, 2006 when the parties reached agreement on terms and announced the acquisition.
The above purchase consideration includes an adjustment of $0.6 million pertaining to the closing
working capital of MaxStream as of July 27, 2006.
Cash in the amount of $1.925 million and 165,090 shares of common stock have been deposited to an
escrow fund established at Wells Fargo Bank, Minnesota. These amounts will be held in escrow for a
period not to exceed one year from the date of closing to satisfy possible claims that may arise
pursuant to specific representation and warranty sections of the merger agreement. The escrowed
amounts of cash and stock have been included in the determination of the purchase consideration on
the date of acquisition because management believes the outcome of the representation and warranty
matters is determinable beyond a reasonable doubt.
The purchase price was allocated to the estimated fair value of assets acquired and liabilities
assumed. The purchase price allocation resulted in goodwill of $26.4 million and a charge of $2.0
million for acquired in-process research and development. The Company believes that the
acquisition resulted in the recognition of goodwill primarily because MaxStream’s wireless
technologies and products significantly expand Digi’s wireless offering, covering both short and
medium range distances using embedded modules and boxed/packaged solutions and provides the
capability to provide our customers end-to-end wireless solutions.
MaxStream’s operating results are included in the Company’s consolidated results of operations from
the date of acquisition. The consolidated balance sheet as of September 30, 2006 reflects the
allocation of the purchase price to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition.
The table below sets forth the final purchase price allocation (in thousands):
| |
|
|
|
|
Cash, including cash in escrow and direct acquisition costs |
|
$ |
19,826 |
|
Common stock, including stock in escrow |
|
|
20,704 |
|
|
|
|
|
|
|
$ |
40,530 |
|
|
|
|
|
|
|
|
|
|
Fair value of net tangible assets acquired |
|
$ |
4,716 |
|
Identifiable intangible assets: |
|
|
|
|
Existing purchased and core technology |
|
|
6,900 |
|
Existing customer relationships |
|
|
3,600 |
|
Trade names and trademarks |
|
|
300 |
|
Patent pending / unpatented technology |
|
|
1,300 |
|
In-process research and development |
|
|
2,000 |
|
Goodwill |
|
|
26,433 |
|
Deferred tax liabilities related to identifiable intangibles |
|
|
(4,719 |
) |
|
|
|
|
|
|
$ |
40,530 |
|
|
|
|
|
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The purchased and core technologies identified above have useful lives ranging between four to nine
years, customer relationships have useful lives of ten years, and patents and trademarks have
useful lives between five to ten years. Useful lives for identifiable intangible assets are
estimated at the time of acquisition based on the periods of time from which the Company expects to
derive benefits from the identifiable intangible assets. The identifiable intangible assets are
amortized using the straight-line method which reflects the pattern in which the asset is consumed.
At the time of acquisition, MaxStream had development projects in process associated with the
XStream Gen. 2, X. Eleven, Mesh Firmware, Xbee Zigbee Firmware and Xplore products. Management
estimated that $2.0 million of the purchase price represented the fair value of acquired in-process
research and development related to the products listed below (in thousands) that were under
development, had a measurable percentage completed and a documented expected life, had not yet
reached technological feasibility, and had no alternative future uses. This amount was expensed as
a non-tax-deductible charge upon consummation of the acquisition.
| |
|
|
|
|
XStream Gen. 2 |
|
$ |
900 |
|
X. Eleven |
|
|
500 |
|
Mesh Firmware |
|
|
400 |
|
Xbee Zigbee Firmware |
|
|
100 |
|
Xplore |
|
|
100 |
|
|
|
|
|
Total in-process research and development |
|
$ |
2,000 |
|
|
|
|
|
The Company utilized the income valuation approach to determine the estimated fair value of
the acquired in-process research and development. These estimates were based on the following
assumptions:
| |
• |
|
The estimated revenues were based upon the Company’s estimate of revenue growth for each
of the products over the next five fiscal years, using the assumption that all revenue
recorded after that date will be generated from future technologies. |
| |
| |
• |
|
The estimated gross margin was based upon historical gross margin for MaxStream’s
products, with an increase over time attributable to production synergies. |
| |
| |
• |
|
The estimated operating expenses were based on consideration of historical selling,
general and administrative expenses as a percentage of sales and MaxStream’s projected
operating expenses. |
| |
| |
• |
|
Maintenance research and development, defined as the research and development necessary
to sustain the existing technology and its revenue stream, was also included as an
operating expense. The estimated remaining cost to complete each in-process research and
development technology was also included in operating expenses. |
| |
| |
• |
|
When applying the income valuation approach, the cash flows expected to be generated by
an asset are discounted to their present value equivalent using a rate of return that
reflects the relative risk of the investment, as well as the time value of money. This
return, known as the weighted average cost of capital (“WACC”), is an overall rate based
upon the individual rates of return for invested capital (equity and interest-bearing
debt). The discount rate used in the income valuation approach was 25%. Premiums were
added to the WACC to account for the inherent risks in the development of the products, the
risks of the products being completed on schedule, and the risk of the eventual sales of
the product meeting the expectations of the Company. The Company used a 40% rate of return
for the in-process research and development projects. |
The Company anticipates that all of the projects will be released in calendar year 2007, with the
exception of Xplore which will be released during calendar year 2006. These estimates described
above are subject to
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
change, given the uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur.
Rabbit Semiconductor Inc.
On May 26, 2005, the Company acquired Rabbit Semiconductor Inc. (Rabbit), formerly Z-World, Inc., a
privately held corporation for a purchase price of $49.3 million in cash (excluding cash acquired
of $0.4 million and assumption of $1.3 million of debt) in exchange for all outstanding shares of
Rabbit’s common stock and outstanding stock options. The Company did not replace Rabbit’s
outstanding options with Digi options.
The purchase price was allocated to the estimated fair value of assets acquired and liabilities
assumed. The purchase price allocation resulted in goodwill of $30.6 million. The Company
believes that the acquisition resulted in the recognition of goodwill primarily because the
complementary nature of Rabbit microprocessor and microprocessor-based modules, and Z-World single
board computer product lines are anticipated to extend Digi’s position in the commercial device
networking module business.
Rabbit’s operating results are included in the Company’s consolidated results of operations from
the date of acquisition. The consolidated balance sheets as of September 30, 2006 and 2005 reflect
the allocation of the purchase price to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition.
The table below sets forth the final purchase price allocation (in thousands):
| |
|
|
|
|
Cash, including direct acquisition costs |
|
$ |
49,287 |
|
|
|
|
|
|
|
|
|
|
Fair value of net tangible assets acquired |
|
$ |
8,766 |
|
Identifiable intangible assets: |
|
|
|
|
Purchased and core technology |
|
|
8,700 |
|
Customer relationships |
|
|
4,400 |
|
Patents and trademarks |
|
|
2,600 |
|
In-process research and development |
|
|
300 |
|
Goodwill |
|
|
30,644 |
|
Deferred tax liabilities related to identifiable
intangibles |
|
|
(6,123 |
) |
|
|
|
|
|
|
$ |
49,287 |
|
|
|
|
|
The purchased and core technology identified above have useful lives ranging between five to
seven years, customer relationships have useful lives of nine years, and patents and trademarks
have useful lives between ten to thirteen years. Useful lives for identifiable intangible assets
are estimated at the time of acquisition based on the periods of time from which the Company
expects to derive benefits from the identifiable intangible assets. The identifiable intangible
assets are amortized using the straight-line method which reflects the pattern in which the asset
is consumed.
At the time of acquisition, Rabbit had a development project in process for the Rabbit 4000
microprocessor. The project involved the design and development of a next-generation
microprocessor that would have increased code execution speed, reduced code size, added security
features, and integrated Ethernet capabilities. Management estimated that $0.3 million of the
purchase price represented the fair value of acquired in-process research and development related
to the Rabbit 4000 microprocessor that had not yet reached technological
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
feasibility and had no alternative future uses. This amount was expensed as a non-tax-deductible
charge upon consummation of the acquisition.
The Company utilized the income valuation approach to determine the estimated fair value of the
acquired in-process research and development. These estimates were based on the following
assumptions:
| |
• |
|
The estimated revenues were based upon the Company’s estimate of revenue growth over the
next six fiscal years, or the estimated life cycle of the Rabbit 4000 microprocessor, using
the assumption that all revenue recorded after that date will be generated from future
technologies. |
| |
| |
• |
|
The estimated gross margin was based upon historical gross margin for Rabbit’s products,
with an increase over time attributable to production synergies. |
| |
| |
• |
|
The estimated selling, general and administrative expenses were based on consideration
of historical operating expenses as a percentage of sales and Rabbit’s projected operating
expenses. |
| |
| |
• |
|
When applying the income valuation approach, the cash flows expected to be generated by
an asset are discounted to their present value equivalent using a rate of return that
reflects the relative risk of the investment, as well as the time value of money. This
return, known as the WACC, is an overall rate based upon the individual rates of return for
invested capital (equity and interest-bearing debt). The discount rate used in the income
valuation approach was 23%. Premiums were added to the WACC to account for the inherent
risks in the development of the products, the risks of the products being completed on
schedule, and the risk of the eventual sales of the product meeting the expectations of the
Company. The Company used a 40% rate of return for the in-process research and development
projects. |
The Company released the Rabbit 4000 microprocessor in March 2006. The Company anticipates that
the projected revenue from the Rabbit 4000 microprocessor will be in line with original
projections. These estimates are subject to change and no assurance can be given that deviations
from these estimates will not occur.
FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
Effective April 1, 2005, the Company acquired FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
(collectively referred to as FS Forth) from Embedded Solutions AG of Germany. FS Forth is a
provider of embedded modules, software and development services. The purchase price included a
payment of $5.6 million in cash, with contingent consideration of up to $1.2 million payable on
October 1, 2007 if FS Forth achieves certain future milestones. A payment of $0.8 million was made
in October 2006 as contingent consideration based on the achievement of the milestones identified
in the merger agreement. This contingent consideration is recorded as an accrued liability and an
addition to goodwill as of September 30, 2006.
The purchase price allocation resulted in goodwill of $3.2 million. The Company believes that the
FS Forth acquisition resulted in the recognition of goodwill primarily because of the anticipated
extension of its commercial device networking module business. FS Forth had modules that would
immediately add value to the Company’s broader module product line.
FS Forth’s operating results are included in the Company’s consolidated results of operations from
the date of acquisition. The consolidated balance sheets as of September 30, 2006 and 2005 reflect
the allocation of the purchase price to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The table below sets forth the purchase price allocation (in thousands):
| |
|
|
|
|
Cash, including direct acquisition costs |
|
$ |
5,554 |
|
|
|
|
|
|
|
|
|
|
Fair value of net tangible assets acquired |
|
$ |
1,154 |
|
Identifiable intangible assets: |
|
|
|
|
Purchased and core technology |
|
|
720 |
|
Customer relationships |
|
|
1,290 |
|
Goodwill |
|
|
3,174 |
|
Deferred tax liabilities related to identifiable
intangibles |
|
|
(784 |
) |
|
|
|
|
|
|
$ |
5,554 |
|
|
|
|
|
The purchased and core technology and customer relationships identified above have useful
lives of three years. Useful lives for identifiable intangible assets are estimated at the time of
acquisition based on the periods of time from which the Company expects to derive benefits from the
identifiable intangible assets. The identifiable intangible assets are amortized using the
straight-line method which reflects the pattern in which the asset is consumed.
The Company has determined that the FS Forth acquisition was not material to the consolidated
results of operations or financial condition of the Company; therefore, pro forma financial
information is not presented.
The following unaudited pro forma condensed consolidated results of operations have been prepared
as if the acquisition of MaxStream and Rabbit had occurred as of the beginning of each period
presented. Pro forma adjustments include amortization of identifiable intangible assets. The pro
forma net income for the year ended September 30, 2006 includes the $2.0 million charge related to
acquired in-process research and development associated with the MaxStream acquisition. The pro
forma net income for the year ended September 30, 2005 includes the $0.3 million charge related to
acquired in-process research and development associated with the Rabbit acquisition.
(in
thousands, except per common share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended September 30, |
|
|
|
|
| |
|
2006 |
|
2005 |
|
|
|
|
Net sales |
|
$ |
155,749 |
|
|
$ |
156,574 |
|
|
|
|
|
Net income |
|
$ |
10,738 |
|
|
$ |
15,252 |
|
|
|
|
|
Net income per common share, basic |
|
$ |
0.46 |
|
|
$ |
0.63 |
|
|
|
|
|
Net income per common share, diluted |
|
$ |
0.45 |
|
|
$ |
0.60 |
|
|
|
|
|
The unaudited pro forma condensed consolidated results of operations are not necessarily
indicative of results that would have occurred had the MaxStream and Rabbit acquisitions occurred
as of the beginning of each period presented above, nor are they necessarily indicative of the
results that will be obtained in the future.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
Identifiable Intangible Assets
Amortized identifiable intangible assets as of September 30, 2006 and 2005 are comprised of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of September 30, 2006 |
|
As of September 30, 2005 |
| |
|
Total |
|
Total |
| |
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
| |
|
carrying |
|
Accumulated |
|
|
|
|
|
carrying |
|
Accumulated |
|
|
| |
|
amount |
|
amortization |
|
Net |
|
amount |
|
amortization |
|
Net |
| |
|
|
|
|
Purchased and core technology |
|
$ |
48,022 |
|
|
$ |
(31,492 |
) |
|
$ |
16,530 |
|
|
$ |
41,086 |
|
|
$ |
(26,517 |
) |
|
$ |
14,569 |
|
License agreements |
|
|
2,440 |
|
|
|
(1,890 |
) |
|
|
550 |
|
|
|
2,440 |
|
|
|
(1,490 |
) |
|
|
950 |
|
Patents and trademarks |
|
|
7,608 |
|
|
|
(2,837 |
) |
|
|
4,771 |
|
|
|
5,691 |
|
|
|
(1,956 |
) |
|
|
3,735 |
|
Customer maintenance contracts |
|
|
700 |
|
|
|
(324 |
) |
|
|
376 |
|
|
|
700 |
|
|
|
(254 |
) |
|
|
446 |
|
Customer relationships |
|
|
11,470 |
|
|
|
(2,356 |
) |
|
|
9,114 |
|
|
|
7,803 |
|
|
|
(1,161 |
) |
|
|
6,642 |
|
| |
|
|
|
|
Total |
|
$ |
70,240 |
|
|
$ |
(38,899 |
) |
|
$ |
31,341 |
|
|
$ |
57,720 |
|
|
$ |
(31,378 |
) |
|
$ |
26,342 |
|
| |
|
|
|
|
Amortization expense for fiscal years 2006, 2005 and 2004 is as follows (in thousands):
| |
|
|
|
|
| Fiscal year |
|
Total |
2006 |
|
$ |
7,484 |
|
2005 |
|
$ |
6,037 |
|
2004 |
|
$ |
5,617 |
|
Estimated amortization expense for the next five years is as follows (in thousands):
| |
|
|
|
|
2007 |
|
$ |
7,487 |
|
2008 |
|
$ |
5,639 |
|
2009 |
|
$ |
4,358 |
|
2010 |
|
$ |
3,960 |
|
2011 |
|
$ |
3,345 |
|
Goodwill
The changes in the carrying amount of goodwill for fiscal 2006 and 2005 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Beginning balance, October 1 |
|
$ |
38,675 |
|
|
$ |
5,816 |
|
Acquisition of MaxStream |
|
|
26,433 |
|
|
|
|
|
Acquisition of Rabbit |
|
|
— |
|
|
|
30,644 |
|
Acquisition of FS Forth |
|
|
800 |
|
|
|
2,374 |
|
Other, primarily currency
translation adjustment |
|
|
(67 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
|
Ending balance, September 30 |
|
$ |
65,841 |
|
|
$ |
38,675 |
|
|
|
|
|
|
|
|
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
During fiscal 2005 and 2004, the Company operated in two reportable segments. Effective
October 1, 2005, the Company changed its organizational structure to functional reporting to
eliminate redundancies in management and infrastructure. In addition, certain intellectual
property that was previously utilized primarily in products that comprised the Device
Networking Solutions segment has now been integrated throughout the Company’s products in
order to provide more functionality and allow for ease of migration to next generation
technologies for the Company’s customers. As a result of these changes in organizational
structure and use of the Company’s product technology, the Chief Executive Officer, as the
chief operating decision maker, now reviews and assesses financial information, operating
results, and performance of the Company’s business in the aggregate. Accordingly, effective
October 1, 2005, the Company has a single operating and reporting segment and all periods
presented have been reclassified to conform to the single reportable segment.
The Company’s revenues consist of products that are in non-embedded and embedded product
groupings. Non-embedded products provide external connectivity solutions, while embedded
products solutions generally incorporate networking modules or microprocessors that are
smaller in size than non-embedded products and are internal to the devices being networked.
The products included in the non-embedded product grouping include multi-port serial adapters,
network connected products including terminal servers and non-embedded device servers,
universal serial bus connected products, and cellular products. The products included in the
embedded product grouping include microprocessors and development tools, embedded modules,
core modules and single-board computers, and network interface cards. The following table
provides revenue by product grouping (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30 |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Non-embedded |
|
$ |
86,638 |
|
|
$ |
87,453 |
|
|
$ |
82,896 |
|
Embedded |
|
|
58,025 |
|
|
|
37,745 |
|
|
|
28,330 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
144,663 |
|
|
$ |
125,198 |
|
|
$ |
111,226 |
|
|
|
|
|
|
|
|
|
|
|
The information in the following table provides revenue by the geographic location of the
customer for the years ended September 30, 2006, 2005 and 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
88,770 |
|
|
$ |
72,004 |
|
|
$ |
61,881 |
|
Europe |
|
|
35,104 |
|
|
|
29,380 |
|
|
|
23,090 |
|
Asia Pacific |
|
|
16,557 |
|
|
|
22,167 |
|
|
|
25,717 |
|
Other international |
|
|
4,232 |
|
|
|
1,647 |
|
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
144,663 |
|
|
$ |
125,198 |
|
|
$ |
111,226 |
|
|
|
|
|
|
|
|
|
|
|
Net long-lived assets by geographic location:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
13,870 |
|
|
$ |
15,424 |
|
|
$ |
13,016 |
|
International, primarily Europe |
|
|
5,618 |
|
|
|
5,384 |
|
|
|
5,618 |
|
|
|
|
|
|
|
|
|
|
|
Total net long-lived assets |
|
$ |
19,488 |
|
|
$ |
20,808 |
|
|
$ |
18,634 |
|
|
|
|
|
|
|
|
|
|
|
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
The Company’s U.S. export sales comprised 35.4%, 40.4% and 44.2% of net sales for the years ended
September 30, 2006, 2005 and 2004, respectively.
The following table identifies customers whose net sales comprised more than 10% of net sales
during the years ended September 30, 2006, 2005 and 2004 as well as customers who comprised more
than 10% of trade accounts receivable as of September 30, 2006, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended September 30, |
| |
|
2006 |
|
2005 |
|
2004 |
| |
|
|
|
|
|
Accounts |
|
|
|
|
|
Accounts |
|
|
|
|
|
Accounts |
| |
|
Net Sales % |
|
Receivable % |
|
Net Sales % |
|
Receivable % |
|
Net Sales % |
|
Receivable % |
Customer A |
|
|
* |
|
|
|
11.2 |
% |
|
|
|
* |
|
|
10.3 |
% |
|
|
|
* |
|
|
24.7 |
% |
Customer B |
|
|
* |
|
|
|
|
* |
|
|
12.9 |
% |
|
|
|
* |
|
|
15.6 |
% |
|
|
|
* |
Customer C |
|
|
* |
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
11.6 |
% |
Customer D |
|
|
* |
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
10.3 |
% |
|
|
|
| * |
|
Represents less than 10% of net sales or trade accounts receivable, as applicable |
5. SELECTED BALANCE SHEET DATA
| |
|
|
|
|
|
|
|
|
| As of September 30, (in thousands) |
|
2006 |
|
|
2005 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
20,800 |
|
|
$ |
17,769 |
|
Less allowance for doubtful accounts |
|
|
495 |
|
|
|
872 |
|
|
|
|
|
|
|
|
|
|
$ |
20,305 |
|
|
$ |
16,897 |
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
16,491 |
|
|
$ |
15,074 |
|
Work in process |
|
|
606 |
|
|
|
569 |
|
Finished goods |
|
|
4,814 |
|
|
|
2,884 |
|
|
|
|
|
|
|
|
|
|
$ |
21,911 |
|
|
$ |
18,527 |
|
|
|
|
|
|
|
|
Property, equipment and improvements, net: |
|
|
|
|
|
|
|
|
Land |
|
$ |
2,381 |
|
|
$ |
2,351 |
|
Buildings |
|
|
20,653 |
|
|
|
20,124 |
|
Improvements |
|
|
2,612 |
|
|
|
2,638 |
|
Equipment |
|
|
12,483 |
|
|
|
17,484 |
|
Purchased software |
|
|
8,929 |
|
|
|
9,794 |
|
Furniture and fixtures |
|
|
1,756 |
|
|
|
1,615 |
|
|
|
|
|
|
|
|
|
|
|
48,814 |
|
|
|
54,006 |
|
Less accumulated depreciation and amortization |
|
|
29,326 |
|
|
|
33,198 |
|
|
|
|
|
|
|
|
|
|
$ |
19,488 |
|
|
$ |
20,808 |
|
|
|
|
|
|
|
|
Other accrued expenses: |
|
|
|
|
|
|
|
|
Product warranty accrual |
|
$ |
1,104 |
|
|
$ |
1,187 |
|
Accrued professional fees |
|
|
879 |
|
|
|
1,417 |
|
Other accrued expenses |
|
|
3,335 |
|
|
|
2,444 |
|
|
|
|
|
|
|
|
|
|
$ |
5,318 |
|
|
$ |
5,048 |
|
|
|
|
|
|
|
|
Included in equipment at September 30, 2006 is $2.4 million of equipment under capital leases
with accumulated depreciation of $1.2 million. Depreciation expense was $2.7 million, $2.3 million
and $2.4 million for each of the fiscal years ended 2006, 2005 and 2004, respectively.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL GUARANTEES
The Company, in general, warrants its products to be free from defects in material and workmanship
under normal use and service. The warranty periods range from 90 days to five years from the date
of receipt. The Company has the option to repair or replace products it deems defective due to
material or workmanship. Estimated warranty costs are accrued in the period that the related
revenue is recognized based upon an estimated average per unit repair or replacement cost applied
to the estimated number of units under warranty. These estimates are based upon historical
warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty
accrual. The following table summarizes the activity associated with the product warranty accrual
for the years ended September 30, 2006, 2005 and 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accruals for |
|
|
|
|
| |
|
Balance at |
|
Warranties |
|
Settlements |
|
Balance at |
| Fiscal year |
|
October 1, |
|
issued |
|
made |
|
September 30, |
2006 |
|
$ |
1,187 |
|
|
$ |
454 |
(1) |
|
$ |
(537 |
) |
|
$ |
1,104 |
|
2005 |
|
$ |
855 |
|
|
$ |
900 |
(1) |
|
$ |
(568 |
) |
|
$ |
1,187 |
|
2004 |
|
$ |
879 |
|
|
$ |
493 |
|
|
$ |
(517 |
) |
|
$ |
855 |
|
|
|
|
| (1) |
|
Includes $17 for fiscal 2006 and $97 for fiscal 2005 of warranty liabilities assumed as a
result of acquisitions described in Note 2. |
The Company is not responsible and does not warrant that customer software versions created by
OEM customers based upon the Company’s software source code will function in a particular way,
conform to any specifications, are fit for any particular purpose and does not indemnify these
customers from any third party liability as it relates to or arises from any customization or
modifications made by the OEM customer.
7. CAPITAL LEASE OBLIGATIONS AND SHORT-TERM BORROWINGS
On July 26, 2006, the Company entered into a short-term loan agreement in the amount of $5.0
million to finance the July 27, 2006 acquisition of MaxStream, Inc. Interest was based on the
daily LIBOR rate plus 0.35% which ranged between 5.64% and 5.70% from the date of the loan through
August 17, 2006. Per the terms of the agreement, payment of the outstanding balance was due
October 31, 2006; however, the Company had the option to prepay without penalty. The Company paid
the note in full on August 17, 2006.
On May 20, 2005, the Company entered into a short-term loan agreement in the amount of $21.0
million. This short-term note was used to finance the Rabbit acquisition. Per the terms of the
agreement, payment of the outstanding balance was due October 1, 2005; however, the Company had the
option to prepay without penalty. The Company paid the note in full on July 15, 2005. Interest
was based on the daily LIBOR rate plus 0.35% which ranged between 3.39% and 3.68% from the date of
the loan through July 15, 2005.
At the time the Company acquired Rabbit (see Note 2), Rabbit maintained a $5.0 million revolving
line of credit with an outstanding balance of $1.3 million. The Company repaid all but $1,000 of
this line of credit which is classified as a current short-term borrowing as of September 30, 2005.
The remaining $1,000 was paid in December 2005. The revolving line of credit agreement was
terminated as of March 2006.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL LEASE OBLIGATIONS AND SHORT-TERM BORROWINGS (CONTINUED)
At the time the Company acquired Rabbit and FS Forth (see Note 2), Rabbit and FS Forth had
outstanding capital lease agreements for equipment. The following table summarizes future amounts
due under capital leases (in thousands):
| |
| Fiscal Year |
|
|
|
|
2007 |
|
$ |
472 |
|
2008 |
|
|
445 |
|
2009 |
|
|
330 |
|
2010 |
|
|
64 |
|
|
|
|
|
Total minimum payments required |
|
|
1,311 |
|
|
|
|
|
|
Less interest on capital lease obligations |
|
|
(205 |
) |
|
|
|
|
| |
Net minimum principal payments |
|
|
1,106 |
|
|
|
|
|
|
Less capital lease obligations, current portion |
|
|
(381 |
) |
|
|
|
|
| |
Capital leases obligations, net of current portion |
|
$ |
725 |
|
|
|
|
|
8. INCOME TAXES
The components of the income tax provision are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the years ended September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,248 |
|
|
$ |
(2,325 |
) |
|
$ |
923 |
|
State |
|
|
991 |
|
|
|
968 |
|
|
|
700 |
|
Foreign |
|
|
(785 |
) |
|
|
623 |
|
|
|
416 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
951 |
|
|
|
589 |
|
|
|
1,266 |
|
Foreign |
|
|
749 |
|
|
|
463 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,154 |
|
|
$ |
318 |
|
|
$ |
3,487 |
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset at September 30 consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Current deferred tax asset |
|
$ |
2,667 |
|
|
$ |
2,892 |
|
Non-current deferred tax asset |
|
|
1,366 |
|
|
|
— |
|
Non-current deferred tax liability |
|
|
(7,482 |
) |
|
|
(2,195 |
) |
|
|
|
|
|
|
|
Net deferred tax (liability) asset |
|
$ |
(3,449 |
) |
|
$ |
697 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Uncollectible accounts
and other reserves |
|
$ |
978 |
|
|
$ |
1,393 |
|
Depreciation and amortization |
|
|
1,073 |
|
|
|
372 |
|
Inventories |
|
|
845 |
|
|
|
984 |
|
Compensation costs |
|
|
844 |
|
|
|
515 |
|
Net operating loss carryforwards |
|
|
1,682 |
|
|
|
3,137 |
|
Tax credit carryforwards |
|
|
3,140 |
|
|
|
4,246 |
|
Identifiable intangible assets |
|
|
(12,011 |
) |
|
|
(9,950 |
) |
|
|
|
|
|
|
|
Net deferred tax (liability) asset |
|
$ |
(3,449 |
) |
|
$ |
697 |
|
|
|
|
|
|
|
|
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
As of September 30, 2006, the Company had domestic federal net operating loss carryforwards and tax
credit carryforwards of $2.6 million and $2.9 million, respectively, which expire at various dates
through 2026. The Company also had foreign net operating loss carryforwards and tax credit
carryforwards at September 30, 2006, of $2.0 million and $0.2 million, respectively, the majority
of which carry forward indefinitely.
The Company has concluded that it is more likely than not that net deferred tax assets will be
realized based on future projected taxable income and the anticipated future reversal of deferred
tax liabilities, and therefore no valuation allowance has been established at September 30, 2006.
The amount of the net deferred tax assets actually realized, however, could vary if there are
differences in the timing or amount of future reversals of existing deferred tax liabilities or
changes in the amounts of future taxable income. If the Company’s future taxable income
projections are not realized, a valuation allowance would be required, and would be reflected as
income tax expense at the time that any such change in future taxable income is determined.
The reconciliation of the statutory federal income tax rate to the Company’s effective income tax
rate for the years ended September 30 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
|
2004 |
Statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefits |
|
|
4.2 |
|
|
|
3.5 |
|
|
|
3.8 |
|
Utilization of tax credits |
|
|
(2.7 |
) |
|
|
(3.4 |
) |
|
|
(4.8 |
) |
Extraterritorial income tax benefit and
manufacturing deduction |
|
|
(3.3 |
) |
|
|
(3.0 |
) |
|
|
(3.6 |
) |
Acquired in-process research and development |
|
|
4.6 |
|
|
|
0.6 |
|
|
|
— |
|
Reversal of tax reserves primarily due to
settlement of tax audits |
|
|
(10.4 |
) |
|
|
(31.6 |
) |
|
|
— |
|
Non-deductible stock-based compensation |
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
(1.0 |
) |
|
|
0.7 |
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.2 |
% |
|
|
1.8 |
% |
|
|
28.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006, the Company recorded discrete tax benefits of $1.6 million, primarily related
to the settlement of an audit with the French government of certain of the Company’s prior fiscal
years income tax returns. The Company had established tax reserves that were no longer required as
a result of the settlement.
In the first quarter of fiscal 2005, the Internal Revenue Service (IRS) completed an audit of
certain of the Company’s prior fiscal years income tax returns, subject to final approval by
the Congressional Joint Committee on Taxation. As a result of a settlement agreement
associated with this audit, the Company paid $3.2 million to the IRS in the first quarter of
fiscal 2005 resulting in a reduction to the income taxes payable liability. In February 2005,
the Congressional Joint Committee on Taxation approved the settlement with the IRS. The
Company had tax reserves recorded in excess of the ultimate amount settled, resulting in an
income tax benefit of $5.7 million in fiscal 2005 representing the excess income tax reserves
over the amount paid.
The Company operates in multiple tax jurisdictions both in the U.S. and outside of the U.S.
Accordingly, the Company must determine the appropriate allocation of income to each of these
jurisdictions. This determination requires the Company to make several estimates and
assumptions. Tax audits associated with the allocation of this income, and other complex
issues, may require an extended period of time to resolve. Certain open tax years are
expected to close during fiscal year 2007 and future years that may result in adjustments to
the Company’s income tax balances in those years that are material to its consolidated
financial position and results of operations.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION
The Company’s Stock Option Plan (the Stock Option Plan) provides for the issuance of non-statutory
stock options (NSOs) and incentive stock options (ISOs) to key employees and non-employee board
members holding not more than 5% of the outstanding shares of the Company’s common stock. The
Company’s Non-Officer Stock Option Plan (the Non-Officer Plan) provides for the issuance of NSOs to
key employees who are not officers or directors of the Company. The Company’s 2000 Omnibus Stock
Plan (the Omnibus Plan and, together with the Stock Option Plan and the Non-Officer Plan, the
Plans), provides for the issuance of stock-based incentives, including ISOs and NSOs, to employees
and others who provide services to the Company, including consultants, advisers and directors.
Options granted under the Plans will expire if unexercised after ten years from the date of grant.
Options granted under the Plans generally vest over a four-year service period.
The exercise price for ISOs and non-employee director options granted under the Stock Option Plan
or the Omnibus Plan is set at the fair market value of the Company’s common stock based on the
closing price on the date of grant. The exercise price for nonstatutory options granted under the
Plans is set by the Compensation Committee of the Board of Directors. While the Plans expressly
permit grants at less than fair market value, the Company’s practice is to only award grants at
fair market value. The authority to grant options under the Plans and set other terms and
conditions rests with the Compensation Committee. The Stock Option Plan and Non-Officer Plan
terminate in 2006 and the Omnibus Plan terminates in 2010. The Company recorded cash received from
the exercise of stock options of $4.6 million and related tax benefits of $0.7 million during
fiscal 2006. Upon exercise, the Company issues new shares of stock.
The Plans have provisions allowing employees to elect to pay their withholding obligation through
share reduction. No employees elected to pay income tax withholding obligations through share
reduction during fiscal 2006, 2005 or 2004.
In connection with the acquisition of NetSilicon in fiscal 2002, the Company assumed options to
purchase shares of common stock of NetSilicon under the NetSilicon, Inc. Amended and Restated 1998
Director Stock Option Plan, the NetSilicon, Inc. Amended and Restated 1998 Incentive and
Non-Qualified Stock Option Plan and the NetSilicon, Inc. 2001 Stock Option and Incentive Plan (the
Assumed Plans), which options became exercisable for shares of the Company’s common stock. The
Company cannot grant additional awards under these plans.
The Company also sponsors an Employee Stock Purchase Plan (the Purchase Plan) covering all domestic
employees. The Purchase Plan allows eligible participants the right to purchase common stock on a
quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month
offering period. Employee contributions to the Purchase Plan were $0.8 million, $0.5 million and
$0.7 million in the fiscal years ended 2006, 2005 and 2004, respectively. Pursuant to the Purchase
Plan, 83,066, 71,345 and 103,875 common shares were issued to employees during the fiscal years
ended 2006, 2005 and 2004 respectively. Shares are issued under the Purchase Plan from treasury
stock. As of September 30, 2006, 169,084 common shares are available for future issuances under the
Purchase Plan.
Prior to October 1, 2005, the Company accounted for its stock-based awards using the
intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” (APB No. 25) and related interpretations, in accordance with Statement
of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (FAS No. 123).
Accordingly, compensation costs for stock options granted were measured as the excess, if any, of
the fair value of the Company’s common stock at the date of grant over the exercise price to
acquire the common stock. Such compensation expense, if any, was amortized on a straight-line basis
over the option vesting period.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123
(revised 2004), “Share-Based Payment” (FAS No. 123R), as amended by FASB Staff Position No. FAS
123(R)-4 (FSP FAS 123(R)-4), using the modified prospective method of application. Under this
method, compensation expense is recognized both for (i) awards granted, modified or settled
subsequent to September 30, 2005 and (ii) the non-vested portion of awards granted prior to October
1, 2005. Compensation expense recorded during fiscal 2006 includes approximately $0.7 million
related to awards issued subsequent to September 30, 2005. In addition, compensation expense
recorded during fiscal 2006 includes approximately $1.6 million related to the current vesting
portion of awards issued prior to September 30, 2005.
The impact of adopting FAS No. 123R for the Company’s fiscal year ended September 30, 2006 was an
increase in compensation expense of $2.3 million and a reduction of $0.07 for basic earnings per
share and $0.06 for diluted earnings per share. The total income tax benefit recognized in the
income statement for stock based compensation during fiscal 2006 was $0.8 million. Compensation
cost capitalized as part of inventory was immaterial as of September 30, 2006.
Stock-based compensation expense (pre-tax) is included in the consolidated results of operations
for the year ended September 30, 2006 as follows (in thousands):
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
September 30, 2006 |
|
Cost of sales |
|
$ |
89 |
|
Sales and marketing |
|
|
694 |
|
Research and development |
|
|
530 |
|
General and administrative |
|
|
976 |
|
|
|
|
|
Total stock-based compensation |
|
$ |
2,289 |
|
|
|
|
|
FAS No. 123R also requires that the excess windfall tax benefit resulting from the tax
deductibility of the increase in the value of share-based arrangements be presented as a component
of cash flows from financing activities in the Consolidated Statements of Cash Flows. In periods
prior to October 1, 2005, such amounts were presented as a component of cash flows from operating
activities.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
A summary of options and common shares reserved for grant under the Plans and Assumed Plans are as
follows (in thousands, except per common share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
Options |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
| |
|
Available |
|
|
Options |
|
|
Average |
|
|
Contractual Term |
|
|
Intrinsic |
|
| |
|
for Grant |
|
|
Outstanding |
|
|
Exercise Price |
|
|
(in years) |
|
|
Value(1) |
|
Balances, September 30, 2003 |
|
|
2,002 |
|
|
|
5,856 |
|
|
$ |
8.44 |
|
|
|
|
|
|
|
|
|
| |
Granted |
|
|
(640 |
) |
|
|
640 |
|
|
|
10.02 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
(1,466 |
) |
|
|
5.86 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
126 |
|
|
|
(245 |
) |
|
|
14.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September
30, 2004 |
|
|
1,488 |
|
|
|
4,785 |
|
|
$ |
9.15 |
|
|
|
|
|
|
|
|
|
| |
Granted |
|
|
(635 |
) |
|
|
635 |
|
|
|
13.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
(778 |
) |
|
|
7.20 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
97 |
|
|
|
(131 |
) |
|
|
12.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September
30, 2005 |
|
|
950 |
|
|
|
4,511 |
|
|
$ |
9.98 |
|
|
|
|
|
|
|
|
|
| |
Granted |
|
|
(478 |
) |
|
|
478 |
|
|
|
12.34 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
(615 |
) |
|
|
7.41 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
125 |
|
|
|
(134 |
) |
|
|
12.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September
30, 2006 |
|
|
597 |
|
|
|
4,240 |
|
|
$ |
10.54 |
|
|
|
5.40 |
|
|
$ |
15,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2004 |
|
|
|
|
|
|
3,869 |
|
|
$ |
9.33 |
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2005 |
|
|
|
|
|
|
3,544 |
|
|
$ |
9.54 |
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
|
|
|
|
3,300 |
|
|
$ |
10.08 |
|
|
|
4.48 |
|
|
$ |
13,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The aggregate intrinsic value represents the total pre-tax intrinsic value, based on
Digi’s closing stock price of $13.50 as of September 29, 2006, which would have been received by
the option holders had all option holders exercised their options as of that date. |
The intrinsic value of an option is the amount by which the fair value of the underlying stock
exceeds its exercise price. The total intrinsic value of all options exercised during the twelve
months ended September 30, 2006 was $2.9 million. The weighted average fair value of options
granted during the twelve months ended September 30, 2006 was $5.79. The weighted average fair value was determined based upon the fair
value of each option on the grant date, utilizing the Black-Scholes option-pricing model and the
following assumptions:
| |
|
|
Risk free interest rate
|
|
4.28% — 5.02%
|
Expected option holding period
|
|
3 — 5 years
|
Expected volatility
|
|
50% — 60%
|
Weighted average volatility
|
|
55% |
Expected dividend yield
|
|
0 |
The fair value of each option award granted during the periods presented was estimated using
the Black-Scholes option valuation model that uses the assumptions noted in the table above.
Expected volatilities are based on the historical volatility of our stock. We use historical data
to estimate option exercise and employee termination information within the valuation model;
separate groups of grantees that have similar historical exercise behaviors are considered
separately for valuation purposes. The expected term of options granted is derived from the
vesting period and historical information and represents the period of time that options granted
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate
in effect at the time of the grant whose maturity equals the expected term of the option.
A summary of the Company’s non-vested options as of September 30, 2006 and changes during the
twelve months then ended is presented below (in thousands, except per common share amounts):
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
| |
|
|
|
|
|
Grant Date |
| |
|
Number of |
|
Fair Value per |
| |
|
Options |
|
Common Share |
Nonvested at September 30, 2005 |
|
|
967 |
|
|
$ |
4.81 |
|
| |
Granted |
|
|
478 |
|
|
|
5.79 |
|
Vested |
|
|
(412 |
) |
|
|
4.59 |
|
Forfeited |
|
|
(93 |
) |
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
| |
Nonvested at September 30, 2006 |
|
|
940 |
|
|
$ |
5.33 |
|
|
|
|
|
|
|
|
|
|
The Company used historical data to estimate pre-vesting forfeiture rates. The pre-vesting
forfeiture rate used in fiscal 2006 was 2.5%. As of September 30, 2006 the total unrecognized
compensation cost related to non-vested stock-based compensation arrangements net of expected
forfeitures was $4.8 million and the related weighted average period over which it is expected to
be recognized is approximately 2.6 years.
At September 30, 2006, the weighted average exercise price and remaining life of the stock options
are as follows (in thousands, except remaining life and exercise price):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
|
|
Options Exercisable |
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
|
Weighted |
| Range of |
|
Options |
|
Contractual Life |
|
Average |
|
|
Options |
|
Average |
| Exercise Prices |
|
Outstanding |
|
(In Years) |
|
Exercise Price |
|
|
Exercisable |
|
Exercise Price |
$2.19 — $5.00 |
|
|
205 |
|
|
|
6.1 |
|
|
$ |
2.84 |
|
|
|
|
195 |
|
|
$ |
2.82 |
|
$5.01 — $6.00 |
|
|
410 |
|
|
|
5.0 |
|
|
$ |
5.40 |
|
|
|
|
396 |
|
|
$ |
5.41 |
|
$6.01 — $7.00 |
|
|
332 |
|
|
|
4.4 |
|
|
$ |
6.78 |
|
|
|
|
319 |
|
|
$ |
6.78 |
|
$7.01 — $8.00 |
|
|
265 |
|
|
|
3.9 |
|
|
$ |
7.61 |
|
|
|
|
256 |
|
|
$ |
7.62 |
|
$8.01 — $10.00 |
|
|
414 |
|
|
|
6.0 |
|
|
$ |
9.58 |
|
|
|
|
395 |
|
|
$ |
9.57 |
|
$10.01 — $11.00 |
|
|
1,246 |
|
|
|
4.8 |
|
|
$ |
10.73 |
|
|
|
|
995 |
|
|
$ |
10.75 |
|
$11.01 — $12.00 |
|
|
281 |
|
|
|
3.7 |
|
|
$ |
11.90 |
|
|
|
|
240 |
|
|
$ |
11.96 |
|
$12.01 — $13.00 |
|
|
381 |
|
|
|
9.0 |
|
|
$ |
12.72 |
|
|
|
|
12 |
|
|
$ |
12.63 |
|
$13.01 — $20.00 |
|
|
539 |
|
|
|
6.9 |
|
|
$ |
14.51 |
|
|
|
|
325 |
|
|
$ |
14.44 |
|
$20.01 — $27.69 |
|
|
167 |
|
|
|
2.7 |
|
|
$ |
25.61 |
|
|
|
|
167 |
|
|
$ |
25.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.19 — $27.69 |
|
|
4,240 |
|
|
|
5.4 |
|
|
$ |
10.54 |
|
|
|
|
3,300 |
|
|
$ |
10.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information under FAS 123 for Periods Prior to Fiscal 2006:
Had the Company applied the fair-value-based method of accounting for its stock options granted to
employees and for the stock purchases under the employee stock purchase plan and charged operations
over the option vesting periods based on the fair value of options on the date of grant, net income
and net income per common
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION (CONTINUED)
share would have changed to the pro forma amounts indicated below (in thousands, except per common
share data):
| |
|
|
|
|
|
|
|
|
| |
|
Years ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Net income as reported |
|
$ |
17,665 |
|
|
$ |
8,663 |
|
Add: Total stock-based compensation
expense included in reported net
income,
net of related tax effects |
|
|
35 |
|
|
|
89 |
|
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects |
|
|
(1,363 |
) |
|
|
(2,338 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
16,337 |
|
|
$ |
6,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic — as reported |
|
$ |
0.79 |
|
|
$ |
0.41 |
|
Basic — pro forma |
|
$ |
0.73 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
Diluted — as reported |
|
$ |
0.76 |
|
|
$ |
0.39 |
|
Diluted — pro forma |
|
$ |
0.70 |
|
|
$ |
0.29 |
|
The weighted average fair value of options granted and assumed in fiscal years 2005 and 2004
was $6.35 and $5.07, respectively. The weighted average fair value was determined based upon the
fair value of each option on the grant date, utilizing the Black-Scholes option-pricing model and
the following assumptions:
| |
|
|
|
|
|
|
|
|
| Assumptions: |
|
2005 |
|
2004 |
Risk free interest rate |
|
|
3.52 |
% |
|
|
2.86 |
% |
Expected option holding period |
|
3.9 years |
|
3.6 years |
Expected volatility |
|
|
60 |
% |
|
|
70 |
% |
Expected dividend yield |
|
|
0 |
|
|
|
0 |
|
10. SHARE RIGHTS PLAN
The Company has adopted a share rights plan. Each right entitles its holder to buy one
one-hundredth of a share of a new series of junior participating preferred stock at an exercise
price of $115, subject to adjustment. The rights are exercisable only if certain ownership
considerations are met. The Company will be entitled to redeem the rights prior to the rights
becoming exercisable.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS
The Company has entered into various operating lease agreements for office facilities and
equipment, the last of which expires in fiscal 2015. The office facility leases generally require
the Company to pay a pro-rata share of the lessor’s operating expenses. Certain operating leases
contain escalation clauses and are being amortized on a straight-line basis over the term of the
lease. The following schedule reflects future minimum rental commitments under noncancelable
operating leases. These minimum payments have not been reduced by
minimum sublease rentals of $0.2
million due in the future under noncancelable subleases.
| |
|
|
|
|
| |
|
Amount |
|
| Fiscal Year |
|
(in thousands) |
|
2007 |
|
$ |
2,400 |
|
2008 |
|
|
1,328 |
|
2009 |
|
|
747 |
|
2010 |
|
|
552 |
|
2011 |
|
|
553 |
|
Thereafter |
|
|
958 |
|
|
|
|
|
Total minimum payments required |
|
$ |
6,538 |
|
|
|
|
|
The following schedule shows the composition of total rental expense for all operating leases
for the years ended September 30 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Rentals |
|
$ |
2,352 |
|
|
$ |
1,921 |
|
|
$ |
1,652 |
|
Less: sublease rentals |
|
|
(127 |
) |
|
|
(183 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,225 |
|
|
$ |
1,738 |
|
|
$ |
1,523 |
|
|
|
|
|
|
|
|
|
|
|
12. EMPLOYEE BENEFIT PLANS
The Company currently has a savings and profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code (the Code), whereby eligible employees may contribute pre-tax earnings, not
to exceed amounts allowed under the Code.
Employees may contribute up to 25% of their pre-tax earnings (not to exceed amounts allowed under
the Code). The Company provides a match of 100% on the first 3% of each employee’s bi-weekly
contribution and a 50% match on the next 2% of each employee’s bi-weekly contribution. In
addition, the Company may make contributions to the plan at the discretion of the Board of
Directors. The Company provided matching contributions of $0.9 million, $0.8 million and
$0.8 million in the fiscal years ended September 30, 2006, 2005 and 2004, respectively.
13. CONTINGENCIES
On April 19, 2002, a consolidated amended class action complaint was filed in the United
States District Court for the Southern District of New York asserting claims relating to the
initial public offering (IPO) of NetSilicon and approximately 300 other public companies. The
complaint names as defendants the Company, NetSilicon, certain of its officers and certain
underwriters involved in NetSilicon’s IPO, among numerous others, and asserts, among other
things, that NetSilicon’s IPO prospectus and registration statement violated federal
securities laws because they contained material misrepresentations and/or omissions regarding the conduct of NetSilicon’s IPO underwriters in allocating shares in
NetSilicon’s IPO to the underwriters’ customers. The Company believes that the claims against
the NetSilicon defendants
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES (CONTINUED)
are without merit and has defended the litigation vigorously. Pursuant to a stipulation
between the parties, the two named officers were dismissed from the lawsuit, without
prejudice, on October 9, 2002.
In June 2003, the Company elected to participate in a proposed settlement agreement with the
plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would
result in a dismissal, with prejudice, of all claims in the litigation against the Company and
against any of the other issuer defendants who elect to participate in the proposed settlement,
together with the current or former officers and directors of participating issuers who were named
as individual defendants.
Consummation of the proposed settlement remains conditioned upon obtaining approval by the Court.
On September 1, 2005, the Court preliminarily approved the proposed settlement and directed that
notice of the terms of the proposed settlement be provided to class members. Thereafter, the Court
held a fairness hearing on April 24, 2006, at which objections to the proposed settlement were
heard. After the fairness hearing, the Court took under advisement whether to grant final approval
to the proposed settlement.
If the proposed settlement is not consummated, the Company intends to continue to defend the
litigation vigorously. The litigation process is inherently uncertain and unpredictable,
however, there can be no guarantee as to the ultimate outcome of this pending lawsuit. The
Company maintains liability insurance for such matters and expects that the liability
insurance will be adequate to cover any potential unfavorable outcome, less the applicable
deductible amount of $250,000 per claim. As of September 30, 2006, the Company has accrued a
liability for the deductible amount of $250,000 which the Company believes reflects the amount
of loss that is probable. In the event the Company has losses that exceed the limits of the
liability insurance, such losses could have a material effect on the business, or consolidated
results of operations or financial condition of the Company.
On April 13, 2004, the Company filed a lawsuit against Lantronix Inc. (Lantronix) alleging that
certain of Lantronix’s products infringe the Company’s U.S. Patent No. 6,446,192. The Company
filed the lawsuit in the U.S. District Court in Minnesota. The lawsuit sought both monetary and
non-monetary relief. On May 3, 2004, Lantronix filed a lawsuit against the Company alleging that
certain of the Company’s products infringe Lantronix’s U.S. Patent No. 6,571,305, in the U.S.
District Court for the Central District of California. The lawsuit sought both monetary and
non-monetary relief. On February 7, 2005 Lantronix and Acticon Technologies LLC filed a lawsuit
against the Company alleging that certain of the Company’s products infringe U.S. Patent No.
4,972,470. The lawsuit was filed in the U.S. District Court for the Eastern District of Texas.
The lawsuit sought both monetary and non-monetary relief. On May 12, 2005 Lantronix filed a
lawsuit against the Company alleging that certain of the Company’s products infringe Lantronix’s
U.S. Patent No. 6,881,096. The lawsuit was filed in the U.S. District Court for the Eastern
District of Texas. The lawsuit sought both monetary and non-monetary relief. On May 2, 2006,
Lantronix and the Company settled all pending infringement litigations between the companies.
Under and subject to the terms of the agreement, the companies have cross-licensed each others’
patents, and each company will have the benefit and protection afforded by all of each others’
current and future patents for a period of six years.
In the normal course of business, the Company is subject to various claims and litigation,
including patent infringement and intellectual property claims. Management of the Company expects
that these various claims and litigation will not have a material adverse effect on the
consolidated results of operations or financial condition of the Company.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per common share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter ended |
| |
|
Dec. 31 |
|
Mar. 31 |
|
June 30 |
|
Sept. 30 |
| |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales |
|
$ |
33,376 |
|
|
$ |
34,380 |
|
|
$ |
35,860 |
|
|
$ |
41,047 |
|
Gross profit (1) |
|
|
18,198 |
|
|
|
18,318 |
|
|
|
19,467 |
|
|
|
21,522 |
|
Net income (1)(2)(3) |
|
|
2,183 |
|
|
|
2,567 |
|
|
|
3,348 |
|
|
|
3,015 |
|
Net income per common share — basic |
|
|
0.10 |
|
|
|
0.11 |
|
|
|
0.14 |
|
|
|
0.12 |
|
Net income per common share — diluted |
|
|
0.09 |
|
|
|
0.11 |
|
|
|
0.14 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales |
|
$ |
29,470 |
|
|
$ |
29,312 |
|
|
$ |
30,208 |
|
|
$ |
36,208 |
|
Gross profit (1) |
|
|
17,213 |
|
|
|
17,002 |
|
|
|
17,258 |
|
|
|
20,018 |
|
Net income (1)(2)(3) |
|
|
2,961 |
|
|
|
8,799 |
|
|
|
2,484 |
|
|
|
3,421 |
|
Net income per common share — basic |
|
|
0.13 |
|
|
|
0.39 |
|
|
|
0.11 |
|
|
|
0.15 |
|
Net income per common share — diluted |
|
|
0.13 |
|
|
|
0.37 |
|
|
|
0.11 |
|
|
|
0.15 |
|
|
|
|
| (1) |
|
Effective October 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123R), using the modified prospective method of application. Total
compensation cost for stock-based payment arrangements totaled $2.3 million ($1.5 million after
tax) during fiscal year 2006. Prior to the adoption of this Statement, no compensation cost for
stock-based payment arrangements was recognized in earnings. Refer to Note 9 to the Consolidated
Financial Statements for further discussion. |
| |
| (2) |
|
During 2006 and 2005, the Company reversed income tax reserves of $1.6 million and $5.7
million, respectively, which were no longer required primarily as a result of the settlement of
tax audits with the French government in 2006 and the Internal Revenue Service in 2005. In 2003,
the Company reversed a valuation allowance, resulting in an income tax benefit of $1.4 million,
based on anticipated future taxable income generated by the Company’s German operations. |
| |
| (3) |
|
The Company adopted the provisions of FAS 142 as of October 1, 2002 at which time it was
determined that there was a total goodwill impairment of $43.9 million. The charge was attributable
primarily to an impairment of the carrying value of goodwill related to the acquisition of
NetSilicon of $38.4 million and goodwill related to the CDC and INXTECH acquisitions of $3.5
million and $2.0 million, respectively. |
The summation of quarterly net income per common share may not equate to the year-end
calculation as quarterly calculations are performed on a discrete basis.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
|
|
|
|
Balance at |
| |
|
beginning |
|
costs and |
|
|
|
|
|
end of |
| Description |
|
of period |
|
expenses |
|
Deductions |
|
period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation account — doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
$ |
872 |
|
|
$ |
(204 |
) |
|
$ |
173 |
(1) |
|
$ |
495 |
|
September 30, 2005 |
|
$ |
1,022 |
|
|
$ |
(123 |
) |
|
$ |
27 |
(1) |
|
$ |
872 |
|
September 30, 2004 |
|
|
1,017 |
|
|
|
18 |
|
|
|
13 |
(1) |
|
|
1,022 |
|
|
|
|
| (1) |
|
Uncollectible accounts charged against allowance, net of recoveries |
68
|
|
|
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
|
|
|
| ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal financial
officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this
evaluation, the principal executive officer and principal financial officer concluded that the
Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as
of September 30, 2006 using the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this
assessment, management concluded that the Company’s internal control over financial reporting was
effective as of September 30, 2006. Management’s assessment of the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
On July 27, 2006, the Company acquired MaxStream, Inc. (MaxStream). MaxStream, whose total assets
represented 19.8% of total consolidated assets as of September 30, 2006 and whose total net sales
represented 2.2% of total consolidated net sales for the year ended September 30, 2006, was
acquired in a purchase business combination and was excluded from the Company’s September 30, 2006
assessment of the effectiveness of the Company’s internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
Other than the changes resulting from the MaxStream acquisition, there have been no significant
changes in the Company’s internal control over financial reporting during the Company’s most
recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
|
|
|
| ITEM 9B. |
|
OTHER INFORMATION |
None
69
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of filing this Form 10-K, the following individuals were executive officers of the
Registrant:
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
Joseph T. Dunsmore
|
|
|
48 |
|
|
Chairman, President and Chief Executive Officer |
|
|
|
|
|
|
|
Subramanian Krishnan
|
|
|
52 |
|
|
Senior Vice President, Chief Financial Officer
and Treasurer |
|
|
|
|
|
|
|
Lawrence A. Kraft
|
|
|
40 |
|
|
Senior Vice President of Sales and Marketing |
|
|
|
|
|
|
|
Joel K. Young
|
|
|
42 |
|
|
Senior Vice President of Research and Development and Chief Technical Officer |
Mr. Dunsmore joined the Company in October 1999 as President and Chief Executive Officer and a
member of the Board of Directors and was elected Chairman of the Board in May 2000. Prior to
joining the Company, Mr. Dunsmore was Vice President of Access for Lucent Microelectronics, a
telecommunications company now known as Agere Systems Inc., since June 1999. From October 1998 to
June 1999, he acted as an independent consultant to various high technology companies. From
February 1998 to October 1998, Mr. Dunsmore was Chief Executive Officer of NetFax, Inc., a
telecommunications company. From October 1995 to February 1998, he held executive management
positions at US Robotics and then at 3COM after 3COM acquired US Robotics in June 1997. Prior to
that, Mr. Dunsmore held various marketing management positions at AT&T Paradyne Corporation from
May 1983 to October 1995.
Mr. Krishnan was named Senior Vice President, Chief Financial Officer and Treasurer on February 1,
1999, prior to which he served as the Company’s Vice President of Finance since January 11, 1999.
Prior to joining the Company, he served as a principal with LAWCO Financial, an investment banking
firm in Minneapolis, Minnesota from January 1997 to January 1999. Prior to LAWCO, he served for 13 years with the
Valspar Corporation as the Director of Corporate Financial Planning and Reporting and Taxes and was
primarily responsible for mergers, acquisitions and joint ventures.
Mr. Kraft joined the Company as Vice President of Americas Sales and Marketing in February 2003 and
was named Senior Vice President of Sales and Marketing in November 2005. Prior to joining the
Company, Mr. Kraft was Vice President of Marketing for Advanced Switching Communications (ASC), a
provider of broadband access platforms, from June 1999 to February 2002 where he built a marketing
and product management organization. From July 1998 to October 1998, Mr. Kraft was Vice President
of Marketing for NetFax, Inc., a telecommunications company. Mr. Kraft also previously held the
positions of Manager of Product Marketing at 3COM/U.S. Robotics, Vice President of Marketing for
ISDN Systems Corporation, and Group Products Manager for the Internet access program at Sprint
Corporation.
Mr. Young joined the Company in July 2000 as Vice President of Engineering and was named Vice
President of Research and Development and Chief Technical Officer in November 2005. In October
2006, Mr. Young was named Senior Vice President of Research and Development and Chief Technical
Officer. Prior to joining the Company, Mr. Young served as a Vice President for Transcrypt
International, a provider of encryption products, in various engineering, sales and marketing
positions from February 1996 to June 2000. Before that, he held various engineering and management
positions at AT&T and AT&T Bell Laboratories from 1986 to 1996. When he left AT&T, he was a
District Manager responsible for creating new business services.
70
CODE OF ETHICS
The Company adopted a “code of ethics” within the meaning of Rule 406 of Regulation S-K, which is
applicable to the Company’s senior financial management, including specifically the Company’s Chief
Executive Officer, Chief Financial Officer and Controller. A copy of this code of ethics is listed
as an exhibit to this report. The Company intends to satisfy its disclosure obligations regarding
any amendment to, or a waiver from, a provision of this code of ethics by posting such information
on the Company’s website at www.digi.com. The Company also has a “code of conduct” that applies to
all directors, officers and employees, a copy of which is available through the Company’s website
(www.digi.com) under the “About us — Investor Relations — Corporate Governance” caption.
|
|
|
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
None.
71
PART IV
|
|
|
| ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Consolidated Financial Statements and Schedules of the Company
| |
1. |
|
Consolidated Statements of Operations for the fiscal years ended September 30, 2006, 2005 and 2004 |
| |
| |
|
|
Consolidated Balance Sheets as of September 30, 2006 and 2005 |
| |
| |
|
|
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2006, 2005 and 2004 |
| |
| |
|
|
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the fiscal years ended September 30, 2006, 2005 and 2004 |
| |
| |
|
|
Notes to Consolidated Financial Statements |
| |
2. |
|
Schedule of Valuation and Qualifying Accounts |
| |
| |
3. |
|
Report of Independent Registered Public Accounting Firm |
(b) Exhibits
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
2(a)
|
|
Agreement and Plan of Merger among the Company, Dove Sub Inc. and NetSilicon,
Inc. dated as of October 30, 2001 (excluding schedules and exhibits which the Registrant
agrees to furnish supplementally to the Securities and Exchange Commission upon request)
(1) |
|
|
|
2(b)
|
|
Purchase and assignment contract dated March 20, 2005 between Embedded Solutions
AG, Klaus Flesch, Angelika Flesch and Digi International GmbH (excluding schedules and
exhibits which the Registrant agrees to furnish supplementally to the Securities and
Exchange Commission upon request) (2) |
|
|
|
2(c)
|
|
Agreement and Plan of Merger among Digi International Inc., Karat Sub Inc. and
Z-World, Inc. dated as of May 26, 2005 (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the Securities and Exchange Commission
upon request) (3) |
|
|
|
2(d)
|
|
Agreement and Plan of Merger among Digi International Inc., Ocean Acquisition Sub
Inc. and MaxStream, Inc. dated as of July 27, 2006 (excluding schedules and exhibits
which the Registrant agrees to furnish supplementally to the Securities and Exchange
Commission upon request) (4) |
|
|
|
3(a)
|
|
Restated Certificate of Incorporation of the Company, as amended (5) |
|
|
|
3(b)
|
|
Amended and Restated By-Laws of the Company, as amended (6) |
|
|
|
4(a)
|
|
Form of Rights Agreement, dated as of June 10, 1998 between Digi International
Inc. and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent (7) |
|
|
|
4(b)
|
|
Amendment dated January 26, 1999, to Share Rights Agreement, dated as of June 10,
1998 between Digi International Inc. and Wells Fargo Bank Minnesota, National
Association (formerly known as Norwest Bank Minnesota, National Association), as Rights
Agent (8) |
72
|
|
|
| ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED) |
Exhibits (continued)
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
10(a)
|
|
Digi International Inc. Stock
Option Plan as Amended and Restated as of November 27, 2006* |
|
|
|
10(b)
|
|
Form of indemnification agreement with directors and officers of the Company (9) |
|
|
|
10(c)
|
|
Agreement between the Company and Subramanian Krishnan dated March 26, 1999* (10) |
|
|
|
10(c)(i)
|
|
Amendment to Agreement between the Company and Subramanian Krishnan dated February
5, 2001* (11) |
|
|
|
10(d)
|
|
Employment Agreement between the Company and Joseph T. Dunsmore dated September
27, 2006* |
|
|
|
10(e)
|
|
Digi International Inc. Employee Stock Purchase Plan, as Amended and Restated,
of the Company as of November 27, 2006 |
|
|
|
10(f)
|
|
Digi International Inc. 2000 Omnibus Stock Plan as Amended and Restated as of
November 27, 2006* |
|
|
|
10(g)
|
|
Digi International Inc. Non-Officer Stock Option Plan, as Amended and
Restated as of November 27, 2006 |
|
|
|
10(h)
|
|
NetSilicon, Inc. Amended and Restated 1998 Director Stock Option Plan (12) |
|
|
|
10(i)
|
|
NetSilicon, Inc. Amended and Restated 1998 Incentive and Non-Qualified
Stock Option Plan (13) |
|
|
|
10(j)
|
|
NetSilicon, Inc. 2001 Stock Option and Incentive Plan (14) |
|
|
|
10(k)
|
|
Form of Notice of Grant of Stock Options and Option Agreement and Terms
and Conditions of Nonstatutory Stock Option Agreement* (15) |
|
|
|
10(l)
|
|
Fiscal 2007 Executive Officer Compensation* (16) |
|
|
|
10(m)
|
|
Agreement between the Company and Lawrence A. Kraft, dated February 4, 2003* |
|
|
|
14
|
|
Code of Ethics (17) |
|
|
|
21
|
|
Subsidiaries of the Company |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
24
|
|
Powers of Attorney |
|
|
|
31(a)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
31(b)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
32
|
|
Section 1350 Certification |
|
|
|
| * |
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this
Form 10-K. |
73
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
| (1) |
|
Incorporated by reference to Annex A to the Company’s Registration Statement on Form S-4
(File no. 333-74118). |
| (2) |
|
Incorporated by reference to Exhibit 2(a) to the Company’s Form 10-Q for the quarter ended
March 31, 2005 (File no. 0-17972). |
| (3) |
|
Incorporated by reference to Exhibit 2 to the Company’s Form 8-K dated May 26, 2005 (File no.
0-17972). |
| (4) |
|
Incorporated by reference to Exhibit 2 to the Company’s Form 8-K dated July 27, 2006 (File
no. 0-17972) |
| (5) |
|
Incorporated by reference to Exhibit 3(a) to the Company’s Form 10-K for the year ended
September 30, 1993 (File no. 0-17972). |
| (6) |
|
Incorporated by reference to Exhibit 3(b) to the Company’s Form 10-K for the year ended
September 30, 2001 (File no. 0-17972). |
| (7) |
|
Incorporated by reference of Exhibit 1 to the Company’s Registration Statement on Form 8-A
dated June 24, 1998 (File no. 0-17972). |
| (8) |
|
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). |
| (9) |
|
Incorporated by reference to Exhibit 10(b) to the Company’s Registration Statement on Form
S-1 (File no. 33-30725). |
| (10) |
|
Incorporated by reference to Exhibit 10(k) to the Company’s Form 10-Q for the quarter ended
March 31, 1999 (File no. 0-17972). |
| (11) |
|
Incorporated by reference to Exhibit 10(e) to the Company’s Form 10-Q for the quarter ended
December 31, 2000 (File no. 0-17972). |
| (12) |
|
Incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82672). |
| (13) |
|
Incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82670). |
| (14) |
|
Incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82668). |
| (15) |
|
Incorporated by reference to Exhibit 10(a) to the Company’s Form 8-K dated September 13, 2004
(File no. 0-17972). |
| (16) |
|
Incorporated by reference to Item 1.01 of the Company’s Form 8-K dated September 26, 2006
(File no. 0-17972) |
| (17) |
|
Incorporated by reference to Exhibit 14 to the Company’s Form 10-K for the year ended
September 30, 2003 (File no. 0-17972). |
74
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 6, 2006 |
By: |
/s/ Joseph T. Dunsmore
|
|
| |
|
Joseph T. Dunsmore |
|
| |
|
President, Chief Executive Officer, Chairman, and Director |
|
| |
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 6, 2006 |
/s/ Joseph T. Dunsmore
|
|
| |
Joseph T. Dunsmore |
|
| |
President, Chief Executive Officer, Chairman, and Director
(Principal Executive Officer) |
|
| |
| |
|
|
| December 6, 2006 |
/s/ Subramanian Krishnan
|
|
| |
Subramanian Krishnan |
|
| |
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
|
| |
| |
|
|
GUY C. JACKSON |
|
|
KENNETH E. MILLARD |
|
|
AHMED NAWAZ
|
|
A majority of the Board of Directors* |
WILLIAM N. PRIESMEYER |
|
|
BRADLEY J. WILLIAMS |
|
|
|
|
|
| * |
|
Joseph T. Dunsmore, by signing his name hereto, does hereby sign this document on behalf of each
of the above named directors of the Registrant pursuant to Powers of Attorney duly executed by such
persons. |
| |
|
|
|
|
| |
|
|
| December 6, 2006 |
/s/ Joseph T. Dunsmore
|
|
| |
Joseph T. Dunsmore |
|
| |
Attorney-in-fact |
|
75
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
Description |
|
Page |
2(a)
|
|
Agreement and Plan of Merger among the Company,
Dove Sub Inc. and NetSilicon, Inc. dated as of
October 30, 2001
|
|
Incorporated by Reference |
2(b)
|
|
Purchase and assignment contract dated March 30, 2005
between Embedded Solutions AG, Klaus Flesch, Angelika
Flesch and Digi International GmbH
|
|
Incorporated by Reference |
2(c)
|
|
Agreement and plan of Merger among Digi International
Inc., Karat Sub Inc. and Z-World, Inc. dated as of
May 26, 2005 (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Securities and Exchange Commission upon request)
|
|
Incorporated by Reference |
2(d)
|
|
Agreement and Plan of Merger among Digi International
Inc., Ocean Acquisition Sub Inc. and MaxStream, Inc.
dated as of July 27, 2006 (excluding schedules and
exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange
Commission upon request)
|
|
Incorporated by Reference |
3(a)
|
|
Restated Certificate of Incorporation of the Company,
as amended
|
|
Incorporated by Reference |
3(b)
|
|
Amended and Restated By-Laws of the Company,
as amended
|
|
Incorporated by Reference |
4(a)
|
|
Form of Rights Agreement, dated as of June 10, 1998
between Digi International Inc. and Wells Fargo Bank
Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as
Rights Agent
|
|
Incorporated by Reference |
4(b)
|
|
Amendment dated January 26, 1999, to Shares Rights
Agreement, dated as of June 10, 1998 between Digi
International Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent
|
|
Incorporated by Reference |
10(a)
|
|
Digi International Inc. Stock Option Plan as Amended and Restated as of
November 27, 2006 |
|
Filed Electronically |
10(b)
|
|
Form of indemnification agreement with directors
and officers of the Company
|
|
Incorporated by Reference |
10(c)
|
|
Agreement between the Company and Subramanian
Krishnan dated March 26, 1999
|
|
Incorporated by Reference |
10(c)(i)
|
|
Amendment to the Agreement between the Company and
Subramanian Krishnan dated February 5, 2001
|
|
Incorporated by Reference |
10(d)
|
|
Employment Agreement between the Company and
Joseph T. Dunsmore, dated September 27, 2006
|
|
Filed Electronically |
10(e)
|
|
Digi International Inc. Employee Stock Purchase Plan,
as Amended and Restated of the Company as of
November 27, 2006,
|
|
Filed Electronically |
10(f)
|
|
Digi International Inc. 2000 Omnibus Stock Plan as Amended and
Restated as of November 27, 2006
|
|
Filed Electronically |
10(g)
|
|
Digi International Inc. Non-Officer Stock Option Plan, as
Amended and Restated as of November 27, 2006
|
|
Filed Electronically |
10(h)
|
|
NetSilicon, Inc. Amended and Restated 1998 Director Stock
Option Plan
|
|
Incorporated by Reference |
10(i)
|
|
NetSilicon, Inc. Amended and Restated 1998 Incentive and
Non-Qualified Stock Option Plan
|
|
Incorporated by Reference |
10(j)
|
|
NetSilicon, Inc. 2001 Stock Option and Incentive Plan
|
|
Incorporated by Reference |
10(k)
|
|
Form of Notice of Grant of Stock Options and Option
Agreement and Terms and Conditions of Nonstatutory
Stock Option Agreement
|
|
Incorporated by Reference |
76
EXHIBIT INDEX (CONTINUED)
| |
|
|
|
|
| Exhibit |
|
Description |
|
Page |
|
|
|
|
|
10(l)
|
|
Fiscal 2007 Executive Officer Compensation
|
|
Incorporated by Reference |
10(m)
|
|
Agreement between the Company and Lawrence A. Kraft,
dated February 4, 2003
|
|
Filed Electronically |
14
|
|
Code of Ethics
|
|
Incorporated by Reference |
21
|
|
Subsidiaries of the Company
|
|
Filed Electronically |
23
|
|
Consent of Independent Registered Public Accounting Firm
|
|
Filed Electronically |
24
|
|
Powers of Attorney
|
|
Filed Electronically |
31(a)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
Filed Electronically |
31(b)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
Filed Electronically |
32
|
|
Section 1350 Certification
|
|
Filed Electronically |
77