Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2009
OR
|
|
|
o |
|
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: 1-34033
DIGI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
41-1532464 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification Number) |
11001 Bren Road East
Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(952) 912-3444
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files.)
Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
On April 30, 2009, there were 24,620,820 shares of the registrants $.01 par value Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except per common share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
40,085 |
|
|
$ |
43,070 |
|
|
$ |
81,446 |
|
|
$ |
87,644 |
|
Cost of sales (exclusive of amortization of
purchased
and core technology shown separately below) |
|
|
19,908 |
|
|
|
18,986 |
|
|
|
38,977 |
|
|
|
38,529 |
|
Amortization of purchased and core technology |
|
|
1,008 |
|
|
|
907 |
|
|
|
2,052 |
|
|
|
2,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
19,169 |
|
|
|
23,177 |
|
|
|
40,417 |
|
|
|
47,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
8,976 |
|
|
|
9,034 |
|
|
|
18,601 |
|
|
|
17,720 |
|
Research and development |
|
|
6,196 |
|
|
|
6,529 |
|
|
|
13,170 |
|
|
|
13,118 |
|
General and administrative |
|
|
3,398 |
|
|
|
3,941 |
|
|
|
7,281 |
|
|
|
7,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,570 |
|
|
|
19,504 |
|
|
|
39,052 |
|
|
|
38,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
599 |
|
|
|
3,673 |
|
|
|
1,365 |
|
|
|
8,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
404 |
|
|
|
1,020 |
|
|
|
984 |
|
|
|
2,074 |
|
Interest expense |
|
|
(50 |
) |
|
|
(12 |
) |
|
|
(135 |
) |
|
|
(26 |
) |
Other income (expense) |
|
|
41 |
|
|
|
(19 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
395 |
|
|
|
989 |
|
|
|
654 |
|
|
|
2,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
994 |
|
|
|
4,662 |
|
|
|
2,019 |
|
|
|
10,300 |
|
Income tax provision |
|
|
279 |
|
|
|
1,565 |
|
|
|
288 |
|
|
|
3,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
715 |
|
|
$ |
3,097 |
|
|
$ |
1,731 |
|
|
$ |
6,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,953 |
|
|
|
25,714 |
|
|
|
25,169 |
|
|
|
25,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
25,195 |
|
|
|
26,312 |
|
|
|
25,439 |
|
|
|
26,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,541 |
|
|
$ |
14,176 |
|
Marketable securities |
|
|
32,589 |
|
|
|
59,337 |
|
Accounts receivable, net |
|
|
20,762 |
|
|
|
24,310 |
|
Inventories |
|
|
34,212 |
|
|
|
30,240 |
|
Income taxes receivable |
|
|
608 |
|
|
|
|
|
Other |
|
|
4,750 |
|
|
|
5,106 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
121,462 |
|
|
|
133,169 |
|
Marketable securities, long-term |
|
|
2,507 |
|
|
|
179 |
|
Property, equipment and improvements, net |
|
|
16,304 |
|
|
|
16,255 |
|
Identifiable intangible assets, net |
|
|
28,293 |
|
|
|
34,032 |
|
Goodwill |
|
|
83,122 |
|
|
|
86,578 |
|
Other |
|
|
1,191 |
|
|
|
1,203 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
252,879 |
|
|
$ |
271,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Capital lease obligations, current portion |
|
$ |
204 |
|
|
$ |
267 |
|
Accounts payable |
|
|
8,033 |
|
|
|
10,343 |
|
Income taxes payable |
|
|
|
|
|
|
182 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
3,840 |
|
|
|
5,981 |
|
Warranty |
|
|
1,143 |
|
|
|
1,214 |
|
Deferred payment on acquisition |
|
|
2,913 |
|
|
|
|
|
Other |
|
|
2,910 |
|
|
|
2,946 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
19,043 |
|
|
|
20,933 |
|
Capital lease obligations, net of current portion |
|
|
2 |
|
|
|
78 |
|
Income taxes payable |
|
|
4,780 |
|
|
|
4,358 |
|
Deferred tax liabilities |
|
|
5,387 |
|
|
|
7,582 |
|
Deferred payment on acquisition |
|
|
2,762 |
|
|
|
5,575 |
|
Other noncurrent liabilities |
|
|
791 |
|
|
|
956 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
32,765 |
|
|
|
39,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
28,367,265 and 28,335,876 shares issued |
|
|
283 |
|
|
|
283 |
|
Additional paid-in capital |
|
|
179,394 |
|
|
|
177,614 |
|
Retained earnings |
|
|
80,356 |
|
|
|
78,625 |
|
Accumulated other comprehensive loss |
|
|
(11,513 |
) |
|
|
(1,897 |
) |
Treasury stock, at cost, 3,738,034 and 2,960,457 shares |
|
|
(28,406 |
) |
|
|
(22,691 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
220,114 |
|
|
|
231,934 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
252,879 |
|
|
$ |
271,416 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
DIGI INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,731 |
|
|
$ |
6,767 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation of property, equipment and improvements |
|
|
1,203 |
|
|
|
1,293 |
|
Amortization of identifiable intangible assets and other assets |
|
|
3,662 |
|
|
|
3,499 |
|
Excess tax benefits from stock-based compensation |
|
|
(42 |
) |
|
|
(165 |
) |
Stock-based compensation |
|
|
1,842 |
|
|
|
1,776 |
|
Deferred income tax benefit |
|
|
(1,540 |
) |
|
|
(1,920 |
) |
Other |
|
|
40 |
|
|
|
32 |
|
Changes in operating assets and liabilities |
|
|
(7,694 |
) |
|
|
(1,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(798 |
) |
|
|
9,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchase of held-to-maturity marketable securities |
|
|
(7,647 |
) |
|
|
(51,691 |
) |
Proceeds from maturities of held-to-maturity marketable securities |
|
|
32,063 |
|
|
|
47,181 |
|
Contingent purchase price payments related to business acquisitions |
|
|
|
|
|
|
(1,315 |
) |
Increase in noncurrent restricted cash |
|
|
|
|
|
|
(392 |
) |
Proceeds from sale-leaseback and sale of other property,
equipment, improvements |
|
|
|
|
|
|
6,494 |
|
Purchase of property, equipment, improvements and certain
other intangible assets |
|
|
(1,666 |
) |
|
|
(1,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
22,750 |
|
|
|
(1,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payments on capital lease obligations |
|
|
(139 |
) |
|
|
(188 |
) |
Excess tax benefits from stock-based compensation |
|
|
42 |
|
|
|
165 |
|
Proceeds from stock option plan transactions |
|
|
120 |
|
|
|
1,636 |
|
Proceeds from employee stock purchase plan transactions |
|
|
529 |
|
|
|
348 |
|
Purchase of treasury stock |
|
|
(6,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(5,598 |
) |
|
|
1,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1,989 |
) |
|
|
(903 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
14,365 |
|
|
|
8,760 |
|
Cash and cash equivalents, beginning of period |
|
|
14,176 |
|
|
|
18,375 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
28,541 |
|
|
$ |
27,135 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
DIGI INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. |
|
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The interim unaudited condensed consolidated financial statements included in this Form 10-Q have
been prepared by Digi International Inc. (the Company, Digi, we, our, or us) pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures, normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of America, have been
condensed or omitted, pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
related notes thereto, including the summary of significant accounting policies, presented in our
2008 Annual Report on Form 10-K as filed with the SEC.
The condensed consolidated financial statements presented herein reflect, in the opinion of
management, all adjustments which consist only of normal, recurring adjustments necessary for a
fair presentation of the condensed consolidated financial position and the condensed consolidated
results of operations and cash flows for the periods presented. The condensed consolidated results
of operations for any interim period are not necessarily indicative of results for the full year.
The year-end condensed balance sheet data were derived from audited financial statements, but do
not include all disclosures required by accounting principles generally accepted in the United
States of America.
Changes in Presentation
We have reclassified certain prior year amounts to conform to the current years presentation
and to the presentation in our 2008 Annual Report on Form 10-K. These reclassifications had
no effect on our reported consolidated net earnings.
Recently Issued Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP SFAS 157-4).
FSP SFAS 157-4 provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset
or liability have significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly. This FSP SFAS 157-4 emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions. FSP SFAS 157-4 is
effective beginning with our quarterly report on Form 10-Q for the period ending June 30, 2009, and
shall be applied prospectively. We do not believe that the implementation of this standard will
have a material impact on our consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. |
|
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
In April 2009, the FASB issued FASB Staff Position No. 115-2 and No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP SFAS 115-2). FSP SFAS 115-2 amends the
other-than-temporary impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary impairments in the financial
statements. FSP SFAS 115-2 is effective beginning with our quarterly report on Form 10-Q for the
period ending June 30, 2009 and shall be applied to new and existing investments held by us as of
April 1, 2009. We do not believe that the implementation of this standard will have a material
impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP SFAS 107-1). FSP SFAS 107-1 amends SFAS No. 107
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies as well as in
annual financial statements and also amends APB Opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim reporting periods. FSP
SFAS 107-1 applies to all financial statements within the scope of SFAS No. 107 and requires all
entities to disclose the method(s) and significant assumptions used to estimate the fair value of
financial instruments. FSP SFAS 107-1 is effective beginning with our quarterly report on Form
10-Q for the period ending June 30, 2009. We do not believe that the implementation of this
standard will have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP SFAS 142-3). FSP SFAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142). FSP SFAS 142-3 intends to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flow used to measure the fair value
of the asset under SFAS No. 141 (Revised 2007), Business Combinations and other accounting
principles generally accepted in the United States. This statement is effective for financial
statements issued for fiscal years and interim periods within those years beginning after December
15, 2008 and must be applied prospectively to intangible assets acquired after the effective date.
We are currently evaluating the impact of FSP SFAS 142-3 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). This
Statement retained the fundamental requirements in the former Statement that the acquisition method
of accounting (previously referred to as the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. This Statement defined the
acquirer as the entity that obtains control of one or more businesses in the business combination
and established the acquisition date as the date that the acquirer achieves control. The new
standard requires the acquiring entity in a business combination to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree. This Statement also
makes certain other modifications to the former Statement. SFAS 141(R) is effective for business
combinations that are consummated by us beginning October 1, 2009. Early adoption is not
permitted. SFAS 141(R) is expected to have a material impact on how we will identify, negotiate,
and value future acquisitions and how such acquisitions will affect our consolidated financial
statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. |
|
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 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. In February
2008, the FASB issued FASB Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13 (FSP 157-1) and FASB Staff
Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-1 amends
SFAS 157 to exclude various accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under Statement 13, with the exception of assets or
liabilities assumed in a business combination that are required to be measured at fair value under
SFAS 141 or SFAS 141(R). FSP 157-2 defers the effective date of SFAS 157 to our fiscal years
beginning October 1, 2009 for all nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). In October 2008, the FASB issued FASB Staff Position No. 157-3 (FSP
157-3) which clarifies the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. We adopted the required provisions of SFAS 157
for our financial assets and liabilities at the beginning of our fiscal year 2009 (see Note 7) and
the remaining provisions for nonfinancial assets and liabilities will be adopted by us for our
fiscal years beginning October 1, 2009. We are currently evaluating the impact of FSP 157-2 on our
consolidated financial statements.
Comprehensive income is comprised of net income, foreign currency translation adjustments and
unrealized loss on available-for-sale marketable securities, net of tax. Comprehensive income was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
715 |
|
|
$ |
3,097 |
|
|
$ |
1,731 |
|
|
$ |
6,767 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation (loss) gain |
|
|
(1,713 |
) |
|
|
18 |
|
|
|
(9,614 |
) |
|
|
713 |
|
Change in unrealized gain (loss) on investments,
net of tax |
|
|
6 |
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(992 |
) |
|
$ |
3,115 |
|
|
$ |
(7,885 |
) |
|
$ |
7,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. |
|
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 potentially dilutive common
shares outstanding during the period. Potentially dilutive common shares of our stock result
from dilutive common stock options and shares purchased through the employee stock purchase
plan.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. |
|
NET INCOME PER COMMON SHARE (CONTINUED) |
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
715 |
|
|
$ |
3,097 |
|
|
$ |
1,731 |
|
|
$ |
6,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common
share weighted average shares outstanding |
|
|
24,953 |
|
|
|
25,714 |
|
|
|
24,169 |
|
|
|
25,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and employee
stock purchase plan |
|
|
242 |
|
|
|
598 |
|
|
|
270 |
|
|
|
813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per
common
share adjusted weighted average shares |
|
|
25,195 |
|
|
|
26,312 |
|
|
|
24,439 |
|
|
|
26,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares related to stock options to purchase 4,587,240 and 4,365,675
common shares for the three and six month periods ended March 31, 2009, respectively, and
2,378,069 and 1,021,239 common shares for the three and six month periods ended March 31,
2008, 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 anti-dilutive.
Sarian Systems, Ltd.
On April 28, 2008, we acquired Sarian Systems, Ltd. (Sarian), which is now a wholly owned
subsidiary of Digi International Ltd. Prior to the acquisition, Sarian was a privately held
corporation located in the United Kingdom. The total purchase price of $30.9 million, net of $3.1
million of cash acquired, was for all of the outstanding ordinary shares of Sarian.
The purchase price was allocated to the estimated fair value of assets acquired and liabilities
assumed. The purchase price allocation resulted in non-deductible goodwill of $15.4 million and a
charge of $1.9 million for acquired in-process research and development. We believe that the
acquisition resulted in the recognition of goodwill primarily because Sarians wireless IP-based
routing capability is highly complementary to our market approach and significantly expands our
wireless offering.
The following unaudited pro forma condensed consolidated results of operations have been prepared
as if the acquisition of Sarian had occurred as of October 1, 2007 (in thousands, except per common
share amounts).
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. |
|
ACQUISITIONS (CONTINUED) |
Pro forma adjustments include amortization of identifiable intangible assets and the $1.9 million
charge related to acquired in-process research and development associated with the Sarian
acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
Six months ended March 31, 2008 |
|
|
|
Pro forma |
|
|
As Reported |
|
|
Pro forma |
|
|
As Reported |
|
Net sales |
|
$ |
45,943 |
|
|
$ |
43,070 |
|
|
$ |
94,530 |
|
|
$ |
87,644 |
|
Net income |
|
$ |
918 |
|
|
$ |
3,097 |
|
|
$ |
4,650 |
|
|
$ |
6,767 |
|
Net income per common share, basic |
|
$ |
0.04 |
|
|
$ |
0.12 |
|
|
$ |
0.18 |
|
|
$ |
0.26 |
|
Net income per common share, diluted |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.18 |
|
|
$ |
0.26 |
|
The unaudited pro forma condensed consolidated results of operations are not necessarily indicative
of results that would have occurred had the Sarian acquisition occurred as of the beginning of
fiscal 2008 as presented above, nor are they necessarily indicative of the results that will be
obtained in the future.
Spectrum Design Solutions, Inc.
On July 23, 2008, we acquired Spectrum Design Solutions, Inc. (Spectrum), which is a wholly owned
subsidiary of Digi International Inc. Prior to the acquisition, Spectrum was a privately held
Minneapolis-based corporation and a leading wireless design services organization. The acquisition
was a cash merger for $10.0 million of which $4.0 million was paid on the acquisition date, $3.0
million will be paid in January 2010, and the remaining $3.0 million will be paid in July 2011. We
have determined that the Spectrum acquisition is not material to our consolidated results of
operations or financial condition. Therefore, pro forma financial information is not presented.
5. |
|
SELECTED BALANCE SHEET DATA
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
September 30, 2008 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
21,286 |
|
|
$ |
25,007 |
|
Less allowance for doubtful accounts |
|
|
524 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
$ |
20,762 |
|
|
$ |
24,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
26,882 |
|
|
$ |
20,979 |
|
Work in process |
|
|
1,437 |
|
|
|
981 |
|
Finished goods |
|
|
5,893 |
|
|
|
8,280 |
|
|
|
|
|
|
|
|
|
|
$ |
34,212 |
|
|
$ |
30,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses: |
|
|
|
|
|
|
|
|
Accrued professional fees |
|
|
621 |
|
|
|
507 |
|
Deferred gain on building sale short-term |
|
|
250 |
|
|
|
273 |
|
Unearned revenue |
|
|
61 |
|
|
|
353 |
|
Other accrued expenses |
|
|
1,978 |
|
|
|
1,813 |
|
|
|
|
|
|
|
|
|
|
$ |
2,910 |
|
|
$ |
2,946 |
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost or market value, with cost determined using the
first-in, first-out method.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our marketable securities consist of commercial paper, corporate bonds and government municipal
bonds. Prior to October 1, 2008, all marketable securities were classified as held-to-maturity and
carried at amortized cost, except for the Lehman Brothers security, which was carried at expected
realizable value due to an other-than-temporary impairment recorded during the fourth quarter of
fiscal 2008. We changed our policy as of October 1, 2008 to account for our marketable securities
as available-for-sale on a prospective basis with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders equity. In addition, we have
reclassified the Lehman Brothers security as available-for-sale as we plan on selling a portion of
this bond in fiscal 2009, as discussed further below. We continue to account for all other
marketable securities purchased prior to October 1, 2008 as held-to-maturity.
We analyze our held-to-maturity investments for impairment on an ongoing basis. Factors considered
in determining whether an unrealized loss is a temporary loss or an other-than-temporary loss
include the length of time and extent to which the securities have been in an unrealized loss
position, the trend of any unrealized losses and our ability and intent to hold the investment for
a period of time sufficient to allow for any anticipated market recovery. During the fourth
quarter of fiscal 2008, we recorded an other-than-temporary impairment of $1,014,900 on a bond
issued by Lehman Brothers with a par amount of $1,194,000. This impairment reflected the estimated
decline in the value of this security precipitated by the bankruptcy of the securitys issuer. The
impairment charge was recorded as a temporary tax difference as we have sufficient capital gains in
the available carryback years to utilize the capital loss that will be realized when the bond is
sold. We expect to sell a portion of the bond in fiscal 2009, and carryback the capital loss to
utilize a capital gain which was generated in fiscal 2006 for which the statute of limitations will
expire at the end of fiscal 2009. The resulting value of $179,100 for the security became its new
cost basis as of September 30, 2008. No additional other-than-temporary impairment charges for the
Lehman Brothers bond were recorded for the six month period ended March 31, 2009 as there has not
been any change in the fair value assumptions utilized to calculate the impairment.
We obtain quoted market prices and trading activity for each security, where available, review the
financial solvency of each security issuer and obtain other relevant information from our
investment advisors to estimate the fair value for each security in our investment portfolio. As
of March 31, 2009, 13 of our securities were trading below our amortized cost basis. Other than
the impaired Lehman Brothers security, we determined each decline in value to be temporary based
upon the factors described above. We expect to realize the full par value of these securities,
plus accrued interest, at the time of maturity for our held-to-maturity investments. For those
assets classified as available-for-sale, we expect to realize the fair value of these securities,
plus accrued interest, either at the time of maturity or when the security is sold.
Held-to-maturity marketable securities are recorded at amortized cost on our balance sheet as of
March 31, 2009 and were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost (1) |
|
|
Gains |
|
|
Losses |
|
|
Fair Value (1) |
|
Corporate bonds |
|
$ |
23,675 |
|
|
$ |
17 |
|
|
$ |
(196 |
) |
|
$ |
23,496 |
|
Government
municipal bonds |
|
|
3,663 |
|
|
|
16 |
|
|
|
|
|
|
|
3,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,338 |
|
|
$ |
33 |
|
|
$ |
(196 |
) |
|
$ |
27,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in amortized cost and fair value is purchased and accrued interest of $416,507. |
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. |
|
MARKETABLE SECURITIES (CONTINUED) |
Available-for-sale marketable securities are recorded at fair value on our balance sheet and the
unrealized loss is recorded in accumulated other comprehensive loss as of March 31, 2009 and was
comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost (1) |
|
|
Gains |
|
|
Losses |
|
|
Fair Value (1) |
|
Corporate bonds (2) |
|
$ |
4,285 |
|
|
$ |
5 |
|
|
$ |
(1 |
) |
|
$ |
4,289 |
|
Government
municipal bonds |
|
|
3,477 |
|
|
|
|
|
|
|
(8 |
) |
|
|
3,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,762 |
|
|
$ |
5 |
|
|
$ |
(9 |
) |
|
$ |
7,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in amortized cost and fair value is purchased and accrued interest of $101,969. |
|
(2) |
|
The Lehman Brothers security is included in amortized cost at a fair value of $179,100,
net of the impairment charge of $1,014,900 recorded in the fourth quarter of fiscal 2008. |
Marketable securities were comprised of the following as of September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost (1) |
|
|
Gains |
|
|
Losses |
|
|
Fair Value (1) |
|
Corporate bonds (2) |
|
$ |
55,807 |
|
|
$ |
12 |
|
|
$ |
(2,771 |
) |
|
$ |
53,048 |
|
Government municipal bonds |
|
|
3,709 |
|
|
|
|
|
|
|
(10 |
) |
|
|
3,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
59,516 |
|
|
$ |
12 |
|
|
$ |
(2,781 |
) |
|
$ |
56,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in amortized cost and fair value is purchased and accrued interest of $967,258. |
|
(2) |
|
The Lehman Brothers security is included in amortized cost at a fair value of $179,100,
net of the impairment charge of $1,014,900 recorded in the fourth quarter of fiscal 2008. |
Securities that mature within one year are classified as current assets on the balance sheet and
securities classified as noncurrent have a maturity of greater than one year from the date of
purchase. We do not invest in securities with a maturity in excess of 24 months.
7. |
|
FAIR VALUE MEASUREMENTS |
We adopted SFAS 157 as of October 1, 2008, with the exception of the application of SFAS 157 to
nonfinancial assets and liabilities. SFAS 157 clarifies the definition of fair value, establishes
a framework for measuring fair value, and expands the disclosures on fair value measurements.
Under SFAS 157, fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
as of the measurement date. SFAS 157 also establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability based on market data obtained from
independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors
market participants would use in valuing the asset or liability based upon the best information
available in the circumstances. The categorization of financial assets and liabilities within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. |
|
FAIR VALUE MEASUREMENTS (CONTINUED) |
The hierarchy is broken down into three levels defined as follows:
|
|
|
Level 1 Inputs are quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2 Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, and inputs (other than quoted prices) that are observable for the asset
or liability, either directly or indirectly. |
|
|
|
Level 3 Inputs are unobservable for the asset or liability. See the section below
titled Level 3 Valuation Techniques for further discussion of how we determine fair
value for investments classified as Level 3. |
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
As of our effective date of October 1, 2008, fair value under SFAS 157 is applied to financial
assets such as commercial paper, corporate bonds and government municipal bonds which are
classified and accounted for as available-for-sale. These items are stated at fair value at each
reporting period; however, the definition of fair value is now applied using SFAS 157.
The following table provides information by level for financial assets that are measured at fair
value, as defined by SFAS No. 157, on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009 Using: |
|
|
|
Total carrying |
|
|
Quoted price in |
|
|
Significant other |
|
|
Significant |
|
|
|
value at |
|
|
active markets |
|
|
observable inputs |
|
|
unobservable inputs |
|
|
|
March 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
14,585 |
|
|
$ |
14,585 |
|
|
$ |
|
|
|
$ |
|
|
|
Available-for-sale marketable
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
7,758 |
|
|
|
7,579 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and
marketable
securities measured at fair value |
|
$ |
22,343 |
|
|
$ |
22,164 |
|
|
$ |
|
|
|
$ |
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and marketable securities measured at fair value using quoted market prices are
classified within Level 1 of the valuation hierarchy.
Level 3 Valuation Techniques
Financial assets are considered Level 3 when their fair values are determined using pricing models,
discounted cash flow methodologies or similar techniques and at least one significant model
assumption or input is unobservable. Level 3 financial assets also include certain investment
securities for which there is limited market activity or a decrease in the observability of market
pricing for these investments, such that the determination of fair value requires significant
judgment or estimation. Our Lehman Brothers security was valued at $179,100 primarily using broker
pricing that incorporates transaction details within an inactive market as a baseline, as well as
assumptions about liquidity and credit valuation adjustments of marketplace participants at March
31, 2009. No change was made in the Level 3 valuation during the first six months of fiscal 2009.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. |
|
FAIR VALUE MEASUREMENTS (CONTINUED) |
The use of different assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different estimates of fair value
of these securities, currently and in the future. The fair value of our securities could change
significantly based on changes in market conditions and continued uncertainties in the credit
markets. If these uncertainties continue or if these securities experience credit rating
downgrades, we may incur additional impairment charges for other securities in our investment
portfolio.
8. |
|
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS |
Amortizable identifiable intangible assets were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
September 30, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
carrying |
|
|
Accum. |
|
|
|
|
|
|
carrying |
|
|
Accum. |
|
|
|
|
|
|
amount |
|
|
amort. |
|
|
Net |
|
|
amount |
|
|
amort. |
|
|
Net |
|
Purchased and core technology |
|
$ |
45,035 |
|
|
$ |
(32,518 |
) |
|
$ |
12,517 |
|
|
$ |
46,660 |
|
|
$ |
(30,745 |
) |
|
$ |
15,915 |
|
License agreements |
|
|
2,440 |
|
|
|
(2,440 |
) |
|
|
|
|
|
|
2,440 |
|
|
|
(2,440 |
) |
|
|
|
|
Patents and trademarks |
|
|
9,132 |
|
|
|
(5,166 |
) |
|
|
3,966 |
|
|
|
8,906 |
|
|
|
(4,682 |
) |
|
|
4,224 |
|
Customer maintenance contracts |
|
|
700 |
|
|
|
(499 |
) |
|
|
201 |
|
|
|
700 |
|
|
|
(464 |
) |
|
|
236 |
|
Customer relationships |
|
|
17,056 |
|
|
|
(6,218 |
) |
|
|
10,838 |
|
|
|
18,137 |
|
|
|
(5,472 |
) |
|
|
12,665 |
|
Non-compete agreements |
|
|
1,014 |
|
|
|
(243 |
) |
|
|
771 |
|
|
|
1,075 |
|
|
|
(83 |
) |
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,377 |
|
|
$ |
(47,084 |
) |
|
$ |
28,293 |
|
|
$ |
77,918 |
|
|
$ |
(43,886 |
) |
|
$ |
34,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $1.8 million and $1.6 million for the three months ended March 31,
2009 and 2008, respectively, and $3.7 million and $3.5 million for the six months ended March
31, 2009 and 2008, respectively.
Estimated amortization expense related to identifiable intangible assets for the remainder of
fiscal 2009 and the five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
2009 (six months) |
|
$ |
3,850 |
|
2010 |
|
|
7,253 |
|
2011 |
|
|
5,362 |
|
2012 |
|
|
3,952 |
|
2013 |
|
|
2,962 |
|
2014 |
|
|
2,648 |
|
The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Beginning balance, October 1 |
|
$ |
86,578 |
|
|
$ |
66,817 |
|
Foreign currency translation adjustment |
|
|
(3,456 |
) |
|
|
503 |
|
|
|
|
|
|
|
|
Ending balance, March 31 |
|
$ |
83,122 |
|
|
$ |
67,320 |
|
|
|
|
|
|
|
|
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes have been provided at an effective rate of 14.3% and 34.3% for the six month periods
ended March 31, 2009 and 2008, respectively.
On October 3, 2008 the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 was signed into
law. That act retroactively extended the research and development tax credit until December 31,
2009. We recorded a discrete tax benefit of $0.4 million during the first quarter of fiscal 2009
for research and development credits earned during the last three quarters of fiscal 2008.
The discrete tax event affected our effective tax rates as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Effective tax rate before impact of discrete tax benefits |
|
|
34.8 |
% |
|
|
34.3 |
% |
Impact of discrete tax benefits |
|
|
-20.5 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
Effective tax rate |
|
|
14.3 |
% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in
thousands):
|
|
|
|
|
Uncertain tax positions as of December 31, 2008 |
|
$ |
3,851 |
|
Increases related to current year income tax positions |
|
|
150 |
|
|
|
|
|
Uncertain tax positions as of March 31, 2009 |
|
$ |
4,001 |
|
|
|
|
|
The total amount of uncertain tax positions that, if recognized, would affect our effective tax
rate is $3.8 million.
We recognize interest and penalties related to income tax matters in income tax expense. During
the six months ended March 31, 2009, we recognized $0.1 million in interest and penalties. As of
March 31, 2009, we had $0.8 million in accrued interest and penalties on our consolidated balance
sheet.
There are no tax positions for which it is reasonably possible that the total amounts of uncertain
tax positions will significantly increase or decrease over the next 12 months.
We operate in multiple tax jurisdictions both in the U.S. and outside of the U.S. Accordingly, we
must determine the appropriate allocation of income to each of these jurisdictions. This
determination requires us 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 may result in adjustments to our income tax balances in those years that are material
to our consolidated financial position and results of operations. Certain open tax years are
expected to close in future periods that may result in adjustments to our income tax balances in
those periods that are material to our consolidated financial position and results of operations.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In general, we warrant our products to be free from defects in material and workmanship under
normal use and service for a period of up to five years from the date of receipt. We have the
option to repair or replace products we deem defective with regard 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 incidence
and are evaluated on an ongoing basis to ensure the adequacy of the warranty reserve. The
following table summarizes the activity associated with the product warranty accrual (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
Balance at |
|
|
Warranties |
|
|
Settlements |
|
|
Balance at |
|
Fiscal year |
|
January 1 |
|
|
issued |
|
|
made |
|
|
March 31 |
|
2009 |
|
$ |
1,230 |
|
|
$ |
123 |
|
|
$ |
(210 |
) |
|
$ |
1,143 |
|
2008 |
|
$ |
1,134 |
|
|
$ |
193 |
|
|
$ |
(194 |
) |
|
$ |
1,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
Balance at |
|
|
Warranties |
|
|
Settlements |
|
|
Balance at |
|
Fiscal year |
|
October 1 |
|
|
issued |
|
|
made |
|
|
March 31 |
|
2009 |
|
$ |
1,214 |
|
|
$ |
344 |
|
|
$ |
(415 |
) |
|
$ |
1,143 |
|
2008 |
|
$ |
1,155 |
|
|
$ |
358 |
|
|
$ |
(380 |
) |
|
$ |
1,133 |
|
We are not responsible and do not warrant that custom software versions created by original
equipment manufacturer (OEM) customers based upon our software source code will function in a
particular way, will conform to any specifications or are fit for any particular purpose and
do 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.
Contingent obligations
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 our subsidiary NetSilicon, Inc. and approximately 300 other public
companies. We acquired Net Silicon, Inc. on February 13, 2002. The complaint names us as a
defendant along with NetSilicon, certain of its officers and certain underwriters involved in
NetSilicons IPO, among numerous others, and asserts, among other things, that NetSilicons IPO
prospectus and registration statement violated federal securities laws because they contained
material misrepresentations and/or omissions regarding the conduct of NetSilicons IPO underwriters
in allocating shares in NetSilicons IPO to the underwriters customers. We believe that the
claims against the NetSilicon defendants are without merit and have 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, we elected to participate in a proposed settlement agreement with the plaintiffs in
this litigation. Had it been approved by the Court, this proposed settlement would have resulted
in a dismissal, with prejudice, of all claims in the litigation against us and against any of the
other issuer defendants who elected to participate in the proposed settlement, together with the
current or former officers and directors of participating issuers who were named as individual
defendants. This proposed issuer settlement was conditioned on, among other things, a ruling by
the District Court that the claims against NetSilicon and against the other issuers who had agreed
to the settlement would be certified for class action treatment for purposes of the proposed
settlement, such that all investors included in the proposed classes in these cases would be bound
by the terms of the settlement unless an investor opted to be excluded from the settlement in a
timely and appropriate fashion.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. |
|
CONTINGENCIES (CONTINUED) |
On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In
re Initial Public Offering Securities Litigation that six purported class action lawsuits
containing allegations substantially similar to those asserted against us could not be certified as
class actions due, in part, to the Court of Appeals determination that individual issues of
reliance and knowledge would predominate over issues common to the proposed classes. On January 8,
2007, the plaintiffs filed a petition seeking rehearing en banc of this ruling. On
April 6, 2007 the Court of Appeals denied the plaintiffs petition for rehearing of the Courts
December 5, 2006 ruling. The Court of Appeals, however, noted that the plaintiffs remained free to
ask the District Court to certify classes different from the ones originally proposed which might
meet the standards for class certification that the Court of Appeals articulated in its December 5,
2006 decision. The plaintiffs have since moved for certification of different classes in the
District Court, and that motion remains pending. In light of the Court of Appeals December 5,
2006 decision regarding certification of the plaintiffs claims, the District Court entered an
order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers,
including NetSilicon.
On August 14, 2007, the plaintiffs filed amended complaints in six focus cases. On November 13,
2007, the issuer defendants and the underwriter defendants separately moved to dismiss the claims
against them in the amended complaints in the six focus cases. On March 26, 2008, the District
Court issued an order in which it denied in substantial part the motions to dismiss the amended
complaints in the six focus cases.
On February 25, 2009, the parties advised the District Court that they have reached an
agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was
filed with the District Court on April 2, 2009. The proposed global settlement remains subject to
preliminary and final approval by the District Court. The litigation process is inherently
uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of
this pending lawsuit. We maintain liability insurance for such matters and expect 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 March 31, 2009, we have an accrued
liability for the deductible amount of $250,000 which we believe is adequate and reflects the
amount of loss that is probable. In the event we have losses that exceed the limits of the
liability insurance, such losses could have a material effect on our business and our consolidated
results of operations or financial condition.
In addition to the matter discussed above, in the normal course of business, we are subject to
various claims and litigation, including patent infringement and intellectual property claims. Our
management expects that these various claims and litigation will not have a material adverse effect
on our consolidated results of operations or financial condition.
12. |
|
SALE AND LEASEBACK OF BUILDING |
On February 18, 2008, we entered into a contract for the sale of our building in Dortmund,
Germany, and subsequent partial leaseback for a five year term (the Agreement). Upon the
closing of the transaction in March 2008, we initiated the leaseback of approximately 40% of
the property for a period of five years, with a renewal option for an additional five years.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. |
|
SALE AND LEASEBACK OF BUILDING (CONTINUED) |
The building was sold for 4.5 million Euros (equivalent to $6.9 million), resulting in a gain
on the sale of 1.0 million Euros ($1.6 million). As a result of the leaseback, $1.5 million
of the gain on the sale was deferred and will be recognized ratably over the lease term as an
offset to rent expense. The remaining $0.1 million was recognized in the second quarter of
fiscal 2008 as a component of general and administrative expense. Of the total sale price,
4.2 million Euros ($6.5 million) was received during March 2008 and the remaining 0.3 million
Euros ($0.4 million) was received in April 2008. These obligations required us, as part of
the Agreement, to deposit 0.3 million Euros ($0.4 million) into an interest-bearing bank
account, which will be refunded to us at the end of the lease term. This deposit was made
during March 2008 and is included in other noncurrent assets as restricted cash on our
consolidated balance sheet.
On April 23, 2009, we announced a business restructuring to increase our focus on wireless and
reduce our emphasis on individual hardware products in favor of solutions that include hardware, software and services.
The restructuring will include the closing of an engineering location in Long Beach,
California, and the relocation and consolidation of the manufacturing facility in Davis,
California to our Minneapolis, Minnesota headquarters. The restructuring will result in a
workforce reduction of 87 positions or 13% of our total workforce. We believe that these
restructuring actions will improve profitability in future quarters. We expect to record a
pre-tax charge of approximately $2.0 million during the third quarter of fiscal 2009 related
to this restructuring.
18
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q 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 our
management as of the time of such statements and relate to, among other things, expectations of the
business environment in which we operate, projections of our future performance, perceived
opportunities in the market and statements regarding our mission and vision. Forward-looking
statements involve known and unknown risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Our operating results and performance trends may be affected by a number of factors, including,
without limitation, those described under Item 1A, Risk Factors in our Annual Report on Form 10-K
for the year ended September 30, 2008. Those risk factors, and other risks, uncertainties and
assumptions identified from time to time in our filings with the Securities and Exchange
Commission, including without limitation, our quarterly reports on Form 10-Q and our registration
statements, could cause our actual future results to differ from those projected in the
forward-looking statements as a result of the factors set forth in our 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.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies was provided in the Managements Discussion and
Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K
for the year ended September 30, 2008. An update to our critical accounting policy related to
goodwill and marketable securities is included below.
Goodwill
Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if
events or circumstances occur which could indicate impairment. We continue to closely monitor
for possible impairment due to our declining stock prices, the continuing impacts of the
economic downturn on our expected operating results and the broader effects of U.S. market
conditions on the fair value of our assets.
19
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
CRITICAL ACCOUNTING POLICIES (CONTINUED)
We have defined the criteria that will result in additional interim goodwill impairment
testing. If these criteria are met, we will undertake the analysis to determine whether a
goodwill impairment has occurred, which could have a material effect on our financial position
and results of operations. As of March 31, 2009 the estimated fair value of common stock,
including a control premium of 30%, exceeded the carrying value of our net assets. However,
our stock price has continued to decline from the previous
quarter at both December 31, 2008 and March 31, 2009. If
our stock price were to decline
from current levels and then remain low, the risk of a near-term impairment increases significantly. The evaluation
of asset impairment requires us to make assumptions about future cash flows and revenues.
These assumptions require significant judgment and actual results may differ from assumed or
estimated amounts. If these estimates and assumptions change, we may be required to recognize
impairment losses in the future.
Marketable Securities
We changed our policy as of October 1, 2008 to account for our marketable securities as
available-for-sale on a prospective basis. All marketable securities purchased after October
1, 2008 are carried at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders equity. In addition, we have reclassified
the Lehman Brothers bond as available-for-sale as we plan on selling a portion of this bond in
fiscal 2009. We obtain quoted market prices and trading activity for each security, where
available, review the financial solvency of each security issuer and obtain other relevant
information from our investment advisors to estimate the fair value for each security in our
investment portfolio.
OVERVIEW
We operate 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. We compete for customers on the
basis of existing and planned product features, service capabilities, company reputation, brand
recognition, technical support, relationships with partners, quality and reliability, product
development capabilities, price and availability.
We help customers connect, monitor, and control local or remote electronic devices over a network
or via the Internet. We continue to leverage a common core technology base to develop and provide
innovative connectivity solutions to our customers. Our Drop-In Networking Solutions initiative
provides opportunities for us in the next wave of Internet growth. The initial wave was focused on
connecting people, first with personal computers and now with cell phones, PDAs and other related
consumer devices. This next wave is about connecting devices and machines. We are ideally
positioned to take full advantage of the second wave of Internet growth with our Drop-In Networking
Solutions that will provide significant market expansion in what is now being referred to in the
market as wireless machine to machine (M2M) connectivity.
M2M communication works by connecting communication hardware to a physical asset so that
information about its status and performance can be sent to a computer system and used to automate
a business process or a human action so that a person does not have to do it manually.
Incorporating products from both our embedded and non-embedded categories, our Drop-In Networking
Solutions are making it easy for customers to effectively drop-in a wireless M2M solution.
During the second quarter of fiscal 2009, we expanded on Drop-in Networking and introduced our
iDigi Solutions brand. iDigi Solution bundles software and services to our Drop-in Networking
product offerings to make M2M deployments even easier, faster, and more economical. At the heart
of an iDigi Solution bundle is the iDigi Platform, a Platform as a Service (PaaS) that quickly
and easily connects remote assets to a customers business applications. The iDigi Platform runs
on a grid of Digi-managed servers. As an on-demand model, customers pay only for services
consumed, conserving capital and requiring no infrastructure. iDigi Energy was launched as the
first iDigi Solution bundle and targets the Smart Grid efforts of energy services providers.
20
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED) |
OVERVIEW (CONTINUED)
The decrease in revenue and earnings per diluted share for the first six months of fiscal 2009
compared to the first six months of fiscal 2008 is a result of lower than anticipated revenue
across all regions and most product lines attributable to rapidly deteriorating demand conditions
for our products that began in November 2008. The strengthening of the U.S. dollar compared to the
Euro and the British pound also contributed to the decrease in revenue and operating income. Total
revenue was lower than anticipated in the second fiscal quarter of 2009 compared to the prior year
comparable quarter. Wireless revenue increased as a percent of total revenue from 21.8% in the
second quarter of fiscal 2008 to 34.9% in the second quarter of fiscal 2009. We anticipate that
growth in the future will result from products and services that are developed internally as well
as from products and services that are acquired. We are continuing to invest in our wireless
products and services while closely monitoring and controlling discretionary spending. We also are
actively managing our supply chain to ensure that our key sources of supply are intact.
During the second quarter of fiscal 2009, as part of our expense reduction measures, we eliminated
our non-sales incentive compensation program for fiscal 2009. This program applies to executive
management as well as a large part of the employee base. In addition, we will reduce our sales
commission program for the third and fourth quarters of fiscal 2009. During the second quarter of
fiscal 2009, we reversed incentive compensation accrued for the first quarter of fiscal 2009 of
$0.9 million, which was included in our cost of sales and all of our operating expense categories.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from our interim condensed
consolidated statements of operations expressed in dollars, as a percentage of net sales and
as a percentage of change from period-to-period for the periods indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
% increase |
|
|
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
Net sales |
|
$ |
40,085 |
|
|
|
100.0 |
% |
|
$ |
43,070 |
|
|
|
100.0 |
% |
|
|
(6.9 |
)% |
|
$ |
81,446 |
|
|
|
100.0 |
% |
|
$ |
87,644 |
|
|
|
100.0 |
% |
|
|
(7.1 |
)% |
Cost of sales (exclusive of amortiza-
tion of purchased and core technology
shown separately below) |
|
|
19,908 |
|
|
|
49.7 |
|
|
|
18,986 |
|
|
|
44.1 |
|
|
|
4.9 |
|
|
|
38,977 |
|
|
|
47.9 |
|
|
|
38,529 |
|
|
|
44.0 |
|
|
|
1.2 |
|
Amortization of purchased and
core technology |
|
|
1,008 |
|
|
|
2.5 |
|
|
|
907 |
|
|
|
2.1 |
|
|
|
11.1 |
|
|
|
2,052 |
|
|
|
2.5 |
|
|
|
2,043 |
|
|
|
2.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
19,169 |
|
|
|
47.8 |
|
|
|
23,177 |
|
|
|
53.8 |
|
|
|
(17.3 |
) |
|
|
40,417 |
|
|
|
49.6 |
|
|
|
47,072 |
|
|
|
53.7 |
|
|
|
(14.1 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
8,976 |
|
|
|
22.4 |
|
|
|
9,034 |
|
|
|
21.0 |
|
|
|
(0.6 |
) |
|
|
18,601 |
|
|
|
22.8 |
|
|
|
17,720 |
|
|
|
20.2 |
|
|
|
5.0 |
|
Research and development |
|
|
6,196 |
|
|
|
15.4 |
|
|
|
6,529 |
|
|
|
15.1 |
|
|
|
(5.1 |
) |
|
|
13,170 |
|
|
|
16.2 |
|
|
|
13,118 |
|
|
|
15.0 |
|
|
|
0.4 |
|
General and administrative |
|
|
3,398 |
|
|
|
8.5 |
|
|
|
3,941 |
|
|
|
9.2 |
|
|
|
(13.8 |
) |
|
|
7,281 |
|
|
|
8.9 |
|
|
|
7,982 |
|
|
|
9.1 |
|
|
|
(8.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
18,570 |
|
|
|
46.3 |
|
|
|
19,504 |
|
|
|
45.3 |
|
|
|
(4.8 |
) |
|
|
39,052 |
|
|
|
47.9 |
|
|
|
38,820 |
|
|
|
44.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
599 |
|
|
|
1.5 |
|
|
|
3,673 |
|
|
|
8.5 |
|
|
|
(83.7 |
) |
|
|
1,365 |
|
|
|
1.7 |
|
|
|
8,252 |
|
|
|
9.4 |
|
|
|
(83.5 |
) |
Interest income and other, net |
|
|
395 |
|
|
|
1.0 |
|
|
|
989 |
|
|
|
2.3 |
|
|
|
(60.1 |
) |
|
|
654 |
|
|
|
0.8 |
|
|
|
2,048 |
|
|
|
2.3 |
|
|
|
(68.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
994 |
|
|
|
2.5 |
|
|
|
4,662 |
|
|
|
10.8 |
|
|
|
(78.7 |
) |
|
|
2,019 |
|
|
|
2.5 |
|
|
|
10,300 |
|
|
|
11.7 |
|
|
|
(80.4 |
) |
Income tax provision |
|
|
279 |
|
|
|
0.7 |
|
|
|
1,565 |
|
|
|
3.6 |
|
|
|
(82.2 |
) |
|
|
288 |
|
|
|
0.4 |
|
|
|
3,533 |
|
|
|
4.0 |
|
|
|
(91.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
715 |
|
|
|
1.8 |
% |
|
$ |
3,097 |
|
|
|
7.2 |
% |
|
|
(76.9 |
)% |
|
$ |
1,731 |
|
|
|
2.1 |
% |
|
$ |
6,767 |
|
|
|
7.7 |
% |
|
|
(74.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
NET SALES
The following summarizes our net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
% increase |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
Non-embedded |
|
$ |
22,715 |
|
|
|
56.7 |
% |
|
$ |
21,358 |
|
|
|
49.6 |
% |
|
|
6.4 |
% |
|
$ |
46,055 |
|
|
|
56.5 |
% |
|
$ |
45,215 |
|
|
|
51.6 |
% |
|
|
1.9 |
% |
Embedded |
|
|
17,370 |
|
|
|
43.3 |
|
|
|
21,712 |
|
|
|
50.4 |
|
|
|
(20.0 |
) |
|
|
35,391 |
|
|
|
43.5 |
|
|
|
42,429 |
|
|
|
48.4 |
|
|
|
(16.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
40,085 |
|
|
|
100.0 |
% |
|
$ |
43,070 |
|
|
|
100.0 |
% |
|
|
(6.9 |
)% |
|
$ |
81,446 |
|
|
|
100.0 |
% |
|
$ |
87,644 |
|
|
|
100.0 |
% |
|
|
(7.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-embedded
Our non-embedded revenue increased by $1.3 million or 6.4% for the three months ended March 31,
2009 compared to the three months ended March 31, 2008 and increased by $0.8 million or 1.9% for
the six months ended March 31, 2009 compared to the six months ended March 31, 2008. The increases
resulted primarily from an increase in cellular products and incremental net sales of
Sarian-branded products, which were offset by decreases in net sales of serial cards, serial server
and USB products. Most of the increase in our non-embedded net sales took place in the European,
Middle Eastern and African (EMEA) region due to the acquisition of Sarian which provided net
sales of $5.0 million and $8.1 million for the three and six month periods ended March 31, 2009,
respectively, offset by a decrease in the North American, Asian Pacific and Latin American regions.
Without the Sarian acquisition, our non-embedded revenue would have decreased 17.0% and 16.1% for
the three and six months ended March 31, 2009, respectively. Sarian was acquired during the third
quarter of fiscal 2008.
Embedded
Our embedded revenue decreased by $4.3 million or 20.0% for the three months ended March 31, 2009
compared to the three months ended March 31, 2008, and decreased by $7.0 million or 16.6% for the
six months ended March 31, 2009 compared to the six months ended March 31, 2008. The decreases
resulted primarily from decreases in net sales of modules. Most of the decrease in our embedded
net sales took place in the North American, EMEA and Latin American regions. Spectrum net sales of
$1.2 million and $2.2 million for the three and six months ended March 31, 2009, respectively, are
included in the North American embedded product sales. Without the Spectrum acquisition our
embedded revenue would have decreased 25.3% and 21.7% for the three and six months ended March 31,
2009, respectively. Spectrum was acquired during the fourth quarter of fiscal 2008.
The following summarizes our net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
$ increase |
|
|
% increase |
|
|
Six months ended March 31, |
|
|
$ increase |
|
|
% increase |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
(decrease) |
|
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
(decrease) |
|
North America (1) |
|
$ |
20,724 |
|
|
$ |
23,959 |
|
|
$ |
(3,235 |
) |
|
|
(13.5 |
)% |
|
$ |
43,869 |
|
|
$ |
52,083 |
|
|
$ |
(8,214 |
) |
|
|
(15.8 |
)% |
EMEA (2) |
|
|
14,934 |
|
|
|
12,785 |
|
|
|
2,149 |
|
|
|
16.8 |
|
|
|
28,262 |
|
|
|
23,929 |
|
|
|
4,333 |
|
|
|
18.1 |
|
Asia Pacific |
|
|
3,776 |
|
|
|
4,621 |
|
|
|
(845 |
) |
|
|
(18.3 |
) |
|
|
7,610 |
|
|
|
9,150 |
|
|
|
(1,540 |
) |
|
|
(16.8 |
) |
Latin America
(including Mexico) |
|
|
651 |
|
|
|
1,705 |
|
|
|
(1,054 |
) |
|
|
(61.8 |
) |
|
|
1,705 |
|
|
|
2,482 |
|
|
|
(777 |
) |
|
|
(31.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
40,085 |
|
|
$ |
43,070 |
|
|
$ |
(2,985 |
) |
|
|
(6.9 |
)% |
|
$ |
81,446 |
|
|
$ |
87,644 |
|
|
$ |
(6,198 |
) |
|
|
(7.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Spectrum net sales of $1,143,047 and $2,191,457 for the three and six months ended
March 31, 2009, respectively. |
|
(2) |
|
Includes Sarian net sales of $4,996,951 and $8,107,598 for the three and six months ended
March 31, 2009, respectively. |
22
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
NET SALES (CONTINUED)
The strengthening of the U.S. dollar compared to the Euro, British Pound and Japanese Yen for
the three and six month periods ended March 31, 2009 compared to the same periods in the prior
year had an unfavorable impact on net sales of $2.6 million and $4.0 million, respectively.
GROSS MARGIN
Gross margins for the three and six months ended March 31, 2009 was 47.8% and 49.6%,
respectively, compared to 53.8% and 53.7% for the three and six months ended March 31, 2008,
respectively. The decrease in the gross margin for the three months ended March 31, 2009 as
compared to the same period a year ago was due to unfavorable product mix within primarily the
non-embedded products, including sales of Sarian non-embedded products which provide lower
gross margins. The strengthening of the U.S. dollar compared to the Euro and British Pound
had an unfavorable impact on gross margin of approximately 1.1% and 0.6% for the three and six
months ended March 31, 2009, respectively, as compared to the same periods a year ago.
OPERATING EXPENSES
Total operating expenses decreased by $0.9 million and increased by $0.2 million for the three
and six months ended March 31, 2009 as compared to the same periods a year ago as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
$ increase |
|
|
Six months ended March 31, |
|
|
$ increase |
|
($ in thousands) |
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
2009 |
|
|
2008 |
|
|
(decrease) |
|
|
Sales and marketing |
|
$ |
8,976 |
|
|
|
22.4 |
% |
|
$ |
9,034 |
|
|
|
21.0 |
% |
|
$ |
(58 |
) |
|
$ |
18,601 |
|
|
|
22.8 |
% |
|
$ |
17,720 |
|
|
|
20.2 |
% |
|
$ |
881 |
|
Research and development |
|
|
6,196 |
|
|
|
15.4 |
|
|
|
6,529 |
|
|
|
15.1 |
|
|
|
(333 |
) |
|
|
13,170 |
|
|
|
16.2 |
|
|
|
13,118 |
|
|
|
15.0 |
|
|
|
52 |
|
General and
administrative |
|
|
3,398 |
|
|
|
8.5 |
|
|
|
3,941 |
|
|
|
9.2 |
|
|
|
(543 |
) |
|
|
7,281 |
|
|
|
8.9 |
|
|
|
7,982 |
|
|
|
9.1 |
|
|
|
(701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
18,570 |
|
|
|
46.3 |
% |
|
$ |
19,504 |
|
|
|
45.3 |
% |
|
$ |
(934 |
) |
|
$ |
39,052 |
|
|
|
47.9 |
% |
|
$ |
38,820 |
|
|
|
44.3 |
% |
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net decrease of $0.1 million in sales and marketing expenses for the three months ended
March 31, 2009 as compared to March 31, 2008 was primarily due to a decrease of $0.2 million
in compensation-related expenses, a reduction of $0.2 million for advertising costs and a $0.2
million reduction for recruiting fees and travel costs, offset by an increase due to the
incremental ongoing costs related to the Sarian and Spectrum acquisitions of $0.5 million.
For the six months ended March 31, 2009 as compared to March 31, 2008, the net increase in
sales and marketing expenses was $0.9 million primarily due to $1.2 million of incremental
ongoing costs due to the acquisition of Sarian and Spectrum, offset by a reduction of $0.3
million of advertising and marketing expenses.
23
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
OPERATING EXPENSES (CONTINUED)
The net decrease of $0.3 million in research and development expenses for the three months
ended March 31, 2009 compared to March 31, 2008 was due primarily to a decrease of $0.7
million for compensation-related expenses, offset by an increase of $0.2 million of outside
service expense primarily for certification of wireless products and incremental ongoing
expenses of $0.2 million related to the acquisition of Sarian and Spectrum. Research and
development expenses for the six months ended March 31, 2009 increased
$0.1 million compared to the same period a year ago due primarily to an increase of $0.4
million in outside service expense primarily for certification of wireless products and
incremental ongoing expenses of $0.4 million related to the acquisitions of Sarian and
Spectrum, offset by a decrease of $0.5 million of compensation-related expenses and a decrease
of $0.2 million pertaining to agency testing and various development projects.
The net decrease in general and administrative expenses of $0.5 million for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008 is primarily due to a
decrease of compensation-related expenses of $0.6 million, a $0.3 million reduction in
depreciation and amortization expenses and a $0.5 million reduction in legal fees and other
general and administrative expenses, offset by an increase of $0.3 million related to the loss
of sublease income due to the sale of the Dortmund building and $0.6 million of incremental
ongoing expenses due to the acquisitions of Sarian and Spectrum. For the six months ended
March 31, 2009 compared to March 31, 2008, the net decrease in general and administrative
expenses of $0.7 million was due primarily to a decrease of $0.9 million in
compensation-related expenses, $0.6 million in reduced depreciation and amortization as the
Dortmund building was sold and certain intangibles became fully amortized, $0.4 million in
reduced professional fees and outside consulting fees, and a reduction of $0.7 million in
other miscellaneous general and administrative expenses. This was offset by an increase of
$1.5 million in incremental ongoing expenses related to the Sarian and Spectrum acquisitions,
and $0.4 million of increased rent due mostly to the elimination of a sublease income and
recognized gain on the sale of the Dortmund building.
INTEREST INCOME AND OTHER, NET
Other income, net was $0.4 million and $0.7 million for the three and six months ended March 31,
2009 compared to $1.0 million and $2.1 million for the three and six months ended March 31, 2008,
respectively. The decrease of $0.6 million and $1.4 million for the three and six months ended
March 31, 2009, respectively, as compared to the same periods a year ago, was due mostly to a
reduction in interest income. We earned a lower average interest rate of 2.8% and 3.3% for the
three and six months ended March 31, 2009, respectively, compared to 4.7% and 4.9% for the three
and six months ended March 31, 2008. The average invested balance for the three and six months
ended March 31, 2009 was $53.5 million and $57.1 million, respectively, and for the three and six
months ended March 31, 2008 was $86.1 million and $84.6 million, respectively.
INCOME TAXES
For the six month period ended March 31, 2009, income taxes have been provided at an effective rate
of 14.3% compared to 34.3% for the six month period ended March 31, 2008. On October 3, 2008 the
Tax Extenders and Alternative Minimum Tax Relief Act of 2008 was signed into law. That act
retroactively extended the research and development tax credit until December 31, 2009. As a
result, we recorded a discrete tax benefit of $0.4 million during the first quarter of fiscal 2009
for research and development credits earned during the last three quarters of fiscal 2008. The
total discrete tax benefits for the six months ended March 31, 2009 reduced the effective tax rate
by 20.5 percentage points. We expect our annualized 2009 income tax rate, before the impact of
discrete items, to be approximately 29% to 32%.
24
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations principally with funds generated from operations. At March
31, 2009, we had cash, cash equivalents and short-term marketable securities of $61.1 million
compared to $73.5 million at September 30, 2008, a decrease of $12.4 million. Our working
capital (total current assets less total current liabilities) decreased $9.8 million to $102.4
million at March 31, 2009 compared to $112.2 million at September 30, 2008.
Consolidated Statement of Cash Flow Highlights (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Operating activities |
|
$ |
(798 |
) |
|
$ |
9,333 |
|
|
$ |
(10,131 |
) |
Investing activities |
|
|
22,750 |
|
|
|
(1,631 |
) |
|
|
24,381 |
|
Financing activities |
|
|
(5,598 |
) |
|
|
1,961 |
|
|
|
(7,559 |
) |
Effect of exchange rate changes on cash
and cash equivalents |
|
|
(1,989 |
) |
|
|
(903 |
) |
|
|
(1,086 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
14,365 |
|
|
$ |
8,760 |
|
|
$ |
5,605 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Income to Cash Inflows (Outflows) from Operating Activities (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
Net income |
|
$ |
1,731 |
|
|
$ |
6,767 |
|
|
$ |
(5,036 |
) |
Deferred income tax benefit |
|
|
(1,540 |
) |
|
|
(1,920 |
) |
|
|
380 |
|
Depreciation and amortization |
|
|
4,865 |
|
|
|
4,792 |
|
|
|
73 |
|
Stock-based compensation |
|
|
1,842 |
|
|
|
1,776 |
|
|
|
66 |
|
Excess tax benefits from
stock-based compensation |
|
|
(42 |
) |
|
|
(165 |
) |
|
|
123 |
|
Other reconciling items |
|
|
40 |
|
|
|
32 |
|
|
|
8 |
|
Changes in working capital |
|
|
(7,694 |
) |
|
|
(1,949 |
) |
|
|
(5,745 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by
operating activities |
|
$ |
(798 |
) |
|
$ |
9,333 |
|
|
$ |
(10,131 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in net cash provided by operating activities of $10.1 million for the comparable
six month periods ended March 31, 2009 and 2008 is primarily due to a decrease in net income
of $5.0 million and a net increase in cash outflows due to changes in working capital of $5.7
million at March 31, 2009 as compared to March 31, 2008. The increase in working capital cash
outflows was primarily due to inventory increases as certain forecasted sales were deferred to
future quarters in addition to pre-builds of new products and strategic inventory purchases
and lower accounts payable than the same six month period a year ago, partially offset by a
decrease in accounts receivable primarily due to lower revenue in fiscal 2009.
Net cash provided by investing activities was $22.8 million during the six months ended March 31,
2009 compared to net cash used by investing activities of $1.6 million during the same period in
the prior fiscal year. The net increase of $24.4 million was primarily due to $28.9 million
related to net settlements of marketable securities during the six months ended March 31, 2009
compared to net purchases of marketable securities during the same period one year ago. Purchases
of property, equipment, improvements and certain other intangible assets decreased $0.3 million in
the first half of fiscal 2009 as compared to the same period a year ago. We spent $1.3 million for
a contingent purchase price payment related to the FS Forth acquisition in the first quarter of
fiscal 2008. In the second quarter of fiscal 2008, we used $0.4 million for a deposit on the
Dortmund building leaseback and we received $6.5 million for the Dortmund building sale. We
anticipate total fiscal 2009 capital expenditures will be approximately $3.3 million.
25
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We used $5.6 million for financing activities during the six months ended March 31, 2009 compared
to a cash inflow of $1.9 million during the same period a year ago, or a net decrease of $7.5
million. We used $6.1 million for the purchase of treasury stock during the six months ended March
31, 2009 and also received $1.4 million less in proceeds from stock option and employee stock
purchase plan transactions during the first half of fiscal 2009 as compared to the same period a
year ago.
We had cash provided by operating activities in excess of $20.0 million during each of the last
three fiscal years. In addition, we believe that our current cash balance and our potential
capacity for additional debt and/or equity financing would be sufficient to fund our business for
the next twelve months.
There have been no material changes in our contractual obligations disclosed in our Annual Report
on Form 10-K for the year ended September 30, 2008.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP SFAS 157-4).
FSP SFAS 157-4 provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset
or liability have significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly. This FSP SFAS 157-4 emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions. FSP SFAS 157-4 is
effective beginning with our quarterly report on Form 10-Q for the period ending June 30, 2009, and
shall be applied prospectively. We do not believe that the implementation of this standard will
have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 115-2 and No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP SFAS 115-2). FSP SFAS 115-2 amends the
other-than-temporary impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary impairments in the financial
statements. FSP SFAS 115-2 is effective beginning with our quarterly report on Form 10-Q for the
period ending June 30, 2009 and shall be applied to new and existing investments held by us as of
April 1, 2009. We do not believe that the implementation of this standard will have a material
impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP SFAS 107-1). FSP SFAS 107-1 amends SFAS No. 107
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies as well as in
annual financial statements and also amends APB Opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim reporting periods. FSP
SFAS 107-1 applies to all financial statements within the scope of SFAS No. 107 and requires all
entities to disclose the method(s) and significant assumptions used to estimate the fair value of
financial instruments. FSP SFAS 107-1 is effective beginning with our quarterly report on
Form 10-Q for the period ending June 30, 2009. We do not believe that the implementation of this
standard will have a material impact on our consolidated financial statements.
26
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED) |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP SFAS 142-3). FSP SFAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142). FSP SFAS 142-3 intends to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flow used to measure the fair value
of the asset under SFAS No. 141 (Revised 2007), Business Combinations and other accounting
principles generally accepted in the United States. This statement is effective for financial
statements issued for fiscal years and interim periods within those years beginning after December
15, 2008 and must be applied prospectively to intangible assets acquired after the effective date.
We are currently evaluating the impact of FSP SFAS 142-3 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). This
Statement retained the fundamental requirements in the former Statement that the acquisition method
of accounting (previously referred to as the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. This Statement defined the
acquirer as the entity that obtains control of one or more businesses in the business combination
and established the acquisition date as the date that the acquirer achieves control. The new
standard requires the acquiring entity in a business combination to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree. This Statement also
makes certain other modifications to the former Statement. SFAS 141(R) is effective for business
combinations that are consummated by us beginning October 1, 2009. Early adoption is not
permitted. SFAS 141(R) is expected to have a material impact on how we will identify, negotiate,
and value future acquisitions and how such acquisitions will affect our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 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. In February
2008, the FASB issued FASB Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13 (FSP 157-1) and FASB Staff
Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-1 amends
SFAS 157 to exclude various accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under Statement 13, with the exception of assets or
liabilities assumed in a business combination that are required to be measured at fair value under
SFAS 141 or SFAS 141(R). FSP 157-2 defers the effective date of SFAS 157 to our fiscal years
beginning October 1, 2009 for all nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). In October 2008, the FASB issued FASB Staff Position No. 157-3 (FSP 157-3) which
clarifies the application of SFAS 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset when the market
for that financial asset is not active. We adopted the required provisions of SFAS 157 for our
financial assets and liabilities at the beginning of our fiscal year 2009 (see Note 7) and the
remaining provisions for nonfinancial assets and liabilities will be adopted by us for our fiscal
years beginning October 1, 2009. We are currently evaluating the impact of FSP 157-2 on our
consolidated financial statements.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. The majority of
our marketable securities are classified as held-to-maturity and are carried at amortized cost.
Beginning October 1, 2008, newly acquired marketable securities are classified as
available-for-sale and any unrealized gain or loss is included in accumulated other comprehensive
income within stockholders equity. Marketable securities consist of commercial paper, government
municipal bonds and corporate bonds. Our credit policy specifies the types of eligible investments
and minimum credit quality of our investments, as well as diversification and concentration limits
which mitigate our risk. Our portfolio contains no auction rate securities. We do not use
derivative financial instruments to hedge against interest rate risk because the majority of our
investments mature in less than a year. A change in interest rates would not have a material
effect on our consolidated financial statements.
FOREIGN CURRENCY RISK
We have transactions that are executed in the U.S. Dollar, British Pound, Euro and Japanese Yen.
As a result, we are exposed to foreign currency transaction risk associated with certain sales
transactions being denominated in Euros, British Pounds or Japanese Yen, and foreign currency
translation risk as the financial position and operating results of our foreign subsidiaries are
translated into U.S. Dollars for consolidation. We have not implemented a hedging strategy to
reduce foreign currency risk.
For the six months ended March 31, 2009 and 2008, we had approximately $37.6 million and $35.0
million, respectively, of net sales to foreign customers including export sales, of which $18.0
million and $12.4 million, respectively, were denominated in foreign currency, predominantly Euros
and British Pounds for the six months ended March 31, 2009 and predominantly Euros for the six
months ended March 31, 2008. In future periods, a significant portion of sales will continue to be
made in both Euros and British Pounds.
The average monthly exchange rate for the Euro to the U.S. Dollar decreased approximately 10.7%
from 1.4723 to 1.3141 and the average monthly exchange rate for the Japanese Yen to the U.S. Dollar
increased approximately 15.3% from 0.0092 to 0.0106 for the first six months of fiscal year 2009 as
compared to the same period one year ago. The average monthly exchange rate for the British Pound
to the U.S. Dollar has decreased approximately 25.0% from 2.012 to 1.5087 for the first six months
of fiscal year 2009 as compared to the same period one year ago. A 10% change from the first six
months of fiscal 2009 average exchange rate for the Euro, British Pound and Japanese Yen to the
U.S. Dollar would have resulted in a 2.2% increase or decrease in net sales and a 1.8% increase or
decrease in stockholders equity. The above analysis does not take into consideration any pricing
adjustments we need to consider in response to changes in the exchange rate.
CREDIT RISK
We have some exposure to credit risk related to our 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.
Investments are made in accordance with our investment policy and consist of commercial paper,
government municipal bonds and corporate bonds. We may have some exposure related to the fair
value of our securities, which could change significantly based on changes in market conditions and
continued uncertainties in the credit markets. If these uncertainties continue or if these
securities experience credit rating downgrades, we may incur additional impairment charges for
other securities in our investment portfolio.
28
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal
financial officer, of our 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 our
disclosure controls and procedures were effective.
There was no change in our internal control over financial reporting during our most recently
completed fiscal quarter that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The disclosures set forth in Note 11 to the Condensed Consolidated Financial Statements in
Part I, Item 1 of this Form 10-Q are incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors provided in Part I, Item 1A of our 2008
Annual Report on Form 10-K as filed with the SEC on December 5, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 23, 2008, our Board of Directors authorized an additional 500,000 shares of our common
stock for repurchase under our previously announced stock repurchase program. The total number of
shares authorized to be repurchased is 1,500,000 shares. There is no expiration date for the
program. During the fourth quarter of fiscal 2008, we began to repurchase our common stock in the
open market. The following table presents our repurchases during the second quarter of fiscal
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Average |
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
Number |
|
|
Price |
|
|
Shares Purchased |
|
|
of Shares that May |
|
|
|
of Shares |
|
|
Paid |
|
|
as Part of a Publicly |
|
|
Yet Be Purchased |
|
Fiscal Period |
|
Purchased |
|
|
per Share |
|
|
Announced Program |
|
|
Under the Program |
|
January 1,
2009 January 31, 2009 |
|
|
370,197 |
|
|
$ |
7.64 |
|
|
|
370,197 |
|
|
|
658,603 |
|
February 1,
2009 February 28, 2009 |
|
|
214,293 |
|
|
$ |
7.50 |
|
|
|
214,293 |
|
|
|
444,310 |
|
March 1,
2009 March 31, 2009 (1) |
|
|
271,666 |
|
|
$ |
6.91 |
|
|
|
271,666 |
|
|
|
172,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
856,156 |
|
|
$ |
7.38 |
|
|
|
856,156 |
|
|
|
172,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 21,966 shares purchased for $165,042 that were not settled by March 31, 2009. Share
repurchases are included within the Condensed Consolidated Statements of Cash Flows based on
settlement date. |
29
PART II. OTHER INFORMATION (CONTINUED)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on January 26, 2009. Of the 25,383,253 shares of Digi
common stock entitled to vote at the meeting, 21,506,653 shares were present at the meeting in
person or by proxy. The stockholders voted on the following:
|
a) |
|
The following individuals designated by our Board of Directors as nominees for
director were elected for a three-year term, with voting as follows: |
|
|
|
|
|
|
|
|
|
Nominee |
|
Total Votes For |
|
|
Withhold Authority |
|
|
|
|
|
|
|
|
|
|
Kenneth E. Millard |
|
|
10,121,566 |
|
|
|
11,385,087 |
|
William N. Priesmeyer |
|
|
10,032,941 |
|
|
|
11,473,712 |
|
|
b) |
|
Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending September 30,
2009. The proposal passed on a vote of 21,312,237 in favor, 190,928 against, 3,488
abstentions and no broker non-votes. |
In addition, the terms of the following directors continued after the meeting:
Directors with a term ending in 2010: Guy C. Jackson and Ahmed Nawaz
Directors with a term ending in 2011: Joseph T. Dunsmore and Bradley J. Williams
ITEM 5. OTHER INFORMATION
None
30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
2 |
(a) |
|
Share Purchase Agreement dated April 28, 2008 among Digi International Limited, a
subsidiary of Digi International Inc., and all of the shareholders of Sarian Systems
Limited (excluding schedules and exhibits which the Registrant agrees to furnish
supplementally to the Securities and Exchange Commission upon request) (1) |
|
|
|
|
|
|
3 |
(a) |
|
Restated Certificate of Incorporation of the Company, as amended (2) |
|
|
|
|
|
|
3 |
(b) |
|
Amended and Restated By-Laws of the Company (3) |
|
|
|
|
|
|
4 |
(a) |
|
Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (4) |
|
|
|
|
|
|
4 |
(b) |
|
Form of Amended and Restated Certificate of Powers, Designations, Preferences
and Rights of Series A Junior Participating Preferred Shares (5) |
|
|
|
|
|
|
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 |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 2(a) to the Companys Form 10-Q for the quarter ended
March 31, 2008 (File No. 1-34033). |
|
(2) |
|
Incorporated by reference to Exhibit 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File
No. 0-17972) |
|
(3) |
|
Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
June 30, 2008 (File
No. 1-34033) |
|
(4) |
|
Incorporated by reference to Exhibit 4(a) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File
No. 1-34033) |
|
(5) |
|
Incorporated by reference to Exhibit 4(b) to the Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File
No. 1-34033) |
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
DIGI INTERNATIONAL INC. |
|
|
|
|
|
|
|
|
|
Date: May 7, 2009
|
|
By:
|
|
/s/ Subramanian Krishnan
Subramanian Krishnan
|
|
|
|
|
|
|
Senior Vice President, Chief Financial Officer |
|
|
|
|
|
|
and Treasurer (Principal Financial and |
|
|
|
|
|
|
Accounting Officer) |
|
|
32
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit Number |
|
Document Description |
|
Form of Filing |
|
|
|
|
|
|
|
|
2 |
(a) |
|
Share Purchase Agreement dated
April 28, 2008 among Digi International
Limited, a subsidiary of Digi International
Inc., and all of the shareholders of Sarian
Systems Limited (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 to the corresponding exhibit
number to the Companys Form 10-K for
the year ended September 30, 1993
(File No. 0-17972))
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
3 |
(b) |
|
Amended and Restated By-Laws of the
Company
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
4 |
(a) |
|
Share Rights Agreement, dated as of April 22,
2008, between the Company and Wells Fargo
Bank, N.A., as Rights Agent
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
4 |
(b) |
|
Form of Amended and Restated Certificate
of Powers, Designations, Preferences
and Rights of Series A Junior Participating
Preferred Shares
|
|
Incorporated by Reference |
|
|
|
|
|
|
|
|
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 |
33