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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 3, 2005
Digi International Inc.
 
(Exact name of Registrant as specified in its charter)
         
Delaware   0-17972   41-1532464
 
(State or other jurisdiction
of incorporation) 		  (Commission File Number)   (IRS Employer
Identification No.)
     
11001 Bren Road East
Minnetonka, Minnesota 		 
55343
 
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (952) 912-3444
     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
  o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
  o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
  o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
  o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 

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Item 2.02. Results of Operations and Financial Condition
Item 5.02. Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
Item 9.01. Financial Statements and Exhibits.
SIGNATURES
EXHIBIT INDEX
Press Release - Financial Results
Press Release - Election to Board of Directors

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Item 2.02. Results of Operations and Financial Condition.
     On November 3, 2005, Digi International Inc. (the “Company”) reported its financial results for the fourth quarter of 2005 and the year ended September 30, 2005. See the Company’s press release dated November 3, 2005, which is furnished as Exhibit 99.1 and incorporated by reference in this Current Report on Form 8-K.
NON-GAAP FINANCIAL MEASURES
     The press release furnished as Exhibit 99.1 and certain information the Company intends to disclose on the conference call scheduled for 5:00 p.m. eastern time on November 3, 2005 include certain non-GAAP financial measures. These measures include (i) operating income excluding intangibles amortization and non-recurring items, (ii) operating expenses excluding intangibles amortization and non-recurring items, (iii) net income per diluted share excluding the impact of a favorable tax settlement and the in-process research and development charge, (iv) earnings before taxes, depreciation, amortization and non-recurring items, (v) revenue from Device Networking products excluding revenues from Rabbit Semiconductor, a business acquired during the year, and (vi) guidance disclosed by the Company related to earnings per diluted share excluding the impact of stock-based compensation expense, and variations and growth rates related to the foregoing. The non-recurring items consist primarily of acquired in-process research and development charges, restructuring expenses and non-recurring gains and losses that have been described in the Company’s filings with the SEC. The reconciliations of these measures to the most directly comparable GAAP financial measures are provided in the earnings release or are included below.
     With respect to the measures that exclude the favorable tax settlement or non-recurring items, management believes that excluding these one-time non-recurring items provides useful information to investors regarding the Company’s results of operations and financial condition and permits a more meaningful comparison and understanding of the Company’s operating performance. With respect to measures that exclude intangibles amortization, management believes that these measures more accurately focus on the costs that can be meaningfully controlled by the Company, and therefore permit a more meaningful comparison from period to period. Similarly, management believes that earnings before taxes, depreciation, amortization and non-recurring items helps investors compare operating results and corporate performance exclusive of the impact of the Company’s capital structure and the method by which assets were acquired. Management believes that providing revenue exclusive of contributions from the acquired Rabbit Semiconductor business provides better comparability with prior year periods. Finally, management believes that providing guidance exclusive of the impact of stock-based compensation expense so that investors can compare expected results with results for prior periods that did not include stock-based compensation expense. Management uses these various non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of the comparative operating performance of the Company.

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NON-GAAP RECONCILIATION SCHEDULES
Reconciliation of Reported Earnings Per Diluted Share to Earnings Per Diluted Share
Excluding Favorable Tax Settlement and Acquired In-Process Research and Development
(in thousands, except per share amounts)
                                 
    Three months ended     Twelve months ended  
    September 30, 2005     September 30, 2004     September 30, 2005     September 30, 2004  
Gross profit
   $ 21,182     $ 17,884     $ 75,682     $ 67,783  
 
                                
Total operating expenses, before acquired in-process research and development
     16,205       14,068       58,425       56,002  
Acquired in-process research and development
     —       —       300       —  
 
                        
Total operating expenses
     16,205       14,068       58,725       56,002  
 
                        
 
                                
Operating income
   $ 4,977     $ 3,816     $ 16,957     $ 11,781  
 
                                
Income before income taxes
   $ 5,194     $ 4,012     $ 17,983     $ 12,150  
Impact of favorable tax settlement
     —       —       (5,689 )     —  
Income tax provision
     1,773       1,127       6,007       3,487  
 
                        
 
                                
Net income
   $ 3,421     $ 2,885     $ 17,665     $ 8,663  
 
                        
 
                                
Net income per common share, basic
   $ 0.15     $ 0.13     $ 0.79     $ 0.41  
 
                        
Net income per common share, diluted
   $ 0.15     $ 0.13     $ 0.76     $ 0.39  
 
                        
 
                                
Impact of favorable tax settlement, basic
   $ —     $ —     $ (0.25 )   $ —  
 
                        
Impact of favorable tax settlement, diluted
   $ —     $ —     $ (0.24 )   $ —  
 
                        
Impact of acquisition related in-process research and development, basic
   $ —     $ —     $ 0.01     $ —  
 
                        
Impact of acquisition related in-process research and development, diluted
   $ —     $ —     $ 0.01     $ —  
 
                        
Net income per common share, basic, excluding the favorable tax settlement and acquired in-process research and development
   $ 0.15     $ 0.13     $ 0.55     $ 0.41  
 
                        
Net income per common share, diluted, excluding the favorable tax settlement and acquired in-process research and development
   $ 0.15     $ 0.13     $ 0.52     $ 0.39  
 
                        
 
                                
Weighted average common shares, basic
     22,654       21,727       22,450       21,196  
 
                        
 
                                
Weighted average common shares, diluted
     23,210       22,539       23,371       22,031  
 
                        

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Reconciliation of Total Operating Expenses to Operating Expenses Excluding Intangibles Amortization and Nonrecurring Items
(In thousands of dollars and as a percent of Net Sales)
                                                                                                 
            % of net             % of net             % of net             % of net             % of net             % of net  
    FY 02     sales     FY 03     net sales     FY 04     sales     FY 05     sales     Q4 FY 04     sales     Q4 FY 05     sales  
Net sales
   $ 101,536       100.0 %   $ 102,926       100.0 %   $ 111,226       100.0 %   $ 125,198       100.0 %   $ 29,274       100.0 %   $ 36,208       100.0 %
 
                                                                        
 
                                                                                                
Total operating expenses
     76,239       75.1 %     55,073       53.5 %     56,002       50.3 %     58,725       46.9 %     14,068       48.1 %     16,205       44.8 %
 
                                                                                                
Intangibles amortization
     7,945       7.8 %     6,485       6.3 %     5,222       4.7 %     5,550       4.4 %     1,307       4.5 %     1,666       4.6 %
In-process research and development
     3,100       3.1 %     —       0.0 %     —       0.0 %     300       0.2 %     —       0.0 %     —       0.0 %
Restructuring expenses
     2,696       2.7 %     (600 )     -0.6 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
Gain from forgiveness of grant payable
     (1,068 )     -1.1 %     (553 )     -0.5 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
Loss on sale of MiLAN
     3,617       3.6 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
 
                                                                        
 
                                                                                                
Operating expenses excluding intangibles amortization and nonrecurring items
   $ 59,949       59.0 %   $ 49,741       48.3 %   $ 50,780       45.7 %   $ 52,875       42.2 %   $ 12,761       43.6 %   $ 14,539       40.2 %
 
                                                                        

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Reconciliation of Operating Income to Operating Income Excluding Intangibles Amortization and Nonrecurring Items
(In thousands of dollars and as a percent of Net Sales)
                                                                                                 
            % of net             % of net             % of net             % of net             % of net             % of net  
    FY 02     sales     FY 03     sales     FY 04     sales     FY 05     sales     Q4 FY 04     sales     Q4 FY 05     sales  
Net sales
   $ 101,536       100.0 %   $ 102,926       100.0 %   $ 111,226       100.0 %   $ 125,198       100.0 %   $ 29,274       100.0 %   $ 36,208       100.0 %
 
                                                                        
 
                                                                                                
Operating income
     (20,715 )     -20.4 %     6,273       6.1 %     11,781       10.6 %     16,957       13.5 %     3,816       13.0 %     4,977       13.7 %
Intangibles amortization
     7,945       7.8 %     6,485       6.3 %     5,222       4.7 %     5,550       4.4 %     1,307       4.5 %     1,666       4.6 %
In-process research and development
     3,100       3.1 %     —       0.0 %     —       0.0 %     300       0.2 %     —       0.0 %     —       0.0 %
Restructuring expenses
     2,696       2.7 %     (600 )     -0.6 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
Gain from forgiveness of grant payable
     (1,068 )     -1.1 %     (553 )     -0.5 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
Loss on sale of MiLAN
     3,617       3.6 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %     —       0.0 %
 
                                                                        
 
                                                                                                
Operating income excluding intangibles amortization and nonrecurring items
   $ (4,425 )     -4.4 %   $ 11,605       11.3 %   $ 17,003       15.3 %   $ 22,807       18.2 %   $ 5,123       17.5 %   $ 6,643       18.3 %
 
                                                                        

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Reconciliation of Income (Loss) before Income Taxes to Earnings before Taxes, Depreciation, Amortization and Nonrecurring Items
(In thousands of dollars and as a percent of Net Sales)
                                                                                         
                                                                    % increase                
            % of net             % of net             % of net             % of net     from FY 04             % of net  
    FY 02     sales     FY 03     sales     FY 04     sales     FY 05     sales     to FY 05     Q4 FY 05     sales  
Net sales
   $ 101,536       100.0 %   $ 102,926       100.0 %   $ 111,226       100.0 %   $ 125,198       100.0 %           $ 36,208       100.0 %
 
                                                                    
 
                                                                                        
Income (loss) before income taxes
   $ (19,459 )           $ 6,569             $ 12,150             $ 17,983                     $ 5,194          
 
                                                                              
Depreciation and amortization
     11,568               10,303               8,597               8,870                       2,493          
In-process research and development
     3,100               —               —               300                       —          
Restructuring expenses
     2,696               (600 )             —               —                       —          
Gain from forgiveness of grant payable
     (1,068 )             (553 )             —               —                       —          
Loss on sale of MiLAN
     3,617               —               —               —                       —          
 
                                                                              
Earnings before taxes, depreciation, amortization and nonrecurring items
   $ 454       0.4 %   $ 15,719       15.3 %   $ 20,747       18.7 %   $ 27,153       21.7 %     30.9 %   $ 7,687       21.2 %
 
                                                                  

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Reconciliation of Reported Diluted Earnings per Share Guidance for Fiscal 2006 to
Diluted Earnings per Share for Fiscal 2005, Excluding the Impact of the Favorable Tax Settlement and Stock-Based Compensation Expense
                                                 
    Q1 2006 - Estimated Range   Fiscal 2006 - Estimated Range             Fiscal 2005  
    for EPS Guidance     for EPS Guidance             Diluted EPS  
    Low     High     Low     High                  
Reported diluted earnings per share, Sept. 30, 2005
                                           $ 0.76  
 
                                                
Impact of the favorable tax settlement
                                             0.24  
 
                                              
Diluted earnings per share for fiscal 2005, excluding the impact of the favorable tax settlement
                                             0.52  
 
                                              
 
                                                
Reported diluted earnings per share anticipated for Q1 2006 and fiscal 2006
   $ 0.10     $ 0.15     $ 0.53     $ 0.63                  
 
                                                
Estimated impact of stock-based compensation expense in Q1 2006 and fiscal 2006
     0.02       0.02       0.07       0.07                  
 
                                        
Diluted earnings per share anticipated for fiscal 2006, excluding the impact of estimated stock-based compensation expense
   $ 0.12     $ 0.17     $ 0.60     $ 0.70                  
 
                                        
 
                                                
Anticipated diluted earnings per share increase, fiscal 2006 compared to fiscal 2005, excluding the impact of the favorable tax settlement and estimated stock-based compensation expense
                     15 %     35 %                

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Item 5.02. Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.
     On November 2, 2005, the Board of Directors, upon recommendation of the Nominating Committee, elected William N. Priesmeyer as a director of Digi International Inc. to serve a term expiring at the 2006 annual meeting of stockholders. Mr. Priesmeyer’s committee assignments will be determined around the time of the 2006 annual meeting of stockholders and announced at that time. See the Company’s press release dated November 3, 2005, which is filed as Exhibit 99.2 and incorporated by reference in this Current Report on Form 8-K.
Item 9.01. Financial Statements and Exhibits.
       
The following Exhibits are being furnished or filed herewith:
  
 
 
    
99.1
  Press Release dated November 3, 2005 announcing financial results for the fourth quarter of 2005 and the year ended September 30, 2005.
 
    
99.2
  Press Release dated November 3, 2005 announcing election of William Priesmeyer to the Board of Directors.

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SIGNATURES
     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: November 3, 2005  By /s/ Subramanian Krishnan    
  Subramanian Krishnan   
  Senior Vice President, Chief Financial Officer and Treasurer   
 

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EXHIBIT INDEX
         
No.   Exhibit   Manner of Filing
99.1
  Press Release dated November 3, 2005 announcing financial results for the fourth quarter of 2005 and the year ended September 30, 2005.   Filed
Electronically
 
        
99.2
  Press Release dated November 3, 2005 announcing election of William Priesmeyer to the Board of Directors.   Filed
Electronically

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