##### Table of Contents



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: June 30, 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.
  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  (Registrants telephone number, including area code)
 Yes þ No o
 Yes
o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



PagePART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30, 2009 and 2008
    
    
    3Condensed Consolidated Balance Sheets as of
June 30, 2009 and September 30, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    21Forward-looking Statements
    
    
    21ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30ITEM 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    32ITEM 1A. Risk Factors
    
    
    32ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32ITEM 3. Defaults Upon Senior Securities
    
    
    32ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    32ITEM 5. Other Information
    
    
    32ITEM 6. Exhibits
    
    
    33Exhibit 31(a)Exhibit 31(b)Exhibit 32
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended June 30,
    
    
    Nine months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per common share data)Net sales
    
    $
    44,470
    
    
    $
    46,995
    
    
    $
    125,916
    
    
    $
    134,639Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    21,986
    
    
    
    21,200
    
    
    
    60,963
    
    
    
    59,729Amortization of purchased and core technology
    
    
    1,047
    
    
    
    938
    
    
    
    3,099
    
    
    
    2,981Gross profit
    
    
    21,437
    
    
    
    24,857
    
    
    
    61,854
    
    
    
    71,929Operating expenses:Sales and marketing
    
    
    8,624
    
    
    
    9,493
    
    
    
    27,225
    
    
    
    27,213Research and development
    
    
    6,823
    
    
    
    6,995
    
    
    
    19,993
    
    
    
    20,113General and administrative
    
    
    3,435
    
    
    
    3,839
    
    
    
    10,716
    
    
    
    11,821Restructuring costs
    
    
    1,953
    
    
    
    
    
    
    
    1,953
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    1,900
    
    
    
    
    
    
    
    1,900Total operating expenses
    
    
    20,835
    
    
    
    22,227
    
    
    
    59,887
    
    
    
    61,047Operating income
    
    
    602
    
    
    
    2,630
    
    
    
    1,967
    
    
    
    10,882Other income (expense):Interest income
    
    
    275
    
    
    
    776
    
    
    
    1,259
    
    
    
    2,850Interest expense
    
    
    (67
    )
    
    
    (64
    )
    
    
    (202
    )
    
    
    (90
    )Other income, net
    
    
    559
    
    
    
    355
    
    
    
    364
    
    
    
    355Total other income (expense)
    
    
    767
    
    
    
    1,067
    
    
    
    1,421
    
    
    
    3,115Income before income taxes
    
    
    1,369
    
    
    
    3,697
    
    
    
    3,388
    
    
    
    13,997Income tax (benefit) provision
    
    
    (24
    )
    
    
    1,712
    
    
    
    264
    
    
    
    5,245Net income
    
    $
    1,393
    
    
    $
    1,985
    
    
    $
    3,124
    
    
    $
    8,752Net income per common share:Basic
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.34Diluted
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.33Weighted average common shares:Basic
    
    
    24,607
    
    
    
    25,742
    
    
    
    24,982
    
    
    
    25,683Diluted
    
    
    24,875
    
    
    
    26,079
    
    
    
    25,250
    
    
    
    26,353
   3




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 June 30,
    
    
    September 30,2009
    
    
    2008(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,671
    
    
    $
    14,176Marketable securities
    
    
    32,977
    
    
    
    59,337Accounts receivable, net
    
    
    25,742
    
    
    
    24,310Inventories
    
    
    29,234
    
    
    
    30,240Other
    
    
    4,849
    
    
    
    5,106Total current assets
    
    
    122,473
    
    
    
    133,169Marketable securities, long-term
    
    
    4,261
    
    
    
    179Property, equipment and improvements, net
    
    
    16,187
    
    
    
    16,255Identifiable intangible assets, net
    
    
    28,900
    
    
    
    34,032Goodwill
    
    
    86,837
    
    
    
    86,578Other
    
    
    1,187
    
    
    
    1,203Total assets
    
    $
    259,845
    
    
    $
    271,416LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    32
    
    
    $
    267Accounts payable
    
    
    10,141
    
    
    
    10,343Accrued compensation
    
    
    2,685
    
    
    
    5,981Accrued warranty
    
    
    1,020
    
    
    
    1,214Deferred payment on acquisition
    
    
    2,940
    
    
    
    Restructuring
    
    
    1,519
    
    
    
    Other
    
    
    3,148
    
    
    
    3,128Total current liabilities
    
    
    21,485
    
    
    
    20,933Capital lease obligations, net of current portion
    
    
    2
    
    
    
    78Income taxes payable
    
    
    4,621
    
    
    
    4,358Deferred tax liabilities
    
    
    4,914
    
    
    
    7,582Deferred payment on acquisition
    
    
    2,786
    
    
    
    5,575Other noncurrent liabilities
    
    
    803
    
    
    
    956Total liabilities
    
    
    34,611
    
    
    
    39,482Commitments and contingenciesStockholders 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;
28,368,515 and 28,335,876 shares issued
    
    
    284
    
    
    
    283Additional paid-in capital
    
    
    180,190
    
    
    
    177,614Retained earnings
    
    
    81,749
    
    
    
    78,625Accumulated other comprehensive loss
    
    
    (8,622
    )
    
    
    (1,897
    )Treasury stock, at cost, 3,735,242 and 2,960,457 shares
    
    
    (28,367
    )
    
    
    (22,691
    )Total stockholders equity
    
    
    225,234
    
    
    
    231,934Total liabilities and stockholders equity
    
    $
    259,845
    
    
    $
    271,416
   4




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##### Table of Contents



DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine months ended June 30,2009
    
    
    2008(in thousands)Operating activities:Net income
    
    $
    3,124
    
    
    $
    8,752Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    1,899
    
    
    
    1,894Amortization of identifiable intangible assets and other assets
    
    
    5,531
    
    
    
    5,033Excess tax benefits from stock-based compensation
    
    
    (44
    )
    
    
    (177
    )Stock-based compensation
    
    
    2,690
    
    
    
    2,702Deferred income tax benefit
    
    
    (2,346
    )
    
    
    (2,696
    )Restructuring
    
    
    1,519
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    1,900Other
    
    
    (67
    )
    
    
    128Changes in operating assets and liabilities
    
    
    (8,033
    )
    
    
    (2,509
    )Net cash provided by operating activities
    
    
    4,273
    
    
    
    15,027Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (21,615
    )
    
    
    (57,273
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    45,275
    
    
    
    65,667Acquisition of Sarian Systems, Ltd., net of cash acquired
    
    
    
    
    
    
    (27,811
    )Acquisition of assets of MobiApps Holdings Private Limited
    
    
    (2,969
    )
    
    
    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
    
    
    
    
    
    
    6,915Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (2,327
    )
    
    
    (2,567
    )Net cash provided by (used in) investing activities
    
    
    18,364
    
    
    
    (16,776
    )Financing activities:Payments on capital lease obligations
    
    
    (311
    )
    
    
    (293
    )Borrowing on note payable
    
    
    
    
    
    
    25,000Payment on note payable
    
    
    
    
    
    
    (25,000
    )Excess tax benefits from stock-based compensation
    
    
    44
    
    
    
    177Proceeds from stock option plan transactions
    
    
    125
    
    
    
    1,679Proceeds from employee stock purchase plan transactions
    
    
    787
    
    
    
    802Purchase of treasury stock
    
    
    (6,576
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (5,931
    )
    
    
    2,365Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,211
    )
    
    
    (2,240
    )Net increase (decrease) in cash and cash equivalents
    
    
    15,495
    
    
    
    (1,624
    )Cash and cash equivalents, beginning of period
    
    
    14,176
    
    
    
    18,375Cash and cash equivalents, end of period
    
    $
    29,671
    
    
    $
    16,751
   5




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##### Table of Contents



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
   Changes in Presentation
  Recently Issued Accounting Pronouncements
 FASB Accounting
Standards Codification
   6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1.
    
    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2.
    
    COMPREHENSIVE INCOME
  Three months ended June 30,
    
    
    Nine months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    1,393
    
    
    $
    1,985
    
    
    $
    3,124
    
    
    $
    8,752Other comprehensive income (loss):Change in foreign currency translation gain (loss)
    
    
    2,919
    
    
    
    (1,342
    )
    
    
    (6,695
    )
    
    
    (629
    )Change in unrealized loss on investments, net of tax
    
    
    (28
    )
    
    
    
    
    
    
    (30
    )
    
    
    Comprehensive income (loss)
    
    $
    4,284
    
    
    $
    643
    
    
    $
    (3,601
    )
    
    $
    8,123
 3.
    
    NET INCOME PER COMMON SHARE
   Three months ended June 30,
    
    
    Nine months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income
    
    $
    1,393
    
    
    $
    1,985
    
    
    $
    3,124
    
    
    $
    8,752Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    24,607
    
    
    
    25,742
    
    
    
    24,982
    
    
    
    25,683Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    268
    
    
    
    337
    
    
    
    268
    
    
    
    670Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    24,875
    
    
    
    26,079
    
    
    
    25,250
    
    
    
    26,353Net income per common share, basic
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.34Net income per common share, diluted
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.33
   8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    ACQUISITIONS
 MobiApps Holdings Private Limited
    Cash, including direct acquisition costs
    
    $
    3,019Fair value of net tangible assets acquired
    
    $
    136Identifiable intangible assets:Existing purchased and core technology
    
    
    800License agreement
    
    
    400Goodwill
    
    
    1,683$
    3,019
     9




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    ACQUISITIONS (CONTINUED)
 Spectrum Design Solutions, Inc.
  Sarian Systems, Ltd.
    Three months ended June 30, 2008
    
    
    Nine months ended June 30, 2008Pro forma
    
    
    As Reported
    
    
    Pro forma
    
    
    As ReportedNet sales
    
    $
    47,787
    
    
    $
    46,995
    
    
    $
    142,317
    
    
    $
    134,639Net income
    
    $
    1,389
    
    
    $
    1,985
    
    
    $
    7,938
    
    
    $
    8,752Net income per common share, basic
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.31
    
    
    $
    0.34Net income per common share, diluted
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.30
    
    
    $
    0.33
   10




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5.
    
    SELECTED BALANCE SHEET DATA
 (in thousands)
    
    June 30, 2009
    
    
    September 30, 2008Accounts receivable, net:Accounts receivable
    
    $
    26,334
    
    
    $
    25,007Less allowance for doubtful accounts
    
    
    592
    
    
    
    697$
    25,742
    
    
    $
    24,310Inventories:Raw materials
    
    $
    22,668
    
    
    $
    20,979Work in process
    
    
    695
    
    
    
    981Finished goods
    
    
    5,871
    
    
    
    8,280$
    29,234
    
    
    $
    30,240Other current liabilities:Accrued professional fees
    
    
    705
    
    
    
    507Income taxes payable
    
    
    
    
    
    
    182Deferred gain on
building sale 
short-term
    
    
    265
    
    
    
    273Unearned revenue
    
    
    78
    
    
    
    353Other accrued expenses
    
    
    2,100
    
    
    
    1,813$
    3,148
    
    
    $
    3,128
  6.
    
    MARKETABLE SECURITIES
    11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES (CONTINUED)
    Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    11,460
    
    
    $
    11
    
    
    $
    (3
    )
    
    $
    11,468Government municipal bonds
    
    
    3,683
    
    
    
    5
    
    
    
    
    
    
    
    3,688Total marketable securities
    
    $
    15,143
    
    
    $
    16
    
    
    $
    (3
    )
    
    $
    15,156
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $298,056.  12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES (CONTINUED)
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Current marketable securities:Corporate bonds (2)
    
    $
    3,182
    
    
    $
    10
    
    
    $
    
    
    
    $
    3,192Certificates of deposit
    
    
    9,255
    
    
    
    
    
    
    
    (27
    )
    
    
    9,228Government municipal bonds
    
    
    5,410
    
    
    
    5
    
    
    
    (1
    )
    
    
    5,414Current marketable securities
    
    
    17,847
    
    
    
    15
    
    
    
    (28
    )
    
    
    17,834Non-current marketable securities:Corporate bonds (2)
    
    
    3,234
    
    
    
    
    
    
    
    (36
    )
    
    
    3,198Government municipal bonds
    
    
    1,064
    
    
    
    
    
    
    
    (1
    )
    
    
    1,063Non-current marketable securities
    
    
    4,298
    
    
    
    
    
    
    
    (37
    )
    
    
    4,261Total marketable securities
    
    $
    22,145
    
    
    $
    15
    
    
    $
    (65
    )
    
    $
    22,095
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $196,308.(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.   Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    55,628
    
    
    $
    12
    
    
    $
    (2,771
    )
    
    $
    52,869Government municipal bonds
    
    
    3,709
    
    
    
    
    
    
    
    (10
    )
    
    
    3,699Current marketable securities
    
    
    59,337
    
    
    
    12
    
    
    
    (2,781
    )
    
    
    56,568Non-current marketable securities:Corporate bonds (2)
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    179Total 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.  13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES (CONTINUED)
  Due After One YearDue Within One Year
    
    
    Through Five Years (3)Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost (1)
    
    
    Value (1)
    
    
    Cost (1)
    
    
    Value (1)Corporate bonds (2)
    
    $
    14,642
    
    
    $
    14,660
    
    
    $
    3,234
    
    
    $
    3,198Certificates of deposit
    
    
    9,255
    
    
    
    9,228
    
    
    
    
    
    
    
    Government municipal bonds
    
    
    9,093
    
    
    
    9,102
    
    
    
    1,064
    
    
    
    1,063Total marketable securities
    
    $
    32,990
    
    
    $
    32,990
    
    
    $
    4,298
    
    
    $
    4,261
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $494,364.(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.(3)
    
    We do not invest in maturities in excess of 24 months. 7.
    
    FAIR VALUE MEASUREMENTS
    
    
    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 Techniquesfor further discussion of how we determine fair
value for investments classified as Level 3.
  14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7.
    
    FAIR VALUE MEASUREMENTS (CONTINUED)
 Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
   Fair Value Measurements at June 30, 2009 Using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsJune 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    12,772
    
    
    $
    12,772
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    6,390
    
    
    
    6,211
    
    
    
    
    
    
    
    179Certificates of deposit
    
    
    9,228
    
    
    
    9,228
    
    
    
    
    
    
    
    Government municipal bonds
    
    
    6,477
    
    
    
    6,477
    
    
    
    
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    34,867
    
    
    $
    34,688
    
    
    $
    
    
    
    $
    179
  Level 3 Valuation Techniques
    15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8.
    
    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
  June 30, 2009
    
    
    September 30, 2008Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    46,788
    
    
    $
    (33,851
    )
    
    $
    12,937
    
    
    $
    46,660
    
    
    $
    (30,745
    )
    
    $
    15,915License agreements
    
    
    2,840
    
    
    
    (2,446
    )
    
    
    394
    
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    Patents and trademarks
    
    
    9,237
    
    
    
    (5,422
    )
    
    
    3,815
    
    
    
    8,906
    
    
    
    (4,682
    )
    
    
    4,224Customer maintenance contracts
    
    
    700
    
    
    
    (516
    )
    
    
    184
    
    
    
    700
    
    
    
    (464
    )
    
    
    236Customer relationships
    
    
    17,697
    
    
    
    (6,835
    )
    
    
    10,862
    
    
    
    18,137
    
    
    
    (5,472
    )
    
    
    12,665Non-compete agreements
    
    
    1,050
    
    
    
    (342
    )
    
    
    708
    
    
    
    1,075
    
    
    
    (83
    )
    
    
    992Total
    
    $
    78,312
    
    
    $
    (49,412
    )
    
    $
    28,900
    
    
    $
    77,918
    
    
    $
    (43,886
    )
    
    $
    34,032
   2009 (three months)
    
    $
    1,9252010
    
    
    7,2532011
    
    
    5,3622012
    
    
    3,9522013
    
    
    2,9622014
    
    
    2,648
  Nine months ended June 30,2009
    
    
    2008Beginning balance, October 1
    
    $
    86,578
    
    
    $
    66,817Acquisition of MobiApps
    
    
    1,683
    
    
    
    Acquisition of Sarian
    
    
    
    
    
    
    15,432Foreign currency translation adjustment
    
    
    (1,424
    )
    
    
    582Ending balance, June 30
    
    $
    86,837
    
    
    $
    82,831
 9.
    
    INCOME TAXES
    16




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9.
    
    INCOME TAXES (CONTINUED)
  2009
    
    
    2008Effective tax rate before impact of discrete tax benefits &
non-deductible in-process research and development
    
    
    33.9
    %
    
    
    35.1
    %Impact of discrete tax benefits
    
    
    -26.1
    %
    
    
    3.8
    %Impact of non-deductible in-process research and
development
    
    
    
    
    
    
    -1.4
    %Effective tax rate
    
    
    7.8
    %
    
    
    37.5
    %
   Uncertain tax positions as of March 31, 2009
    
    $
    4,001Increases related to current year income tax positionsCurrent year income tax positions
    
    
    272Decreases related to:Prior year income tax positions
    
    
    Settlements
    
    
    (86
    )Expiration of the statute of limitations
    
    
    (285
    )Uncertain tax positions as of June 30, 2009
    
    $
    3,902
      17




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10.
    
    FINANCIAL GUARANTEES
  Three months ended June 30,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    April 1
    
    
    issued
    
    
    made
    
    
    June 302009
    
    $
    1,143
    
    
    $
    9
    
    
    $
    (132
    )
    
    $
    1,0202008
    
    $
    1,133
    
    
    $
    218
    
    
    $
    (227
    )
    
    $
    1,124
 Nine months ended June 30,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    October 1
    
    
    issued
    
    
    made
    
    
    June 302009
    
    $
    1,214
    
    
    $
    353
    
    
    $
    (547
    )
    
    $
    1,0202008
    
    $
    1,155
    
    
    $
    576
    
    
    $
    (607
    )
    
    $
    1,124
  11.
    
    CONTINGENCIES
 Contingent obligations
    18




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11.
    
    CONTINGENCIES (CONTINUED)
 In
re Initial Public Offering Securities Litigation en banc
    12.
    
    SALE AND LEASEBACK OF BUILDING
   19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12.
    
    SALE AND LEASEBACK OF BUILDING (CONTINUED)
  13.
    
    RESTRUCTURING
    EmployeeTerminationCosts
    
    
    Other
    
    
    TotalBalance March 31, 2009
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring charge
    
    
    1,766
    
    
    
    187
    
    
    
    1,953Cash payments
    
    
    (386
    )
    
    
    (48
    )
    
    
    (434
    )Balance June 30, 2009
    
    $
    1,380
    
    
    $
    139
    
    
    $
    1,519
   20




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
      Goodwill
    21




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
   Marketable Securities
  OVERVIEW
     22




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
 OVERVIEW (CONTINUED)
     23




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  Three months ended June 30,
    
    
    % increase
    
    
    Nine months ended June 30,
    
    
    % increase2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Net sales
    
    $
    44,470
    
    
    
    100.0
    %
    
    $
    46,995
    
    
    
    100.0
    %
    
    
    (5.4
    )%
    
    $
    125,916
    
    
    
    100.0
    %
    
    $
    134,639
    
    
    
    100.0
    %
    
    
    (6.5
    )%Cost of sales (exclusive of amortization of purchased and core technology
shown separately below)
    
    
    21,986
    
    
    
    49.4
    
    
    
    21,200
    
    
    
    45.1
    
    
    
    3.7
    
    
    
    60,963
    
    
    
    48.4
    
    
    
    59,729
    
    
    
    44.4
    
    
    
    2.1Amortization of purchased and
core technology
    
    
    1,047
    
    
    
    2.4
    
    
    
    938
    
    
    
    2.0
    
    
    
    11.6
    
    
    
    3,099
    
    
    
    2.5
    
    
    
    2,981
    
    
    
    2.2
    
    
    
    4.0Gross profit
    
    
    21,437
    
    
    
    48.2
    
    
    
    24,857
    
    
    
    52.9
    
    
    
    (13.8
    )
    
    
    61,854
    
    
    
    49.1
    
    
    
    71,929
    
    
    
    53.4
    
    
    
    (14.0
    )Operating expenses:Sales and marketing
    
    
    8,624
    
    
    
    19.4
    
    
    
    9,493
    
    
    
    20.2
    
    
    
    (9.2
    )
    
    
    27,225
    
    
    
    21.6
    
    
    
    27,213
    
    
    
    20.2
    
    
    
    0.0Research and development
    
    
    6,823
    
    
    
    15.3
    
    
    
    6,995
    
    
    
    14.9
    
    
    
    (2.5
    )
    
    
    19,993
    
    
    
    15.9
    
    
    
    20,113
    
    
    
    14.9
    
    
    
    (0.6
    )General and administrative
    
    
    3,435
    
    
    
    7.7
    
    
    
    3,839
    
    
    
    8.2
    
    
    
    (10.5
    )
    
    
    10,716
    
    
    
    8.5
    
    
    
    11,821
    
    
    
    8.8
    
    
    
    (9.3
    )Restructuring costs
    
    
    1,953
    
    
    
    4.4
    
    
    
    
    
    
    
    0.0
    
    
    
    N/A
    
    
    
    1,953
    
    
    
    1.5
    
    
    
    
    
    
    
    0.0
    
    
    
    N/AIn-process research and
development
    
    
    
    
    
    
    0.0
    
    
    
    1,900
    
    
    
    4.0
    
    
    
    (100.0
    )
    
    
    
    
    
    
    0.0
    
    
    
    1,900
    
    
    
    1.4
    
    
    
    (100.0
    )Total operating expenses
    
    
    20,835
    
    
    
    46.8
    
    
    
    22,227
    
    
    
    47.3
    
    
    
    (6.3
    )
    
    
    59,887
    
    
    
    47.5
    
    
    
    61,047
    
    
    
    45.3
    
    
    
    (1.9
    )Operating income
    
    
    602
    
    
    
    1.4
    
    
    
    2,630
    
    
    
    5.6
    
    
    
    (77.1
    )
    
    
    1,967
    
    
    
    1.6
    
    
    
    10,882
    
    
    
    8.1
    
    
    
    (81.9
    )Interest income and other, net
    
    
    767
    
    
    
    1.7
    
    
    
    1,067
    
    
    
    2.2
    
    
    
    (28.1
    )
    
    
    1,421
    
    
    
    1.1
    
    
    
    3,115
    
    
    
    2.3
    
    
    
    (54.4
    )Income before income taxes
    
    
    1,369
    
    
    
    3.1
    
    
    
    3,697
    
    
    
    7.8
    
    
    
    (63.0
    )
    
    
    3,388
    
    
    
    2.7
    
    
    
    13,997
    
    
    
    10.4
    
    
    
    (75.8
    )Income tax (benefit) provision
    
    
    (24
    )
    
    
    0.0
    
    
    
    1,712
    
    
    
    3.6
    
    
    
    (101.4
    )
    
    
    264
    
    
    
    0.2
    
    
    
    5,245
    
    
    
    3.9
    
    
    
    (95.0
    )Net income
    
    $
    1,393
    
    
    
    3.1
    %
    
    $
    1,985
    
    
    
    4.2
    %
    
    
    (29.8
    )%
    
    $
    3,124
    
    
    
    2.5
    %
    
    $
    8,752
    
    
    
    6.5
    %
    
    
    (64.3
    )%
   Three months ended June 30,
    
    
    $ increase
    
    
    % increase
    
    
    Nine months ended June 30,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    (decrease)North America (1)
    
    $
    22,631
    
    
    $
    26,131
    
    
    $
    (3,500
    )
    
    
    (13.4
    )%
    
    $
    66,500
    
    
    $
    78,214
    
    
    $
    (11,714
    )
    
    
    (15.0
    )%EMEA (2)
    
    
    17,094
    
    
    
    14,503
    
    
    
    2,591
    
    
    
    17.9
    
    
    
    45,356
    
    
    
    38,432
    
    
    
    6,924
    
    
    
    18.0Asia Pacific (3)
    
    
    3,991
    
    
    
    5,075
    
    
    
    (1,084
    )
    
    
    (21.4
    )
    
    
    11,601
    
    
    
    14,225
    
    
    
    (2,624
    )
    
    
    (18.4
    )Latin America
(including Mexico)
    
    
    754
    
    
    
    1,286
    
    
    
    (532
    )
    
    
    (41.4
    )
    
    
    2,459
    
    
    
    3,768
    
    
    
    (1,309
    )
    
    
    (34.7
    )Total net sales
    
    $
    44,470
    
    
    $
    46,995
    
    
    $
    (2,525
    )
    
    
    (5.4
    )%
    
    $
    125,916
    
    
    $
    134,639
    
    
    $
    (8,723
    )
    
    
    (6.5
    )%
 (1)
    
    Includes Spectrum net sales of $966,662 and $3,158,119 for the three and nine months ended
June 30, 2009, respectively.(2)
    
    Includes Sarian net sales of $6,094,846 and $14,202,444 for the three and nine months ended
June 30, 2009, respectively
and net sales of $2,376,015 for both the three and nine months ended June 30, 2008,
respectively.(3)
    
    Includes MobiApps net sales of $47,481 for both the three and nine months ended June 30, 2009.  24




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
    Three months ended June 30,
    
    
    % increase
    
    
    Nine months ended June 30,
    
    
    % increase($ in thousands)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Non-embedded
    
    $
    24,026
    
    
    
    54.0
    %
    
    $
    26,325
    
    
    
    56.0
    %
    
    
    (8.7)
    %
    
    $
    70,081
    
    
    
    55.7
    %
    
    $
    71,540
    
    
    
    53.1
    %
    
    
    (2.0
    )%Embedded
    
    
    20,444
    
    
    
    46.0
    
    
    
    20,670
    
    
    
    44.0
    
    
    
    (1.1
    )
    
    
    55,835
    
    
    
    44.3
    
    
    
    63,099
    
    
    
    46.9
    
    
    
    (11.5
    )Total net sales
    
    $
    44,470
    
    
    
    100.0
    %
    
    $
    46,995
    
    
    
    100.0
    %
    
    
    (5.4
    )%
    
    $
    125,916
    
    
    
    100.0
    %
    
    $
    134,639
    
    
    
    100.0
    %
    
    
    (6.5
    )%
 Non-embedded
  Embedded
     25




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
   Three months ended June 30,
    
    
    $ increase
    
    
    Nine months ended June 30,
    
    
    $ increase($ in thousands)
    
    2009
    
    
    2008
    
    
    (decrease)
    
    
    2009
    
    
    2008
    
    
    (decrease)Sales and marketing
    
    $
    8,624
    
    
    
    19.4
    %
    
    $
    9,493
    
    
    
    20.2
    %
    
    $
    (869
    )
    
    $
    27,225
    
    
    
    21.6
    %
    
    $
    27,213
    
    
    
    20.2
    %
    
    $
    12Research and development
    
    
    6,823
    
    
    
    15.3
    
    
    
    6,995
    
    
    
    14.9
    
    
    
    (172
    )
    
    
    19,993
    
    
    
    15.9
    
    
    
    20,113
    
    
    
    14.9
    
    
    
    (120
    )General and administrative
    
    
    3,435
    
    
    
    7.7
    
    
    
    3,839
    
    
    
    8.2
    
    
    
    (404
    )
    
    
    10,716
    
    
    
    8.5
    
    
    
    11,821
    
    
    
    8.8
    
    
    
    (1,105
    )Restructuring costs
    
    
    1,953
    
    
    
    4.4
    
    
    
    
    
    
    
    0.0
    
    
    
    1,953
    
    
    
    1,953
    
    
    
    1.5
    
    
    
    
    
    
    
    0.0
    
    
    
    1,953In-process research and
development
    
    
    
    
    
    
    0.0
    
    
    
    1,900
    
    
    
    4.0
    
    
    
    (1,900
    )
    
    
    
    
    
    
    0.0
    
    
    
    1,900
    
    
    
    1.4
    
    
    
    (1,900
    )Total operating expenses
    
    $
    20,835
    
    
    
    46.8
    %
    
    $
    22,227
    
    
    
    47.3
    %
    
    $
    (1,392
    )
    
    $
    59,887
    
    
    
    47.5
    %
    
    $
    61,047
    
    
    
    45.3
    %
    
    $
    (1,160
    )
    26




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
           27




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
  Consolidated Statements of Cash Flow Highlights (in thousands)
 Nine months ended June 30,2009
    
    
    2008
    
    
    ChangeOperating activities
    
    $
    4,273
    
    
    $
    15,027
    
    
    $
    (10,754
    )Investing activities
    
    
    18,364
    
    
    
    (16,776
    )
    
    
    35,140Financing activities
    
    
    (5,931
    )
    
    
    2,365
    
    
    
    (8,296
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (1,211
    )
    
    
    (2,240
    )
    
    
    1,029Net increase in cash and cash equivalents
    
    $
    15,495
    
    
    $
    (1,624
    )
    
    $
    17,119
 Reconciliation of Net Income to Net Cash Provided by Operating Activities (in thousands)
 Nine months ended June 30,2009
    
    
    2008
    
    
    ChangeNet income
    
    $
    3,124
    
    
    $
    8,752
    
    
    $
    (5,628
    )Deferred income tax benefit
    
    
    (2,346
    )
    
    
    (2,696
    )
    
    
    350Depreciation and amortization
    
    
    7,430
    
    
    
    6,927
    
    
    
    503Stock-based compensation
    
    
    2,690
    
    
    
    2,702
    
    
    
    (12
    )Excess tax benefits from stock-based
compensation
    
    
    (44
    )
    
    
    (177
    )
    
    
    133Restructuring
    
    
    1,519
    
    
    
    
    
    
    
    1,519Acquired in-process research and
development
    
    
    
    
    
    
    1,900
    
    
    
    (1,900
    )Other reconciling items
    
    
    (67
    )
    
    
    128
    
    
    
    (195
    )Changes in working capital
    
    
    (8,033
    )
    
    
    (2,509
    )
    
    
    (5,524
    )Net cash provided by operating activities
    
    $
    4,273
    
    
    $
    15,027
    
    
    $
    (10,754
    )
    28




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
      FASB Accounting
Standards Codification
    29




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
    
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      30




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
       
 ITEM 4.
    
    CONTROLS AND PROCEDURES
     31




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber
    
    
    Price
    
    
    Shares Purchased
    
    
    of Shares that Mayof Shares
    
    
    Paid
    
    
    as Part of a Publicly
    
    
    Yet Be PurchasedFiscal Period
    
    Purchased
    
    
    per Share
    
    
    Announced Program
    
    
    Under the ProgramApril 1, 2009  April 30, 2009
    
    
    8,411
    
    
    $
    6.52
    
    
    
    8,411
    
    
    
    164,233May 1, 2009  May 31, 2009
    
    
    28,595
    
    
    $
    7.24
    
    
    
    28,595
    
    
    
    135,638June 1,
2009  June 30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    135,638Total
    
    
    37,006
    
    
    $
    7.07
    
    
    
    37,006
    
    
    
    135,638
 
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
   32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 6.
    
    EXHIBITS
 Exhibit No.
    
    Description2
    (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 Officer31
    (b)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    
    Section 1350 Certification
 
 (1)
    
    Incorporated by reference to Exhibit 2(a) to the Companys Form 10-Q for the quarter ended
March 31, 2008 (File No. 1-34033).(2)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File No. 0-17972)(3)
    
    Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
June 30, 2008 (File No. 1-34033)(4)
    
    Incorporated by reference to Exhibit 4(a) to the Companys 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 Companys Registration Statement on Form 8-A
filed on April 25, 2008 (File No. 1-34033)  33




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##### Table of Contents



DIGI INTERNATIONAL INC.Date:  August 10, 2009
    By:
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President,
 Chief Financial Officer
and Treasurer 
(Principal Financial and
Accounting Officer)  34




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##### Table of Contents



Exhibit Number
    
    Document Description
    
    Form of Filing2
    (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 Reference3
    (a)
    
    Restated Certificate of Incorporation
of the Company, as Amended (incorporated
by reference to the corresponding exhibit
number to the Companys Form 10-K for
the year ended September 30, 1993
(File No. 0-17972))
    
    Incorporated by Reference3
    (b)
    
    Amended and Restated By-Laws of the
Company
    
    Incorporated by Reference4
    (a)
    
    Share Rights Agreement, dated as of April 22,
2008, between the Company and Wells Fargo
Bank, N.A., as Rights Agent
    
    Incorporated by Reference4
    (b)
    
    Form of Amended and Restated Certificate
of Powers, Designations, Preferences
and Rights of Series A Junior Participating
Preferred Shares
    
    Incorporated by Reference31
    (a)
    
    Rule 13a-14(a)/15d-14(a) 
Certification of Chief Executive Officer
    
    Filed Electronically31
    (b)
    
    Rule 13a-14(a)/15d-14(a) 
Certification of Chief Financial Officer
    
    Filed Electronically32
    
    
    Section 1350 Certification
    
    Filed Electronically
  35