EX-99.3 5 c69143ex99-3.txt PRO FORMA FINANCIAL INFORMATION EXHIBIT 99.3 NETSILICON, INC. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS On March 2, 2001, NetSilicon, Inc. (NSI) filed a Current Report on Form 8-K to report its acquisition of Dimatech Corporation (Dimatech). NSI purchased all of the equity securities of Dimatech pursuant to a stock purchase agreement, dated as of February 16, 2001, among Dimatech, Hiroyuki Kataoka, and NSI. The following unaudited pro forma combined condensed statement of operations for the twelve-month period ended September 30, 2001, gives effect to the acquisition of Dimatech as if it had occurred as of October 1, 2000. The unaudited pro forma information is based on the historical financial statements of NSI and Dimatech and was prepared using the purchase method of accounting. The unaudited pro forma combined condensed statements of operations and accompanying notes are qualified in their entirety and should be read in conjunction with the historical financial statements and accompanying notes of NSI. NSI has a fiscal year end of January 31 and, prior to the acquisition, Dimatech had a fiscal year end of December 31. The unaudited pro forma combined condensed statement of operations for the twelve months ended September 30, 2001 includes NSI's operations for the twelve months ended September 30, 2001 and Dimatech's operations for the period from October 1, 2000 through February 16, 2001. Dimatech's operations for the period from February 17, 2001 through September 30, 2001 are included in the NSI statement of operations for the twelve months ended September 30, 2001. The unaudited pro forma combined condensed financial information has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The unaudited pro forma combined condensed financial information is intended for informational purposes only and is not necessarily indicative of the future results of operations of the consolidated company after the acquisition, or the results of operations of the consolidated company that would have actually occurred had the acquisition been effected as of the dates indicated above. 1 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2001 (In thousands, except per share data) --------------------------------------------------------------------------------
DIMATECH NETSILICON, INC. CORPORATION PRO FORMA PRO FORMA HISTORICAL HISTORICAL (1) ADJUSTMENTS COMBINED Net sales $ 32,214 $ 4,295 $ (3,502)(a)(b) $ 33,007 Cost of sales 13,978 3,009 (3,000)(a) 13,987 -------- -------- -------- -------- Gross margin 18,236 1,286 (502) 19,020 -------- -------- -------- -------- Operating expenses: Sales and marketing 10,666 1,498 (502)(b) 11,662 Research and development 8,504 8,504 General and administrative 8,072 45 (c) 8,117 -------- -------- -------- -------- Total operating expenses 27,242 1,498 (457) 28,283 -------- -------- -------- -------- Operating loss (9,006) (212) (45) (9,263) Other income, net 603 159 762 -------- -------- -------- -------- Loss before income taxes (8,403) (53) (45) (8,501) Income tax provision (benefit) 68 (62) 6 -------- -------- -------- -------- Net (loss) income $ (8,471) $ 9 $ (45) $ (8,507) ======== ======== ======== ======== Net loss per share, basic $ (.61) $ (.61) Net loss per share, assuming dilution (.61) (.61) Weighted average shares, basic 13,936 97 (d) 14,033 Weighted average shares, assuming dilution 13,936 97 (d) 14,033
(1) These amounts reflect Dimatech statement of operations for the period from October 1, 2000 through February 16, 2001. Dimatech's operations for the period from February 17, 2001 through September 30, 2001 are included in the NSI statement of operations. The accompanying notes are an integral part of the pro forma financial statements. 2 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. BASIS OF PRO FORMA PRESENTATION The accompanying unaudited pro forma combined condensed financial statements and related notes of NSI are unaudited. In the opinion of NSI management, the pro forma financial statements include all adjustments necessary for a fair presentation of NSI's results of operations for the periods presented. These financial statements should be read in conjunction with the audited financial statements and accompanying notes included in NSI's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on May 1, 2001. In accordance with the rules and regulations of the Securities and Exchange Commission, unaudited combined statements may omit or condense certain information and disclosures normally required for a complete set of financial statements prepared in accordance with generally accepted accounting principles. However, management of NSI believes that the notes to the unaudited combined statement of operations contains disclosures adequate to make the information presented not misleading. 2. PURCHASE PRICE ALLOCATION AND ACQUISITION COSTS On February 16, 2001, NSI purchased all of the equity securities of Dimatech. Prior to the acquisition, Dimatech was a major distributor of NSI's product in Japan. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The following represents the purchase price allocation. Cash $ 762,000 Accounts receivable 1,018,000 Other tangible assets 162,000 Customer list 351,000 Workforce 148,000 Goodwill 134,000 ---------- Total purchase price $2,575,000 ==========
The purchase price consisted of 242,000 shares of the common stock of NSI valued at $1,258,000 based on the average NSI stock price during a period of five business days before and after the acquisition date, $250,000 of cash and assumed liabilities of approximately $969,000. NSI incurred approximately $98,000 of costs associated with the acquisition, including fees for legal, accounting and consulting services. This unaudited pro forma combined condensed statement of operations does not reflect the provisions of Statement of Financial Accounting Standards Board No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." 3 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 3. PRO FORMA ADJUSTMENTS The following pro forma adjustments have been made to the historical financial statements of NSI and Dimatech based upon assumptions made by NSI management for the purpose of preparing the unaudited pro forma combined condensed statements of operations. (a) To eliminate the effect of sales made by NSI to Dimatech. (b) To eliminate the effect of commissions paid by NSI to Dimatech. (c) To record amortization expense for acquired intangible assets of Dimatech. (d) To record NSI common shares issued in connection with the acquisition of Dimatech. 4. PRO FORMA EARNINGS PER SHARE Basic earnings (loss) per share is computed based on the weighted average number of shares outstanding during the historical period plus the effect of shares issued in connection with the acquisition of Dimatech. Diluted earnings (loss) per share is computed based on the weighted average number of shares outstanding during the historical period plus shares issued in connection with the acquisition of Dimatech and the effect of dilutive potential common shares which consist of shares issuable under stock benefit plans. 4 DIGI INTERNATIONAL INC. UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial information has been prepared to give effect to the acquisition of NetSilicon, Inc. (NSI) by Digi International Inc. (Digi) as well as the sale of substantially all of the assets of Digi's former wholly owned subsidiary, MiLAN Technologies (MiLAN), to Communications Systems, Inc. (CSI). The acquisition of NSI occurred on February 13, 2002. The sale of substantially all of the MiLAN assets occurred on March 25, 2002. Digi has a fiscal year end of September 30 while NSI has a fiscal year end of January 31. The pro forma combined condensed financial information is based on the following: 1. Digi's unaudited historical condensed consolidated financial statements as of December 31, 2001 and for the three month period then ended; 2. NSI's unaudited historical condensed consolidated financial statements as of December 31, 2001 and for the three month period then ended; 3. MiLAN's unaudited historical condensed financial statements as of December 31, 2001 and for the three months then ended; 4. Digi's audited historical consolidated financial statements for the year ended September 30, 2001; 5. NSI's unaudited pro forma combined condensed financial statements for the year ended September 30, 2001 (as described in the preceding pro forma financial statements); 6. MiLAN's unaudited historical condensed financial statements for the year ended September 30, 2001; and 7. Pro forma adjustments as described in the accompanying notes. The pro forma combined condensed balance sheet at December 31, 2001 gives effect to the acquisition of NSI and the sale of substantially all of the assets of MiLAN as if they occurred as of December 31, 2001. The pro forma combined condensed statements of operations for the three months ended December 31, 2001 and the year ended September 30, 2001 give effect to the acquisition of NSI and the sale of substantially all of the assets of MiLAN as if they occurred as of October 1, 2000. The related adjustments are described in the accompanying notes. The unaudited pro forma combined condensed financial information is based upon available information and certain assumptions set forth in the notes to the unaudited pro forma combined condensed financial information, which have been made solely for purposes of developing such unaudited pro forma financial information. The unaudited pro forma combined condensed financial information does not purport to represent what Digi's results of operations or financial condition would actually have been had the acquisition of NSI or the sale of substantially all of the assets of MiLAN occurred as of October 1, 2000, or to project Digi's results of operations or financial condition for any future period or date. 5 The unaudited pro forma combined condensed financial information should be read in conjunction with Digi's historical financial statements and notes thereto, including the Annual Report on Form 10-K for the year ended September 30, 2001 and the Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, NSI's historical financial statements and notes thereto, including NSI's Annual Report on Form 10-K for the year ended January 31, 2001 and NSI's Quarterly Report on Form 10-Q for the quarter ended October 27, 2001. 6 PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 2001 (UNAUDITED) (in thousands) --------------------------------------------------------------------------------
SALE OF DIGI SUBSTANTIALLY DIGI INTERNATIONAL ALL OF INTERNATIONAL. NETSILICON, INC. THE MILAN INC. INC. PRO FORMA PRO FORMA HISTORICAL ASSETS PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ASSETS Current assets: Cash and cash equivalents $ 22,422 $ 8,726 (m) $ 31,148 $ 4,735 $(15,000) (a) $ 20,883 Marketable securities 37,835 37,835 2,351 40,186 Accounts receivable, net 12,895 (4,280) (m) 8,615 2,947 11,562 Inventories, net 16,371 (4,203) (m) 12,168 4,779 123 (b) 17,070 Other 5,656 5,656 2,433 8,089 --------- ------- --------- ------- -------- --------- Total current assets 95,179 243 95,422 17,245 (14,877) 97,790 Property, equipment and improvements, net 21,849 (258) (m) 21,591 1,874 23,465 Intangible assets, net 21,858 (2,734) (m) 19,124 1,406 62,070 (d) 81,194 (1,406) (b) Other 1,515 1,515 2,133 (2,083) (b) 1,565 --------- ------- --------- ------- -------- --------- Total assets $ 140,401 $ (2,749) $ 137,652 $ 22,658 $ 43,704 $ 204,014 ========= ======== ========= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under line of credit agreements $ 452 $ 452 $ 452 Current portion of long-term debt 244 244 244 Accounts payable 7,277 7,277 $ 2,258 9,535 Income taxes payable 3,149 $ (827) (m) 2,322 12 2,334 Accrued expenses 9,210 987 (m) 10,197 3,600 $ 6,395 (f) 20,192 Restructuring reserves 276 276 276 --------- ------- --------- ------- -------- --------- Total current liabilities 20,608 160 20,768 5,870 6,395 33,033 Long term debt 5,371 5,371 5,371 Net deferred income taxes 1,713 1,713 6,903 (g) 8,616 --------- ------- --------- ------- -------- --------- Total liabilities 27,692 160 27,852 5,870 13,298 47,020 --------- ------- --------- ------- -------- --------- Stockholders' equity: Common stock 164 164 141 67 (a) 231 (141) (e) Additional paid-in capital 70,921 70,921 29,575 50,771 (a) 121,692 (29,575) (e) Retained earnings (accumulated deficit) 59,120 (2,909) (m) 56,211 (12,832) (3,100) (c) 53,111 12,832 (e) Accumulated other comprehensive income (loss) 114 114 (96) 96 (e) 114 --------- ------- --------- ------- -------- --------- 130,319 (2,909) 127,410 16,788 30,950 175,148 --------- ------- --------- ------- -------- --------- Unearned stock compensation (544) (a) (544) Treasury stock (17,610) (17,610) (17,610) --------- ------- --------- ------- -------- --------- Total stockholders' equity 112,709 (2,909) 109,800 16,788 30,406 156,994 --------- ------- --------- ------- -------- --------- Total liabilities and stockholders' equity $140,401 $(2,749) $ 137,652 $ 22,658 $ 43,704 $ 204,014 ======== ======== ========= ======== ======== =========
The accompanying notes are an integral part of the pro forma financial statements. 7 PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 (UNAUDITED) (in thousands, except per share data) --------------------------------------------------------------------------------
SALE OF DIGI SUBSTANTIALLY DIGI INTERNATIONAL ALL OF INTERNATIONAL NETSILICON, INC. THE MILAN INC. INC. PRO FORMA PRO FORMA HISTORICAL ASSETS PRO FORMA HISTORICAL ADJUSTMENTS COMBINED Net sales $ 25,150 $ (4,444) (n) $ 20,706 $ 6,155 $ 26,861 Cost of sales 11,700 (2,890) (n) 8,810 2,757 11,567 -------- ------ ------- -------- --------- Gross margin 13,450 (1,554) 11,896 3,398 15,294 -------- ------ ------- -------- --------- Operating expenses: Sales and marketing 6,697 (1,461) (n) 5,236 2,158 7,394 Research and development 3,726 (795) (n) 2,931 2,222 5,153 General and administrative 4,189 (395) (n) 3,794 2,623 $ 742 (h) 7,159 -------- ------ ------- -------- ------- --------- Total operating expenses 14,612 (2,651) 11,961 7,003 742 19,706 -------- ------ ------- -------- ------- --------- Operating (loss) income (1,162) 1,097 (65) (3,605) (742) (4,412) Other income (expense), net 345 345 70 (150) (i) 265 -------- ------ ------- -------- ------- --------- (Loss) income before income taxes (817) 1,097 280 (3,535) (892) (4,147) Income tax (benefit) provision (311) 376 (n) 65 (26) (1,706) (j) (1,667) -------- ------ ------- -------- ------- --------- Net (loss) income $ (506) $ 721 $ 215 $ (3,509) $ 814 $ (2,480) ======== ====== ======= ======== ======= ========= Net (loss) income per share, basic $ (.03) $ .01 $ (.25) $ (.11) Net (loss) income per share, assuming dilution (.03) .01 (.25) (.11) Weighted average shares, basic 15,369 15,369 14,066 6,720 (k) 22,089 (14,066) (e) Weighted average shares, assuming dilution 15,369 15 (o) 15,384 14,066 6,720 (k) 22,089 (14,066) (e) (15) (k)
The accompanying notes are an integral part of the pro forma financial statements. 8 PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2001 (UNAUDITED) (in thousands, except per share data) --------------------------------------------------------------------------------
SALE OF DIGI SUBSTANTIALLY DIGI INTERNATIONAL ALL OF INTERNATIONAL NETSILICON, INC. THE MILAN INC. INC. PRO FORMA PRO FORMA HISTORICAL ASSETS PRO FORMA PRO FORMA ADJUSTMENTS COMBINED Net sales $ 130,405 $(21,911) (n) $ 108,494 $ 33,007 $ 141,501 Cost of sales 66,193 (13,997) (n) 52,196 13,987 66,183 --------- -------- --------- --------- --------- Gross margin 64,212 (7,914) 56,298 19,020 75,318 --------- -------- --------- --------- --------- Operating expenses: Sales and marketing 30,716 (5,309) (n) 25,407 11,662 37,069 Research and development 18,335 (3,291) (n) 15,044 8,504 23,548 General and administrative 16,252 (1,333) (n) 14,919 8,117 $ 2,968 (h) 26,004 Restructuring 1,121 (226) (n) 895 895 ------- ------- -------- --------- -------- --------- Total operating expenses 66,424 (10,159) 56,265 28,283 2,968 87,516 ------- ------- -------- --------- -------- --------- Operating (loss) income (2,212) 2,245 33 (9,263) (2,968) (12,198) Other income (expense), net 2,396 2,396 762 (600) (i) 2,558 ------- ------- -------- --------- -------- --------- Income (loss) before income taxes and cumulative effect of accounting change 184 2,245 2,429 (8,501) (3,568) (9,640) Income tax provision (benefit) 66 448 (n) 514 6 (4,625) (j) (4,105) ------- ------- -------- --------- -------- --------- Net income (loss) before cumulative effect of accounting change $ 118 $ 1,797 $ 1,915 $ (8,507) $ 1,057 $ (5,535) ======= ======= ======== ========= ======== ========= Net loss per share, from continuing operations, basic $ (.01)(l) $ .11 $ (.61) $ (.25) Net loss per share, from continuing operations, assuming dilution (.01)(l) .11 (.61) (.25) Weighted average shares, basic 15,235 15,235 14,033 6,720 (k) 21,955 $ (14,033) (e) Weighted average shares, assuming dilution 15,288 15,288 14,033 6,720 (k) 21,955 (14,033) (e) (53) (k)
The accompanying notes are an integral part of the pro forma financial statements. 9 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. BASIS OF PRO FORMA PRESENTATION The unaudited pro forma combined condensed financial statements of Digi have been prepared on the basis of assumptions relating to the allocation of consideration paid to the acquired assets and liabilities of NSI based on management's best estimates. Below are tables of the estimated acquisition costs and estimated purchase price allocation for NSI: Cash and fair value of Digi's common stock and common stock options issued $65,838,000 Direct acquisition costs 1,315,000 ----------- Total purchase price $67,153,000 ----------- Estimated fair value of net tangible assets acquired $ 8,342,000 Unearned stock compensation related to unvested portion of stock options issued 544,000 Estimated fair value of: Acquired in-process research and development 3,100,000 Identifiable intangible assets, net of deferred tax liabilities of $6,903,000 10,797,000 Goodwill and assembled workforce 44,370,000 ----------- $67,153,000 ===========
On March 25, 2002, Digi announced its sale of substantially all of the MiLAN assets to CSI for $8,059,000, resulting in a net loss of $3,107,000. The historical financial information of Digi has been adjusted in the pro forma combined condensed financial statements to reflect the results of this transaction. 2. PRO FORMA ADJUSTMENTS (a) Adjustment reflects the components of the purchase consideration and related transaction costs, which includes $15,000,000 in cash, Digi's common stock with a market value of $41,732,000 and replacement stock options issued by Digi to certain NSI common stock option holders with an estimated fair value of $9,106,000. The cash and Digi's common stock were issued in exchange for outstanding shares of NSI's common stock and Digi's common stock options were issued in exchange for certain outstanding NSI common stock options. The value of the Digi common stock was based on a per share value of approximately $6.21, calculated as the average market price of Digi's common stock during the five business days immediately preceding and subsequent to the date the parties reached agreement on terms and announced the proposed acquisition. The value of Digi's common stock options is based on the estimated fair value of these options, as of the date the transaction was announced, using the Black-Scholes valuation model. Unearned compensation of $544,000 has been recorded related to the intrinsic value of the unvested replacement common stock options for which future services are required before the option holders vest in the replacement options. (b) These amounts represent adjustments to increase the carrying values of inventories and to eliminate the historical carrying value of intangible assets and capitalized software costs that are recorded at their fair values in adjustment (d). 10 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (c) Digi utilized the income valuation approach to determine the estimated fair value of the purchased in-process research and development. Management estimates that $3,100,000 of the purchase price represents the fair value of purchased in-process research and development that has not yet reached technological feasibility and will have no alternative future uses as of the acquisition date. This amount has been expensed as a non-recurring, non tax-deductible charge upon consummation of the acquisition and deducted from retained earnings in the pro forma combined condensed balance sheet. (d) Goodwill (including assembled workforce) and intangible asset adjustments represent the consideration paid in excess of the fair value of net tangible assets acquired. The identifiable intangible assets included in the estimated purchase price allocation set forth in Note 1 is comprised principally of proven technology, customer maintenance contracts, license agreements, patents, trademark, and customer relationships with an estimated fair value of $17,700,000, and with estimated useful lives ranging from six to ten years. The remaining unallocated portion of the purchase price in excess of the fair value of tangible net assets represents goodwill and assembled workforce. Goodwill and assembled workforce are not amortized in accordance with the provisions of Statement of Financial Accounting Standards Board No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Digi has not yet adopted Statement of Financial Accounting Standards Board No. 142 "Goodwill and Other Intangible Assets. " The historical financial information of Digi and NSI does not reflect the adoption of Financial Accounting Standards Board No. 142, "Goodwill and Other Intangible Assets." (e) Adjustments reflect the elimination of the existing stockholders' equity of NSI. (f) Amount represents accrual for the following items: Digi's direct acquisition costs $1,315,000 NetSilicon's acquisition related costs payable by Digi 2,500,000 Compensation payable to certain members of NetSilicon management upon completion of the acquisition 2,580,000 ---------- Total $6,395,000 ==========
(g) Amount represents the deferred tax liabilities generated as a result of the acquisition of identifiable intangible assets assuming a blended U.S. federal and state statutory income tax rate of 39%. (h) Adjustment represents amortization of acquired identifiable intangibles of NSI based on estimated lives ranging from six to ten years. In addition, the amortization of unearned stock compensation (as the stock options vest) of $211,000 for the twelve months ended September 30, 2001 and $53,000 for the three months ended December 31, 2001 is included in this adjustment. Amortization is not recorded for goodwill established in connection with the NSI acquisition, in accordance with the provisions of Statement of Financial Accounting Standards Board No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." (i) Adjustments represent interest income assumed to be foregone at a weighted-average rate of 4% due to the cash paid for the acquisition of NSI. 11 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (j) Adjustments to income tax provision relating to intangible asset amortization and adjustment (i) assuming a blended U.S. federal and state statutory income tax rate of 39%. In addition, the utilization of NSI operating losses in the Digi consolidated income tax provision is reflected in this adjustment. (k) Adjustment relates to the following items: - To reflect the increase in weighted average basic shares and weighted average dilutive shares outstanding for the common stock and common stock options issued in connection with the acquisition. Pro forma basic earnings per common share for the period presented were calculated assuming that 6,720,000 shares of Digi common stock issued in connection with the acquisition were issued at the beginning of the period presented. - Pro forma diluted earnings per common share for the twelve months ended September 30, 2001 excludes 53,000 shares of Digi historical common equivalent shares because their effect was antidilutive on a combined pro forma basis. Pro forma diluted earnings per common share for the three months ended December 31, 2001 excludes 15,000 shares of Digi historical common equivalent shares because their effect was antidilutive on a combined pro forma basis. - Common equivalent shares attributable to the common stock options issued by Digi in connection with the acquisition, to replace existing NSI common stock options (2,743,000 Digi common stock options), were excluded in determining the weighted average dilutive shares outstanding for the year ended September 30, 2001 because their effect was antidilutive. (l) Per share net income from continuing operations equals amounts in the audited financial statements of Digi for the year ended September 30, 2001, but does not equate to mathematically determined amounts due to rounding. (m) Reflects the sale of substantially all of the MiLAN assets to CSI occurring on December 31, 2001 for $8,059,000, resulting in a net loss of $3,327,000. The net loss has been recorded as a non-recurring charge and deducted from retained earnings in the pro forma combined condensed balance sheet. (n) Reflects the results of MiLAN as if the sale of substantially all of the MiLAN assets to CSI occurred on October 1, 2000 for $8,059,000, resulting in a net loss of $3,702,000. The net loss has been recorded as a non-recurring charge which is excluded from the pro forma combined condensed statement of operations. (o) Adjustment to include common equivalent shares that were excluded from the Digi historical financial information because their effect was antidilutive. 12