<PAGE>
As filed with the Securities and Exchange Commission on May 19, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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LANTRONIX, INC.
(Exact name of Registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
California 3576 33-0362767
(prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
Delaware 15353 Barranca Parkway
(after reincorporation) Irvine, California 92618
(State or other jurisdiction (949) 453-3990
of
incorporation or organization)
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Frederick G. Thiel
President and Chief Executive Officer
Lantronix, Inc.
15353 Barranca Parkway
Irvine, California 92618
(949) 453-3990
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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<S> <C>
John T. Sheridan, Esq. Shane M. Byrne, Esq.
John B. Turner, Esq. Krista Peck, Esq.
Michelle D. Gregory, Esq. Angela C. Hilt, Esq.
WILSON SONSINI GOODRICH & ROSATI Mark Hornor, Esq.
Professional Corporation BROBECK, PHLEGER & HARRISON LLP
650 Page Mill Road One Market
Palo Alto, CA 94304 Spear Tower
(650) 493-9300 San Francisco, California 94105
(415) 442-0900
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed
Title of Each Class of Securities to be Maximum Aggregate Amount of
Registered Offering Price(1)(2) Registration Fee
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Common stock, $0.0001 par value ........ $115,000,000 $30,360
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(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 19, 2000
[LOGO]
Shares
Common Stock
Lantronix, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We have applied for approval for listing of our common stock on the Nasdaq
National Market under the symbol "LTRX." We anticipate that the initial public
offering price will be between $ and $ per share.
-----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.
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<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discounts and Commissions....................... $ $
Proceeds to Lantronix, Inc................................... $ $
</TABLE>
-----------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Lantronix, Inc. and the selling stockholders have granted the underwriters a
30-day option to purchase up to an additional shares of common stock to
cover over-allotments. If the underwriters exercise the over-allotment option
up to shares will be sold by Lantronix, Inc. and up to shares will
be sold by the selling stockholders.
-----------
Joint book-running managers
Robertson Stephens Donaldson, Lufkin & Jenrette
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DLJdirect Inc.
The date of this prospectus is , 2000
<PAGE>
INSIDE FRONT COVER
The words "what does DEVICE SERVER technology mean to you?" are centered on the
page both horizontally and vertically. Above the text are two small pictures:
(1) two engineers working at a mainframe computer; and (2) five telephone poles
in a row. Beneath the text are three pictures: (1) a reflection of a building;
(2) a man using a security card to access a door; and (3) a person ringing up a
receipt on a cash register.
INSIDE GATEFOLD
The words "With Device Server technology you can Internet-enable almost any
electronic device." Below the text is a circle split into three segments. In
each segment there is a picture. In the upper left segment is a photo of an ATM
machine, directly left of the segment is the word "Past." In the upper right
segment there is a photo of an automobile, directly right of the segment is the
word "future". In the lower segment is a photo of a handheld barcode reader,
directly below is the word "Present".
INSIDE GATEFOLD (2)
At the top left of the page is the word "Internet", inside of a yellow bubble.
Directly to the right of the word "Internet" are the words, "Device Server
Technology brings the Internet to virtually every industry from factory
automation to healthcare to retail." Below the yellow bubble and the text is a
red text box with the words "Device Server applications." There are three
arrows down from the red text box, one on the left, one in the center and one
on the right. Below the arrows are six photos in two rows of three. The first
photo at the top left is of a patient being monitored by medical equipment
while a nurse looks on, above the photo are the words "Hospital Information
Access." The top center photo is of a man using a security panel to access a
door, above the photo are the words, "Internet Enabled Security Systems." At
the top right is a photo of a building, with the words "Remote building HVAC
Control." At the bottom left is a photo of a person ringing up a receipt on a
cash register, above the photo are the words, "Cost-effective Retail POS
connectivity." At the bottom contains a photo of two engineers working at a
mainframe, above the photo are the words "Enterprise IT management." On the
bottom left is a photo of five telephone lines with the words "Industrial
control and remote management."
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, references
to "Lantronix," "we," "our" and "us" refer to Lantronix, Inc.
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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TABLE OF CONTENTS
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Page
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Summary.............................................................. 1
Risk Factors......................................................... 5
Note Regarding Forward-Looking Statements............................ 14
Use of Proceeds...................................................... 14
Dividend Policy...................................................... 14
Capitalization....................................................... 15
Dilution............................................................. 16
Selected Consolidated Financial Data................................. 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 18
Change in Auditors................................................... 27
Business............................................................. 28
Management........................................................... 38
Certain Transactions................................................. 45
Principal and Selling Stockholders................................... 47
Description of Capital Stock......................................... 48
Shares Eligible for Future Sale...................................... 51
Underwriting......................................................... 53
Legal Matters........................................................ 56
Experts.............................................................. 56
Where You Can Find Additional Information............................ 56
Index to Consolidated Financial Statements........................... F-1
</TABLE>
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Our logo, "Lantronix," "EZWebCon" and "Comm Port Redirector" are trademarks
or service marks of Lantronix, Inc. We have filed for trademark protection for
"Device Server." This prospectus also contains trademarks and tradenames of
other companies.
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in this offering. You
should read the following summary together with the more detailed information
in this prospectus, including risk factors, regarding our company and the
common stock being sold in this offering.
Our Company
Our Business
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Our Device Servers and Multiport Device Servers are fully integrated
systems that contain memory, processors, operating systems, software
applications and communication ports. As a result, users can gain instant
access to critical information, manage and control devices in real-time over
the Internet or other networks. We have developed networking solutions for
devices such as bar code scanners, building heating, ventilation and air
conditioning, or HVAC, systems, elevators, manufacturing equipment, process
control equipment, vending machines, thermostats, security cameras, medical
instruments, temperature sensors, card readers and point of sale terminals. We
sell our products, which also includes Print Server and other devices, through
multiple channels using original equipment manufacturers, or OEMs, systems
integrators, distributors and value added resellers, or VARS, to a wide variety
of end-markets including industrial automation, healthcare, security/access
control, retail/point of sale, commercial/information technology and
telecommunications.
Our Market
The emergence of the Internet has increased users' access to information and
the speed at which users are able to respond to new information. As Internet
technology applications have become more advanced, users have become able to
conduct business over the Internet in real-time. The increasing productivity
that real-time communication creates has escalated demand for real-time access
to devices over the Internet for a broad range of applications at all levels of
technological sophistication. Moreover, by enabling intelligent devices to make
decisions and communicate using the Internet without human intervention,
significant cost savings and efficiencies can be realized.
The majority of electronic devices in existence today are not connected to
the Internet. Instead, these devices, if networked, primarily communicate
through proprietary, closed control systems requiring a personal computer, or
PC, extensive wiring and custom designed software. Examples of such isolated
systems include point of sale devices, bar code scanners, security systems,
elevators, manufacturing equipment and medical instruments. Moreover, any
intelligent action that must be taken as a result of information provided by
these devices, such as ordering additional inventory when a bar code scanner
provides information that a store is out of a certain product, requires action
by a human being. Today, manufacturers and systems integrators are increasingly
using device server technology which provides a cost-effective solution to
enable electronic devices to be connected and controlled over the Internet as
well as to replace human intervention by enabling the devices to respond
automatically to certain data inputs.
Demand for device server technology is being driven by the need for cost
effective networking solutions for the base of installed devices as well as
devices currently being developed by OEMs and systems integrators. In terms of
the installed base, device server technology can benefit virtually any
electronic device that has a serial port. In terms of devices currently being
developed, device server technology can benefit virtually any
1
<PAGE>
electronic device that contains, or otherwise could contain, a microprocessor.
Cahners In-stat Group, an independent research company, estimates that the
number of microprocessors embedded in electronic devices is expected to
increase from over 4.9 billion units as of December 31, 1999 to 7.3 billion
units by December 31, 2002.
As competition to be the first-to-market with Internet-enabled products
becomes more intense, OEMs, VARs and systems integrators, whose core
competencies typically do not include networking expertise, are increasingly
seeking out third-party providers of networking capabilities that can meet end-
user demand. End-users desire solutions that provide higher levels of
automation and functionality with advanced features and services including:
. scaleable intelligence and reprogrammability;
. open system architecture;
. real-time, continuous communications;
. seamless integration; and
. flexible applications.
Our Solution
We are a leading provider of network device server technology that enables
electronic devices to be accessed, managed, controlled and reprogrammed over
the Internet using standard protocols for connectivity, including fiber optic,
Ethernet and wireless. We believe our products enable our customers to compete
more effectively by allowing them to improve their business models by
automating tasks previously performed by human resources and streamlining
redundant technology. We believe our products offer end-users and manufacturers
the following key advantages:
. a fully integrated solution;
. a remote real-time solution;
. an open, standards-based architecture;
. no gateway requirement to network devices; and
. improved reliability.
Our Strategy
Our objective is to be the leading global provider for network-enabling
devices. The following elements are central to our strategy:
. building our sales channel relationships with OEMs, VARs and systems
integrators;
. completing strategic aquisitions and entering into partnerships to grow
our customer base and product offering;
. developing new products through research and development;
. extending existing customer relationships to expand future revenue
streams;
. leveraging our application expertise; and
. establishing strong brand awareness.
Our Address
Our headquarters are located at 15353 Barranca Parkway, Irvine, California
92618, and our telephone number at that location is (949) 453-3990. Our web
addresses are www.lantronix.com and www.deviceserver.com. Information on our
websites should not be considered to be part of this prospectus.
2
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The Offering
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<C> <S>
Common stock offered by Lantronix................... shares
Overallotment option................................ Up to shares,
including up to
shares offered by us and
up to shares offered
by selling stockholders.
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For working capital,
general corporate
purposes, other
operating expenses,
including research and
development and
strategic acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............. LTRX
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option;
. a four-for-one stock split of our common stock, which will occur prior to
the completion of this offering; and
. our reincorporation in the State of Delaware, which will occur prior to
the completion of this offering.
Except as otherwise indicated, the total number of shares of common stock
outstanding after the offering excludes:
. 5,502,956 shares of common stock issuable upon the exercise of stock
options outstanding at March 31, 2000, at a weighted average exercise
price of $0.37 per share;
. 7,059,988 shares of common stock in the aggregate reserved for future
issuance under our 1993 Stock Option Plan and 1994 Nonstatutory Stock
Option Plan; and
. 1,750,000 shares in the aggregate reserved for future issuance under our
2000 Stock Plan and 2000 Employee Stock Purchase Plan.
3
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The summary consolidated financial information set forth below is derived
from our consolidated financial statements. You should read the following data
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus. The as adjusted
balance sheet data summarized below reflects the application of the net
proceeds from the sale of the shares of common stock offered by us in this
offering at an assumed initial public offering price of $ per share after
deducting the underwriting discounts and commissions and our estimated offering
expenses. See "Capitalization."
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<CAPTION>
Nine months
Year Ended June 30, ended March 31,
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1997 1998 1999 1999 2000
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Statements of Operations Data:
Net revenues........................... $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues....................... 20,430 16,812 16,824 12,846 15,644
Gross profit........................... 10,250 11,488 16,156 10,311 16,987
Total operating expenses............... 9,926 9,627 12,383 8,391 14,821
Income from operations................. 324 1,861 3,773 1,920 2,166
Net income............................. 202 1,303 2,786 1,322 1,135
Earnings per share:
Basic................................ $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.04
Diluted.............................. $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.03
Weighted average shares:...............
Basic................................ 25,128 25,207 26,977 26,964 28,870
Diluted.............................. 25,626 27,128 29,251 29,329 33,567
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March 31, 2000
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Actual As Adjusted
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Balance Sheet Data:
Cash and cash equivalents................................... $ 4,118 $
Working capital............................................. 10,185
Total assets................................................ 17,527
Capital lease obligations, net of current portion........... 110
Retained earnings........................................... 8,507
Total stockholders' equity.................................. 12,075
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4
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RISK FACTORS
Any investment in our shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Business
Variations in quarterly operating results, due to factors including changes in
demand for our products and changes in our mix of net revenues, could cause our
stock price to decline.
Our quarterly net revenues, expenses and operating results have varied in
the past and might vary significantly from quarter to quarter in the future. We
therefore believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance, and you should not rely on
them to predict our future performance or the future performance of our stock
price. Our short-term expense levels are relatively fixed and are based on our
expectations of future net revenues. If we were to experience a reduction in
net revenues in a quarter, we would likely be unable to adjust our short-term
expenditures. If this were to occur, our operating results for that quarter
would be harmed. Moreover, we expect our expenses, particularly our research
and development expenses, to increase significantly in the next two years. If
our operating results in future quarters fall below the expectations of market
analysts and investors, the price of our common stock could fall. Other factors
that might cause our operating results to fluctuate on a quarterly basis
include:
. changes in the mix of net revenues attributable to higher-margin and
lower-margin products;
. anticipated declines in net revenues attributable to our Print Server
line of products if the declines are not offset by increases in net
revenues from our other product lines;
. customers' decisions to defer or accelerate orders;
. varying size or timing of orders for our products;
. short-term fluctuations in the cost or availability of our critical
components, such as flash memory;
. changes in demand for our products generally;
. loss of significant customers;
. announcements or introductions of new products by our competitors;
. defects and other product quality problems; and
. changes in demand for devices that incorporate our connectivity products.
We are transitioning our business, including changing the focus of our product
lines and distribution methods, and substantially increasing our research and
development expenditures. If we are unsuccessful in implementing and managing
this transition, our business will suffer.
Throughout most of our history, we derived substantially all of our net
revenues from the sale of Print Servers and Multiport Device Servers. We
introduced our current Device Server product line in mid-1998. We anticipate
that an increasing percentage of our net revenues will come from sales of these
products. We do not know if this transition will be successful. We do not know
whether our new product line will be accepted by our current target markets to
the extent we anticipate. Moreover, we do not know whether these products will
be accepted to any extent by markets that we target in the future. In addition,
we intend to increase substantially our expenditures on research and
development in the next two years to enhance and develop
5
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additional products for our product line. If we are unable to develop new
products as a result of this effort, or if the products we develop are not
successful, our business could be harmed. Even if we do develop new products
that are accepted by our target markets, we cannot assure you that the revenue
from these products will be sufficient to justify our investment in research
and development. In addition, since our inception, we primarily sold our
products to VARs, system integrators and OEMs. Although we intend to continue
to use these sales channels, we intend to focus more heavily on selling our
products to OEMs. Distributing products though OEMs entails unique risks,
including the risk that an OEM will develop internal expertise in network-
enabling products or otherwise provide network functionality to their products
without using our Device Server technology. If our shift in business strategy
is not successful, our stock could decline in value and you could lose part or
all of your investment.
We might be unable to manage our growth, and if we cannot do so, it could harm
our business.
Our business has grown rapidly in the last year. At March 31, 1999, we had
77 employees. As of March 31, 2000, we had 136 employees. In addition, we have
experienced expansion in our manufacturing and shipping requirements, our
product lines and our customer base. This rapid expansion has placed
significant strain on our administrative, operational and financial resources.
These changes have increased the complexity of managing our company. Our
current systems, management and other resources will need to grow rapidly in
order to meet the demands of our anticipated future growth. If we are unable to
successfully expand and improve our systems as required, or if we are otherwise
unable to manage our growth, our business will be harmed.
New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products and could reduce our market
share or result in pressure to reduce the price of our products.
The market for our products is intensely competitive, subject to rapid
change and is significantly affected by new product introductions and other
market activities of industry participants. Competition could seriously harm
our ability to sell additional products on terms favorable to us. Competitive
pressures could reduce our market share or require us to reduce the price of
our products, which could harm our business. Competitors might offer new
products with features or functionality that are equal to or better than our
products. We might not have sufficient engineering staff or other required
resources to modify our products to match our competitors. In this case, we
could lose new and existing customers to competitors.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, or other
resources, or greater name recognition than we do. As a result, our competitors
may be able to respond more quickly to new or emerging opportunities,
technologies and changes in customer requirements or devote greater resources
to the development, promotion and sale of their products than we can. Current
and potential competitors might have more extensive customer bases that could
be leveraged, thereby gaining market share to our detriment. These competitors
also might be able to undertake more extensive promotional activities, adopt
more aggressive pricing policies, and offer more attractive terms to
purchasers. If we are unable to compete effectively in the future, our market
share might decline and our operating margins could be reduced, which could
harm our business.
We depend on two third-party manufacturing facilities to manufacture all of our
products, which reduces our control over the manufacturing process. We will
also need to secure an additional manufacturer in order to meet our expected
future commitments.
We currently outsource all of our manufacturing to two third-party
manufacturers. Our reliance on these third-party manufacturers exposes us to a
number of significant risks, including:
. reduced control over delivery schedules, quality assurance, manufacturing
yields and production costs;
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. lack of guaranteed production capacity or product supply; and
. reliance on third-party manufacturers to maintain competitive
manufacturing technologies.
We do not have supply agreements with our manufacturers, and instead obtain
manufacturing services on a purchase-order basis. Our manufacturers have no
obligation to supply products to us for any specific product, in any specific
quantity or at any specific price. If our manufacturers were to become unable
or unwilling to continue to manufacture our products in required volumes, at
acceptable quality, quantity, yields and costs, or in a timely manner, our
business would be seriously harmed. As a result, we would have to attempt to
identify and qualify substitute manufacturers for our current manufacturers,
which could be time consuming and difficult, and might result in unforeseen
manufacturing and operations problems. In addition, a natural disaster could
disrupt our manufacturers' facilities and could inhibit our manufacturers'
ability to provide us with manufacturing capacity on a timely basis, or at all.
If this were to occur, we likely would be unable to fill customers' existing
orders or accept new orders for our products. The resulting decline in revenue
would harm our business.
The current manufacturing capacity of our two third-party manufacturers is
not sufficient to meet our expected future growth. Therefore, we are in the
process of locating additional manufacturing capacity. Available capacity to
manufacture products like ours is limited. If we are unable to secure
additional manufacturing capacity on a timely basis and on favorable terms, we
will be unable to grow at the rate we anticipate. This could cause the price of
our stock to decline.
Inability or delays in deliveries from our component suppliers could damage our
reputation and could cause our net revenues to decline and harm our results of
operations.
Although we outsource our manufacturing, we are responsible for procuring
raw materials for our products. Our products incorporate components or
technologies that are only available from single or limited sources of supply.
In particular, some of our integrated circuits are available from a single
source. In the past, from time to time, integrated circuits we use in our
products have been phased out of production. When this happens, we attempt to
purchase sufficient inventory to meet our needs until a substitute component
can be incorporated into our products. Nonetheless, we might be unable to
purchase sufficient components to meet our demands, or we might incorrectly
forecast our demands, and purchase too many or too few components. In addition,
our products use components that have in the past been subject to market
shortages and substantial price fluctuations. For example, the price of flash
memory, a component used in our products, has fluctuated significantly. From
time to time, we have been unable to meet our orders because we were unable to
purchase necessary components for our products. Because we do not have long-
term supply arrangements with any vendor to obtain necessary components or
technology for our products, if we are unable to purchase components from these
suppliers, product shipments could be prevented or delayed, which could result
in a loss of sales. For example, recently our supplier of gate array chips
ended production of that component, which caused an interruption in our ability
to supply one of our multi port products. If we are unable to meet existing
orders or to enter into new orders because of a shortage in components, we will
likely lose net revenues and risk losing customers and harming our reputation
in the marketplace.
If the Internet does not continue to expand as a widespread communications
medium, demand for our products could decline significantly.
Our future success depends on the continued growth of the Internet as a
widely used medium for commerce and communication. If the Internet does not
continue to expand as a widespread communications medium and commercial
marketplace, the growth of the market for Internet connectivity products might
not continue, and the demand for our products could decline significantly. The
resulting decline in our revenues could cause the price of our stock to fall.
7
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If a major customer cancels, reduces, or delays purchases, our net revenues
might decline and our business could be adversely affected.
For the nine months ended March 31, 2000, our two largest customers, each of
whom are distributors, accounted for 23% of our net revenues. Our top five
customers accounted for 38% of our net revenues during this period and our top
ten customers accounted for 46% of our net revenues. We have in the past, and
might in the future, lose one or more major customers. If we fail to continue
to sell to our major customers in the quantities we anticipate, or if any of
these customers terminate our relationship, our reputation, the perception of
our products and technology in the marketplace and the growth of our business
could be harmed. The demand for our products from our OEM, VAR and systems
integrator customers depends primarily on their ability to successfully sell
their products that incorporate our Device Server technology. Our sales are
usually completed on a purchase order basis and we have no long-term purchase
commitments from our customers.
Our future success also depends on our ability to attract new customers,
which often involves an extended process. The sale of our products often
involves a significant technical evaluation, and we often face delays because
of our customers' internal procedures used to evaluate and deploy new
technologies. For these and other reasons, the sales cycle associated with our
products is typically lengthy, often lasting six to nine months and sometimes
longer. Therefore, if we were to lose a major customer, we might not be able to
replace the customer on a timely basis or at all. This would cause our net
revenues to decrease and could cause the price of our stock to decline.
The average selling prices of our products might decrease, which could reduce
our gross margins.
We cannot assure you that we will be able to maintain our average selling
prices and gross margins at current levels. In the past, we have experienced
some reduction in the average sale prices of products, particularly with
respect to our Print Server line of products. In the future, we expect
competition to increase, and we anticipate this could result in additional
pressure on our pricing. In addition, our average selling prices for our
products might decline as a result of other reasons, including promotional
programs and customers who negotiate price reductions in exchange for longer-
term purchase commitments. Average selling prices and gross margins for our
products also might decline as the products mature in their life cycles. In
addition, we might not be able to increase the price of our products in the
event that the price of components or our overhead costs increase. If this were
to occur, our gross margins would decline.
Because we are dependent on international sales for a substantial amount of our
net revenues, we face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results.
Net revenues from international sales represented 34% of net revenues for
the nine months ended March 31, 2000 and 33% of net revenues for the nine
months ended March 31, 1999. Net revenues from Europe represented 29% of our
net revenues for the nine months ended March 31, 2000 and 28% for the nine
months ended March 31, 1999. We expect that international revenues will
continue to represent a significant portion of our net revenues in the
foreseeable future. Doing business internationally involves greater expense and
many additional risks. For example, because the products we sell abroad and the
products and services we buy abroad are priced in foreign currencies, we are
affected by fluctuating exchange rates. In the past, we have from time to time
lost money because of these fluctuations. We might not successfully protect
ourselves against currency rate fluctuations, and our financial performance
could be harmed as a result. In addition, we face other risks of doing business
internationally, including:
. unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
. reduced protection for intellectual property rights in some countries;
. differing labor regulations;
. compliance with a wide variety of complex regulatory requirements;
8
<PAGE>
. changes in a country's or region's political or economic conditions;
. greater difficulty in staffing and managing foreign operations; and
. increased financial accounting and reporting burdens and complexities.
Our international operations require significant attention from our
management and substantial financial resources. We do not know whether our
investments in other countries will produce desired levels of net revenues or
profitability.
Our executive officers and technical personnel are critical to our business,
and without them we might not be able to execute our business strategy.
Our financial performance depends substantially on the performance of our
executive officers and key employees. We are dependent in particular on our
Chief Executive Officer, Frederick G. Thiel, as well as our technical
personnel, due to the specialized technical nature of our business. If we lose
the services of Mr. Thiel or any of our key personnel and are not able to find
replacements in a timely manner, our business could be disrupted, other key
personnel might decide to leave, and we might incur increased operating
expenses associated with finding and compensating replacements.
We might be unable to hire and retain the skilled personnel necessary to
develop our operations, sales, technical and support capabilities in order to
continue to grow, which could harm our business.
Our business cannot continue to grow if we do not hire and retain qualified
technical personnel. Competition for these individuals is intense, and we might
not be able to attract, assimilate or retain highly qualified technical
personnel in the future. In addition, we need to hire and retain operations,
sales and support personnel in the near future. We expect to face greater
difficulty attracting qualified personnel with equity incentives as a public
company than we did as a privately held company. Our failure to attract and
retain highly trained personnel in these areas might limit the rate at which we
can develop, which would harm our business.
If we make unprofitable acquisitions or are unable to successfully integrate
any future acquisitions, our business could suffer.
We have in the past and from time to time in the future might acquire
businesses, client lists, products or technologies that we believe complement
or expand our existing business. For example, in October 1998, we acquired
ProNet GmbH, a German supplier of industrial application device server
technology. Acquisitions of this type involve a number of risks, including the
possibility that the operations of the acquired company will be unprofitable or
that our management's attention will be diverted from the day-to-day operation
of our business. An unsuccessful acquisition could reduce our margins or
otherwise harm our financial condition. Any acquisition could result in a
dilutive issuance of equity securities, the incurrence of debt and the loss of
key employees. We cannot assure you that any acquisitions will be successfully
completed or that, if one or more acquisitions are completed, the acquired
businesses, client lists, products or technologies will generate sufficient
revenue to offset the associated costs of other acquisitions or other adverse
effects.
The market for our products is new and rapidly evolving. If we are not able to
develop or enhance our products to respond to changing market conditions, our
net revenues will suffer.
Our future success depends in large part on our ability to continue to
enhance existing products, lower product cost and develop new products that
maintain technological competitiveness. The demand for network-enabled products
is relatively new and can change as a result of innovations or changes within
our target markets, which include industrial automation, healthcare,
security/access control, retail/point of sale, commercial/information
technology and telecommunications. For example, industry segments might adopt
new or different standards, giving rise to new customer requirements. Any
failure by us to develop and introduce new products or enhancements directed at
new industry standards could harm our business, financial condition
9
<PAGE>
and results of operations. These customer requirements might or might not be
compatible with our current or future product offerings. We might not be
successful in modifying our products and services to address these requirements
and standards. For example, our competitors might develop competing
technologies based on Internet Protocols, Ethernet Protocols or other protocols
that might have advantages over our products. If this were to happen, our
revenue might not grow at the rate we anticipate, or could decline.
Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.
We currently offer a five year warranty on all of our products. Our products
could contain undetected errors or defects. If there is a product failure, we
might have to replace all affected products without being able to book revenue
for replacement units, or we may have to refund the purchase price for the
units. Because of our recent introduction of our line of Device Servers, we do
not have a long history with which to assess the risks of unexpected product
failures or defects for this product line. Regardless of the amount of testing
we undertake, some errors might be discovered only after a product has been
installed and used by customers. Any errors discovered after commercial release
could result in loss of net revenues and claims against us. We warrant our
products against defaults for a five-year period. Significant product warranty
claims against us could harm our business, reputation and financial results and
cause the price of our stock to decline.
Our intellectual property protection might be limited.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws, such as copyright, trademark and trade secret laws, and
contractual restrictions, such as confidentiality agreements and licenses, to
establish and protect our proprietary rights. Despite any precautions that we
have taken:
. laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies might claim common law trademark rights based upon use of
marks that precede the registration of our marks;
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we might be unable to determine the
extent of this unauthorized use; and
. current federal laws that prohibit software copying provide only limited
protection from software "pirates."
Also, the laws of other countries in which we market our products might
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which could significantly harm our business.
Pursuant to an agreement dated February 29, 1989 between us and Gordian,
Inc. Gordian developed certain intellectual property used in our Micro Serial
Server, or MSS, Print Servers and ETS and LRS lines of terminal server
products. These products represented and continue to represent a significant
portion of our net revenues. Under the terms of this agreement Gordian owns the
rights to the intellectual property developed by it but has agreed that for the
term of the agreement it will not develop products for any other party which
will directly compete with a product Gordian developed for us. The agreement
with Gordian currently provides that we are required to pay royalties in
respect of sales of products covered by the agreement. In the year ended June
30, 1999 we paid Gordian approximately $2.0 million in royalties and for the
nine months ended March 31, 2000 we paid Gordian approximately $1.5 million in
royalties. In the event that the Gordian agreement is terminated, we could lose
our rights to the intellectual property developed under the Gordian agreement
and this might prevent us from marketing some or all of Micro Serial Server
line of products in the future. Although we believe that other products
developed by us
10
<PAGE>
using alternative technology can be substituted in the future for the products
sold by us using the technology developed by Gordian, there is no guarantee
that we will not lose customers and revenues which would harm our business.
We might become involved in litigation over proprietary rights, which could be
costly and time consuming.
Substantial litigation regarding intellectual property rights exists in our
industry. There is a risk that third parties, including current and potential
competitors and current developers of our intellectual property or our
manufacturing partners, will claim that our products, or our customers'
products, infringe on their intellectual property rights. In addition,
software, business processes and other property rights in our industry might be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Other parties might currently have, or might eventually be
issued, patents that the proprietary rights we use infringe. Any of these third
parties might make a claim of infringement against us. Any litigation, brought
by us or others could result in the expenditure of significant financial
resources and the diversion of management's time and efforts. In addition, from
time to time we could encounter disputes over rights and obligations concerning
intellectual property. We cannot assume that we will prevail in intellectual
property disputes regarding infringement, misappropriation or other disputes.
Litigation in which we are accused of infringement or misappropriation might
cause a delay in the introduction of new products, require us to develop non-
infringing technology or require us to enter into royalty or license
agreements, which might not be available on acceptable terms, or at all. In
addition, we have obligations to indemnify certain of our customers under some
circumstances for infringement of third party intellectual property rights. If
any claims from third parties required us to indemnify customers under our
agreements, the costs could be substantial, and our business could be harmed.
If a successful claim of infringement were made against us and we could not
develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
Risks Related to this Offering
Our stock price might be volatile and you might not be able to resell your
shares at or above the initial public offering price.
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price might vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you might not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock might fluctuate significantly in response to factors,
some of which are beyond our control, including the following:
. actual or anticipated fluctuations in our annual and quarterly operating
results;
. changes in market valuations of other technology companies;
. changes in financial estimates by securities analysts;
. variations in our operating results which could cause us to fail to meet
analysts' or investors' expectations;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
. additions or departures of key personnel;
. future sale of equity or debt securities; and
. general economic, industry and market conditions.
In addition, the stock market, and the stock of Internet companies in
particular, has experienced extreme volatility that often has been unrelated to
the performance of these companies. These market fluctuations might cause our
stock price to fall regardless of our performance. In the past, companies that
have experienced
11
<PAGE>
volatility in the market price of their stock have been the object of
securities class action litigation. If we were involved in securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources. You should read the "Underwriting"
section for a more complete discussion of the factors that were considered in
determining the initial public offering price of our common stock.
Because some existing stockholders will together own a majority of our stock,
the voting power of other stockholders, including purchasers in this offering,
might be limited.
After this offering, it is anticipated that our officers, directors, and
five percent or greater stockholders will beneficially own or control, directly
or indirectly, a % of our shares of common stock. One individual, Bernhard
Bruscha will own % of our common stock after this offering. As a result, if
some of these existing stockholders choose to act together, they will have the
ability to control matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any
business combinations. This might delay or prevent an acquisition or cause the
market price of our stock to decline. Some of these persons or entities might
have interests different from yours. For example, they might be more interested
than other investors in selling our company or pursuing different business
strategies.
We might be unable to meet our future capital requirements, and if we issue
additional equity securities to raise capital our stockholders could experience
additional dilution.
We might be required to seek additional funding to meet our capital
requirements, particularly if we elect to acquire complementary businesses,
products or technologies. If we are required to raise additional funds, we
might not be able to do so on favorable terms, if at all. In addition, if we
issue new equity securities, stockholders might experience dilution or the
holders of new equity securities might have rights, preferences or privileges
senior to those of existing holders of common stock. If we are unable to raise
additional capital on acceptable terms, we might not be able to develop or
enhance our products, take advantage of future opportunities, or respond to
clients and competition.
Substantial future sales of our common stock in the public market could depress
our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that might be sold in the public market in the future.
You will experience immediate and substantial dilution in the book value of
your shares.
The price for each share in the initial public offering is substantially
higher than the book value per share of our outstanding common stock
immediately after the offering. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $ in the
book value of our common stock from the price you pay for our common stock. For
additional information on this calculation, see "Dilution."
The provisions of our charter documents might inhibit potential acquisition
bids that a stockholder might believe are desirable, and the market price of
our common stock could be lower as a result.
Upon completion of this offering, our Board of Directors will have the
authority to issue up to five million shares of preferred stock. Our Board of
Directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock might delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders might be adversely affected. The
issuance of preferred stock might result in the loss of voting control to other
stockholders. We have no current plans to
12
<PAGE>
issue any shares of preferred stock. Our charter documents also contain other
provisions which might discourage, delay or prevent a merger or acquisition,
including:
. only one of the three classes of directors is elected each year;
. our stockholders have limited rights to remove directors without cause;
. our stockholders have no right to act by written consent;
. our stockholders have limited rights to call a special meeting of
stockholders; and
. stockholders must comply with advance notice requirements to nominate
directors or submit proposals for consideration at stockholder meetings.
These provisions could also have the effect of discouraging others from
making tender offers for our common stock. As a result, these provisions might
prevent the market price of our common stock from increasing substantially in
response to actual or rumored takeover attempts. These provisions might also
prevent changes in our management.
We have broad discretion in how we use the proceeds of this offering, and we
might not use these proceeds effectively.
Our management has broad discretion in the use of the net proceeds of this
offering and could spend the net proceeds in ways that do not yield a favorable
return or to which stockholders object. For example, our planned investment in
research and development may be unprofitable. Also, we might use the proceeds
to acquire complementary businesses or technologies, although no such
acquisitions are currently planned. These acquisitions could prove to be
unprofitable and harm our business. Until we need to use the proceeds of this
offering, we plan to invest the net proceeds in short-term, interest-bearing
securities.
13
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, including, without limitation, statements concerning conditions
in our industry and our business, financial condition and operating results,
including in particular statements relating to our business and growth
strategies and our product development efforts. We use words like "believe,"
"expect," "anticipate," "intend," "future" and other similar expressions to
identify forward-looking statements. Purchasers of our common stock should not
place undue reliance on these forward-looking statements, which speak only as
of their dates. These forward-looking statements are based on our current
expectations, and are subject to a number of risks and uncertainties,
including, without limitation, those identified under "Risk Factors" and
elsewhere in this prospectus. Our actual operating results could differ
materially from those predicted in these forward-looking statements, and any
other events anticipated in the forward-looking statements might not actually
occur.
USE OF PROCEEDS
We expect to receive proceeds of approximately $ from the sale of the
shares of common stock at an assumed initial public offering price of $ per
share, after deducting the underwriting discount and our estimated offering
expenses, or approximately $ if the underwriters exercise in full their
option to purchase additional shares. We intend to use the proceeds for general
corporate purposes, including working capital, research and development, and
expansion of our sales and marketing organizations. We might also use some of
the proceeds to make strategic acquisitions of other companies, technology or
products that complement our business. We are not currently in negotiations for
any of these transactions. Pending these uses, the net proceeds of this
offering will be invested in short-term, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We do not
currently anticipate paying any cash dividends on our common stock in the
foreseeable future, and we intend to retain any future earnings for use in the
expansion of our business and for general corporate purposes. Additionally, our
current debt instruments limit the payment of dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis; and
. as adjusted to reflect our sale of shares of common stock offered
hereby at an assumed offering price of $ per share and our application
of the estimated net proceeds therefrom, after deducting underwriting
discounts and commissions and estimated offering expenses.
See "Use of Proceeds." The capitalization information set forth in the table
below is qualified by the more detailed Consolidated Financial Statements and
Notes thereto included elsewhere in this prospectus and should be read in
conjunction with such consolidated financial statements and notes.
<TABLE>
<CAPTION>
March 31, 2000
-----------------
As
Actual Adjusted
------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents.................................... $ 4,118
======= =====
Capital lease obligations, net of current portion ........... 110
Stockholder's equity:
Preferred stock, $0.0001 par value; 5 million shares
authorized; no shares issued and outstanding...............
Common stock, $0.0001 par value; 200 million shares
authorized; 28,993,820 shares issued and outstanding,
actual; shares issued and outstanding, as adjusted.... 3
Additional paid-in capital................................... 10,657
Deferred compensation........................................ (7,084)
Retained earnings ........................................... 8,507
Accumulated other comprehensive loss......................... (8)
------- -----
Total stockholders' equity................................. 12,075
------- -----
Total capitalization..................................... $12,185 $
======= =====
</TABLE>
This table does not include:
. 5,502,956 shares of common stock issuable upon the exercise of
outstanding stock options as of March 31, 2000 at a weighted average
exercise price of $0.37 per share, of which options for 2,420,584 shares
were exercisable;
. 7,059,988 shares of common stock reserved for future issuance under our
1993 Stock Option Plan and 1994 Nonstatutory Stock Option Plan; and
. 1,750,000 shares in the aggregate reserved for future issuance under our
2000 Stock Plan and 2000 Employee Stock Purchase Plan.
15
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000 was $11.3 million, or $0.39
per share of common stock. Net tangible book value per share is calculated by
subtracting our total liabilities from our total tangible assets, which equals
total assets less intangible assets, and dividing this amount by the number of
shares of common stock outstanding as of March 31, 2000. Assuming the sale by
us of shares of common stock offered in this offering at an initial public
offering price of $ per share and the application of the estimated net
proceeds from this offering, our net tangible book value as of March 31, 2000
would have been $ million, or $ per share of common stock. Assuming the
completion of this offering, there will be an immediate increase in the net
tangible book value of $ per share to our existing stockholders and an
immediate dilution in the net tangible book value of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $
Net tangible book value per share as of March 31, 2000............. $0.39
Increase attributable to new investors.............................
-----
Net tangible book value per share after offering.....................
---
Dilution per share to new investors.................................. $
===
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid by existing stockholders and by new investors, in each case based
upon the number of shares of common stock outstanding as of March 31, 2000.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. % $ % $
New investors..........................
---- ----- ----- ---
Total................................ 100.0% $ 100%
==== ===== ===== ===
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing stockholders will be reduced to %
of the total number of share of common stock to be outstanding after this
offering, and will increase the number of shares of common stock held by the
new investors to shares, or % of the total number of shares of common
stock to be outstanding immediately after this offering. See "Principal and
Selling Stockholders."
The tables and calculations above assume no exercise of outstanding options.
At March 31, 2000, there were 5,502,956 shares of common stock reserved for
issuance upon exercise of outstanding options with a weighted average exercise
price of $0.37 per share, of which options for 2,420,584 were exercisable. To
the extent that these options are exercised, there will be further dilution to
new investors. In addition, the tables and calculations above do not include
the 8,809,988 shares of common stock reserved for future issuance under our
various stock plans.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations data for the years ended June 30, 1997, 1998 and 1999 and the
nine months ended March 31, 2000, and the balance sheet data as of June 30,
1998 and 1999 and March 31, 2000, are derived from the audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended June 30, 1995 and 1996, and
the balance sheet data as of June 30, 1995, 1996 and 1997, are derived from the
audited consolidated financial statements not included elsewhere in this
prospectus. The consolidated statement of operations data for the nine months
ended March 31, 1999, are derived from unaudited consolidated financial
statements included elsewhere in this prospectus. We prepared the unaudited
consolidated financial statements on substantially the same basis as the
audited consolidated financial statements and, in our opinion, they include all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for this period. The historical
results are not necessarily indicative of results to be expected for future
periods.
<TABLE>
<CAPTION>
Nine months ended
Year ended June 30, March 31,
------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ $33,977 $40,252 $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues........ 21,633 27,463 20,430 16,812 16,824 12,846 15,644
------- ------- ------- ------- ------- ------- -------
Gross profit............ 12,344 12,789 10,250 11,488 16,156 10,311 16,987
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 9,484 9,674 7,455 7,857 9,768 6,494 11,904
Research and
development........... 2,078 3,770 2,471 1,770 2,615 1,897 2,330
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 587
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 11,562 13,444 9,926 9,627 12,383 8,391 14,821
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 782 (655) 324 1,861 3,773 1,920 2,166
Minority interest....... -- -- -- -- (30) (57) (49)
Interest income
(expense), net......... (1) 33 (168) (5) 151 121 154
Other income (expense),
net.................... 134 (15) 9 1 (10) (106) (55)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes......... 915 (637) 165 1,857 3,884 1,878 2,216
Provision (benefit) for
income taxes........... 197 (191) (37) 554 1,098 556 1,081
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 718 $ (446) $ 202 $ 1,303 $ 2,786 $ 1,322 $ 1,135
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share:
Basic................. $ 0.03 $ (0.02) $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.04
======= ======= ======= ======= ======= ======= =======
Diluted .............. $ 0.03 $ (0.02) $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.03
======= ======= ======= ======= ======= ======= =======
Weighted average shares:
Basic................. 25,167 25,051 25,128 25,207 26,977 26,964 28,870
======= ======= ======= ======= ======= ======= =======
Diluted............... 25,306 25,051 25,626 27,128 29,251 29,329 33,567
======= ======= ======= ======= ======= ======= =======
<CAPTION>
June 30,
------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 197 $ 230 $ 173 $ 1,759 $ 5,833 $ 4,118
Working capital......... 4,916 3,838 4,812 6,327 8,109 10,185
Total assets............ 10,695 14,985 9,570 9,800 17,292 17,527
Capital lease
obligations, net of
current portion........ -- -- -- -- 97 110
Minority interest....... -- -- -- -- 68 --
Retained earnings....... 3,528 3,081 3,284 4,586 7,372 8,507
Total stockholders'
equity................. 5,853 5,407 5,624 6,928 10,312 12,075
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors
including, but not limited to, those factors set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Since our inception in 1989, we have developed an array of network-
enabling products including Device Servers, Multiport Device Servers, Print
Servers and other products. Beginning in fiscal year 1999, we began to
experience an increase in sales of our Device Servers reflecting our focus on
this higher margin product line. At the same time, we began to experience a
decline in sales of Print Server and other products as we shifted resources to
our Device Server business, which we believe represents a greater opportunity
for long-term growth. We believe sales of our Device Server products will
continue to represent an increasing percentage of our net revenues in the
future. Our strategy for continuing to increase sales of our Device Server
product line involves a two-fold approach. First, we intend to substantially
increase our research and development expenditures over the next two years to
enhance our Device Server product line and develop new products. Second, we
intend to grow our Device Server business through strategic acquisitions,
investments and partnerships, which we believe will support our product lines
and allow us to secure additional intellectual property, increase our customer
base and provide access to new markets.
Our products are sold to OEMs, VARs, systems integrators and distributors,
as well as directly to end-users. One of our distributors, Ingram Micro,
accounted for 11.5% of the our net revenues during the nine months ended March
31, 2000, 15.5% for the year ended June 30, 1999, 22% for the year ended June
30, 1998, and 15.3% for the year ended June 30, 1997. Another distributor, Tech
Data, accounted for 11.2% of our net revenues during the nine months ended
March 31, 2000, 11.5% for the year ended June 30, 1999, 12.6% for the year
ended June 30, 1998 and 15.1% for the year ended June 30, 1997.
In October 1998, we acquired ProNet GmbH, a German company that is a
supplier of industrial application device server technology, and related
marketing rights from third-parties. As a result, we will recognize
approximately $490,000 of amortization relating to a marketing rights agreement
for the period from April 1, 2000 through December 31, 2000. In addition, we
will incur sale commissions payments relating to the acquisition through
December 31, 2000. After that date, we expect to have no further charges
relating to these acquisitions. See notes 2 and 3 of the consolidated financial
statements for additional information relating to this acquisition.
We recognize revenues upon product shipment. We have granted several
customers limited return privileges, as well as limited price protection for
inventories held at the time of published price reductions. Estimated reserves
have been recorded to reflect these agreements, as well as potential warranty
expenses, based on our five-year warranty policy from the date of shipment.
Amortization of stock-based compensation relates to deferred compensation
recorded in connection with the grant of stock options to employees where the
option exercise price is less than the estimated fair value of the underlying
shares of common stock as determined for financial reporting purposes. We have
recorded deferred compensation within stockholders' equity of approximately
$7.7 million, which is being amortized over the vesting period of the related
stock options, which is generally four years. A balance of $7.1 million of this
liability remains at March 31, 2000 and will be amortized as follows: $.5
million during the remainder of
18
<PAGE>
fiscal 2000. $2.4 million in fiscal 2001, $2.2 million in fiscal 2002, $0.9
million in fiscal 2003, $0.8 million in fiscal 2004 and $0.3 in fiscal 2005.
The amount of stock-based compensation amortization actually recognized in
future periods could decrease if options for which accrued, but unvested
compensation has been recorded, are forfeited. See note 5 to the consolidated
financial statements.
On May 18, 2000, the Board of Directors granted options under the 1993 Stock
Plan to employees to purchase 853,511 shares of our common stock at an exercise
price of $6.00 per share. In connection with this option grant, we will record
deferred compensation aggregating $2.2 million that will be amortized over the
vesting period of the options. See note 9 to the consolidated financial
statements.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net revenues represented by each item in our consolidated income statements:
<TABLE>
<CAPTION>
Nine months
Year ended June ended March
30, 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 66.6 59.4 51.0 55.5 47.9
----- ----- ----- ----- -----
Gross profit................................. 33.4 40.6 49.0 44.5 52.1
Operating expenses:
Selling, general and administrative........ 24.3 27.8 29.6 28.0 36.5
Research and development................... 8.1 6.3 7.9 8.2 7.1
Amortization of deferred compensation...... -- -- -- -- 1.8
----- ----- ----- ----- -----
Total operating expenses..................... 32.4 34.0 37.5 36.2 45.4
----- ----- ----- ----- -----
Income from operations....................... 1.1 6.6 11.4 8.3 6.6
Minority interest............................ -- -- (0.1) (0.2) (0.2)
Interest income (expense), net............... (0.5) -- 0.5 0.5 0.5
Other income (expense), net.................. -- -- -- (0.5) (0.2)
----- ----- ----- ----- -----
Net income before income taxes............... 0.5 6.6 11.8 8.1 6.8
Provision (benefit) for income taxes......... (0.1) 2.0 3.3 2.4 3.3
----- ----- ----- ----- -----
Net income................................... 0.7% 4.6% 8.4% 5.7% 3.5%
===== ===== ===== ===== =====
</TABLE>
Comparison of the Nine Months Ended March 31, 1999 and 2000
Net Revenues
Net revenues increased $9.5 million or 40.9%, from $23.2 million in the nine
months ended March 31, 1999 to $32.6 million in the nine months ended March 31,
2000. The increase was primarily attributable to an increase in net revenues of
our Device Server products, offset by a decline in our Print Server and other
products. Device Server net revenues increased $10.3 million, or 151.8%, from
$6.8 million or 29.2% of net revenues in the nine months ended March 31, 1999
to $17.0 million or 52.2% of net revenues in the nine months ended March 31,
2000. A portion of this growth resulted from the acquisition of ProNet GmbH.
Multiport Device Server net revenues increased $1.0 million or 15.7%, from $6.5
million, or 28.1% of net revenues, in the nine months ended March 31, 1999 to
$7.5 million or 23.0% of net revenues in the nine months ended March 31, 2000.
Print Server and other revenues decreased $1.8 million, or 18.4%, from
$9.9 million, or 42.7% of net revenues in the nine months ended March 31, 1999
to $8.1 million, or 24.7% of net revenues in the nine months ended March 31,
2000.
Net revenues generated from sales in the United States increased $5.8
million, or 37.6%, from $15.6 million or 67.2% of net revenues in the nine
months ended March 31, 1999 to $21.4 million or 65.6% of net
19
<PAGE>
revenues in the nine months ended March 31, 2000. Our net revenues derived from
customers located in Europe increased $3.2 million, or 49.3%, from $6.4 million
or 27.7% of net revenues in the nine months ended March 31, 1999 to $9.6
million or 29.4% of net revenues in the nine months ended March 31, 2000. Our
net revenues derived from customers located in other geographic areas increased
$458,000, or 39.0%, from $1.2 million or 5.1% of net revenues in the nine
months ended March 31, 1999 to $1.6 million or 5.0% of net revenues in the nine
months ended March 31, 2000.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues
consists primarily of the cost of raw material components, subcontract labor
assembly from outside manufacturers and associated overhead costs. As part of
our agreement with Gordian, Inc., an outside research and development firm, a
royalty charge is included in cost of revenues and is calculated based on the
related products sold. Gross profit increased by $6.7 million, or 64.7%, from
$10.3 million or 44.5% of net revenues in the nine months ended March 31, 1999
to $17.0 million or 52.1% of net revenues in the nine months ended March 31,
2000. In the nine months ended March 31, 2000, the Gordian royalties were $1.5
million as compared to $1.2 million in the nine months ended March 31, 1999.
The increase in gross profit resulted primarily from a change in product mix
with more emphasis on our higher margin Device Server products and a decrease
in royalties as a percentage of net revenues.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel-
related expenses including salaries and commissions, facilities expenses,
information technology, trade show expenses, advertising, and professional
fees. Selling, general and administrative expenses increased $5.4 million, or
83.3%, from $6.5 million or 28.0% of net revenues in the nine months ended
March 31, 1999 to $11.9 million or 36.5% of net revenues in the nine months
ended March 31, 2000. This increase is due in part to a $1.4 million increase
in the expense associated with the amortization of our marketing rights
agreement and commissions paid in connection with our acquisition of ProNet
GmbH. The balance is related to an increase in our sales force, particularly in
Europe and Asia. We expect selling, general and administrative expenses will
continue to increase in the foreseeable future to support the global expansion
of our operations.
Research and Development
Research and development expenses consist primarily of salaries and the
related costs of employees, as well as expenditures to third-party vendors for
research and development activities. Research and development expenses
increased $433,000, or 22.8%, from $1.9 million or 8.2% of net revenues for the
nine months ended March 31, 1999 to $2.3 million or 7.1% of net revenues for
the nine months ended March 31, 2000. This increase resulted primarily from
increased headcount and expenses related to new product development. This does
not include the royalty payments associated with our agreement with Gordian,
Inc., which are included in our cost of revenues. For the nine months ended
March 31, 1999, the royalties were $1.2 million. When combined with research
and development expenses, this represents 13.5% of net revenues. For the nine
months ended March 31, 2000, the royalties were $1.5 million. When combined
with research and development expenses, this represents 11.7% of net revenues.
Interest and Other Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on
average cash and cash equivalents, less interest on our bank lines of credit
and capital lease obligations. Other income (expense), net consists primarily
of exchange gains and losses from foreign currency transactions and gains and
losses from disposals of fixed assets. Interest and other income (expense), net
was $15,000 in the nine months ended March 31, 1999 and $99,000 in the nine
months ended March 31, 2000.
20
<PAGE>
Provision (Benefit) for Income Taxes
Our effective tax rate was 29.6% in the nine months ended March 31, 1999 and
48.8% in the nine months ended March 31, 2000. The federal statutory rate was
34% for both periods. Our effective tax rate for the nine months ended March
31, 1999 was lower than the federal statutory rate primarily due to the
reversal of the valuation allowance due to the recoverability of deferred tax
assets. Our effective tax rate for the nine months ended March 31, 2000 was
higher than the federal statutory rate primarily due to start-up losses in
foreign subsidiaries which could not be deducted, the amortization of deferred
compensation for which a current tax benefit was not provided and a research
and development tax credit which could not be used. We believe the effective
tax rate during this period was higher than normal. We expect that our
effective tax rate will likely be lower than the effective tax rate experienced
in the nine months ended March 31, 2000 in the future. We utilize the liability
method of accounting for income taxes as set forth in Financial Accounting
Standards Board ("FASB") Statement No. 109, Accounting for Income Taxes. See
Note 6 of notes to consolidated financial statements.
There is no valuation allowance provided on our deferred tax assets since we
believe that it is more likely than not that these assets will be realized.
These assets will be realized through the reversal of timing differences and
through future taxable income.
Comparison of Years Ended June 30, 1998 and 1999
Net Revenues
Net revenues increased $4.7 million, or 16.5%, from $28.3 million in the
year ended June 30, 1998 to $33.0 million in the year ended June 30, 1999. This
increase was due to our acquisition of ProNet GmbH in October 1998 and
sequential growth in our Device Server business.
Gross Profit
Gross profit increased by $4.7 million or 40.6%, from $11.5 million or 40.6%
of net revenues for the year ended June 30, 1998 to $16.2 million or 49.0% of
net revenues for the year ended June 30, 1999. For the year ended June 30,
1998, the royalties paid to Gordian, Inc. were $1.5 million as compared to $2.0
million for the year ended June 30, 1999.
Selling, General and Administrative
Selling, general and administrative expenses increased $1.9 million or
24.3%, from $7.9 million or 27.8% of net revenues in the year ended June 30,
1998 to $9.8 million or 29.6% of net revenues in the year ended June 30, 1999.
This increase is due in part to $602,000 of expenses associated with the
amortization of our marketing rights agreements and commissions paid in
connection with our acquisition of ProNet GmbH. In addition, we experienced
higher personnel-related costs as a result of additional headcount, higher
marketing expenditures, costs related to expanding our international operations
and incremental costs associated with upgrading our information systems.
Research and Development
Research and development expenses increased by $845,000 or 47.7% from $1.8
million or 6.3% of net revenues in the year ended June 30, 1998 to $2.6 million
or 7.9% of net revenues in the year ended June 30, 1999. The increase was
primarily due to resource constraints at our outside research and development
consultants in fiscal year 1998 which resulted in research and development
expenses being lower than intended. The increase was also partially
attributable to our acquisition of ProNet GmbH in October 1998. This does not
include the royalty payments associated with our agreement with Gordian, Inc.,
which are included in our cost of revenues. For the year ended June 30, 1998,
the royalties were $1.5 million. For the year ended June 30, 1999, the
royalties were $2.0 million. When combined with research and development
expenses, this represents 14.0% of net revenues. When combined with research
and development expenses, this represents 11.7% of net revenues.
21
<PAGE>
Interest and Other Income (Expense), Net
Interest and other income (expense), net was a $4,000 net expense in the
year ended June 30, 1998 and a $141,000 net income in the year ended June 30,
1999.
Provision (Benefit) for Income Taxes
Our effective tax rate was 29.8% in the year ended June 30, 1998 and 28.3%
the year ended June 30, 1999. The federal statutory rate was 34% for both
periods. Our effective tax rate in the year ended 1998 was lower than the
federal statutory rate due to a tax benefit provided by our foreign operations.
Our effective tax rate in the year ended June 30, 1999 was lower than the
federal statutory rate due to the reversal of the valuation allowance due to
the recoverability of deferred tax assets. See Note 6 of notes to consolidated
financial statements.
Comparison of Years Ended June 30, 1997 and 1998
Net Revenues
Net revenues decreased by $2.4 million, or 7.8%, from $30.7 million in the
year ended June 30, 1997 to $28.3 million during the year ended June 30, 1998.
The decrease was primarily due to the loss of a major customer of our Print
Server products.
Gross Profit
Gross profit increased by $1.2 million or 12.1% as a percentage of net
revenues from $10.3 million, or 33.4% of net revenues for the year ended June
30, 1997 to $11.5 million, or 40.6% of net revenues for the year ended June 30,
1998 due to a shift in product mix to our higher margin Device Servers and
Multiport Device Servers. For the year ended June 30, 1997, the royalties paid
to Gordian, Inc. were $1.4 million as compared to $1.5 million for the year
ended June 30, 1998.
Selling, General and Administrative
Selling, general and administrative expenses increased $402,000, or 5.4%,
from $7.5 million or 24.3% of net revenues in the year ended June 30, 1997 to
$7.9 million or 27.8% of net revenues in the year ended June 30, 1998.
Research and Development
Research and development expenses decreased by $701,000 or 28.4% from $2.5
million or 8.1% of net revenues in the year ended June 30, 1997 to $1.8 million
or 6.3% of net revenues, in the year ended June 30, 1998. The decrease resulted
from resource constraints at our outside research and development consultants.
This does not include the royalty payments associated with our agreement with
Gordian, Inc., which are included in our cost of revenues. For the year ended
June 30, 1997, the royalties were $1.4 million. When combined with research and
development expenses, this represents 12.6% of net revenues. For the year ended
June 30, 1998, the royalties were $1.5 million. When combined with research and
development expenses, this represents 11.7% of net revenues.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $159,000 in the year ended June
30, 1997 and a $4,000 net expense in the year ended June 30, 1998.
22
<PAGE>
Provision (Benefit) for Income Taxes
Our effective tax benefit was 22.4% in the year ended June 30, 1997 and our
effective tax rate was 29.8% in the year ended June 30, 1998. The federal
statutory rate was 34% for both periods. The effective tax benefit in 1997 was
due to a tax benefit provided by our foreign sales corporation and was offset
by the provision for the valuation allowance in that period. The effective tax
rate in 1998 was lower than the federal statutory rate due to a tax benefit
provided by our foreign sales corporation. See note 6 of notes to consolidated
financial statements.
23
<PAGE>
Quarterly Results of Operations
The following table presents our consolidated operating results for each of
the seven quarters in the period from July 1, 1998 through March 31, 2000, as
well as such data expressed as a percentage of our net revenues. The
information for each of these quarters is unaudited and has been prepared on
the same basis as our audited consolidated financial statements appearing
elsewhere in this prospectus. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
Sep. Dec. Sep. Dec. Mar.
30, 31, Mar. 31, Jun. 30, 30, 31, 31,
1998 1998 1999 1999 1999 1999 2000
------ ------ -------- -------- ------- ------- -------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations:
Net revenues............ $7,128 $8,010 $8,019 $9,823 $10,875 $11,417 $10,339
Cost of revenues........ 4,024 4,421 4,401 3,978 4,701 5,517 5,426
------ ------ ------ ------ ------- ------- -------
Gross profit............ 3,104 3,589 3,618 5,845 6,174 5,900 4,913
Operating expenses:
Selling, general and
administrative....... 1,780 2,347 2,367 3,274 3,594 4,221 4,089
Research and
development.......... 697 477 723 718 722 711 897
Amortization of
deferred
compensation......... -- -- -- -- -- -- 587
------ ------ ------ ------ ------- ------- -------
Total operating
expenses........... 2,477 2,824 3,090 3,992 4,316 4,932 5,573
------ ------ ------ ------ ------- ------- -------
Income (loss) from
operations............. 627 765 528 1,853 1,858 968 (660)
Minority interest
(expense), net......... -- -- (57) 27 (68) 19 --
Interest and other
income (expense), net.. 38 29 (52) 126 62 108 (71)
------ ------ ------ ------ ------- ------- -------
Net income (loss) before
income taxes........... 665 794 419 2,006 1,852 1,095 (731)
Provision (benefit) for
income taxes........... 196 235 125 542 903 534 (356)
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $ 469 $ 559 $ 294 $1,464 $ 949 $ 561 $ (375)
====== ====== ====== ====== ======= ======= =======
As a percentage of net
revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 56.5 55.2 54.9 40.5 43.2 48.3 52.5
------ ------ ------ ------ ------- ------- -------
Gross profit............ 43.5 44.8 45.1 59.5 56.8 51.7 47.5
Operating expenses:
Selling, general and
administrative....... 25.0 29.3 29.5 33.3 33.0 37.0 39.5
Research and
development.......... 9.8 6.0 9.0 7.3 6.6 6.2 8.7
Amortization of
deferred
compensation......... -- -- -- -- -- -- 5.7
------ ------ ------ ------ ------- ------- -------
Total operating
expenses........... 34.8 35.3 38.5 40.6 39.7 43.2 53.9
------ ------ ------ ------ ------- ------- -------
Income (loss) from
operations............. 8.8 9.6 6.6 18.9 17.1 8.5 (6.4)
Minority interest....... -- -- (0.7) 0.3 (0.6) 0.2 --
Interest and other
income (expense), net.. 0.5 0.4 (0.6) 1.3 0.6 0.9 (0.7)
------ ------ ------ ------ ------- ------- -------
Net income (loss) before
income taxes........... 9.3 9.9 5.2 20.4 17.0 9.6 (7.1)
Provision (benefit) for
income taxes........... 2.7 2.9 1.6 5.5 8.3 4.7 (3.4)
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... 6.6% 7.0% 3.7% 14.9% 8.7% 4.9% (3.6)%
====== ====== ====== ====== ======= ======= =======
</TABLE>
Net revenues increased in each of the six quarters ended December 31, 1999.
We did experience a decline in our most recent quarter, which we believe was
partially attributed to reduced purchases due to Year 2000 concerns as well as
a reduction in the sale of Multiport Device Servers during the quarter. We
believe sales of Multiport
24
<PAGE>
Servers will remain relatively flat in future periods. We believe most of our
future net revenues growth will be derived primarily from our Device Server
products.
Cost of revenues show a general increasing trend over the seven quarters,
primarily due to the increase in net revenues. Gross profit as a percentage of
net revenues for the four quarters ended March 31, 2000 was higher as compared
to the three quarters ended March 31, 1999 due to a shift in our net revenues
toward higher margin Device Server products. During the three months ending
March 31, 2000, our gross margin declined due to a sequential decline in sales
of our terminal server products, which are our highest margin products. We
believe this decline in sales was due to our customers' decisions to postpone
purchases due to Year 2000 concerns.
Total operating expenses have increased during each of the seven quarters
ended March 31, 2000, due to our investment in infrastructure to support the
growth of our business. In addition, we incurred charges in the quarter ended
March 31, 2000 to adjust the valuation for stock grants and options under the
guidelines of APB No. 25.
Liquidity and Capital Resources
Since inception, we have financed our operations through the issuance of
common stock and through net cash generated from operations. Our cash
equivalents consist of short term investments with original maturities of 90
days or less. As of March 31, 2000, we had cash and cash equivalents of $4.1
million. We have a secured bank line of credit which provides for borrowings of
up to $5.0 million, at the bank's prime interest rate, which was 9.0% at March
31, 2000, plus 2% per annum. The line of credit expires on December 2, 2000 and
requires us to maintain compliance with customary covenants and conditions. We
had no outstanding balance under our bank line of credit as of December 31,
2000. During fiscal year 1999, we established an unsecured $1.2 million line of
credit with a German bank to fund a portion of the acquisition of ProNet GmbH.
In September 1999, we repaid all borrowings under the line of credit and the
line of credit expires on March 31, 2001.
Our operating activities used cash of $394,000 during the nine months ended
March 31, 2000. Net income of $1.1 million, which includes amortization and
depreciation of $1.5 million, was reduced by increased inventory of $817,000,
increased accounts receivable of $897,000, and decreased accounts payable and
other current liabilities of $744,000. The primary reason for the decrease in
other current liabilities is due to $1.7 million of commission payments made
relating to our acquisition of ProNet GmbH. Our operating activities provided
cash of $3.8 million during the nine months ended March 31, 1999, provided cash
of $5.6 million during fiscal year 1999, provided cash of $2.5 million during
fiscal year 1998 and provided cash of $1.8 million during fiscal year 1997.
Our investing activities used $596,000 of cash during the nine months ended
March 31, 2000. The cash used in the period related mainly to the purchase of
property and equipment, primarily computer hardware, of $480,000 and the
acquisition of a minority interest of a subsidiary of ProNet GmbH. Our
investing activities used cash of $2.6 million during the nine months ended
March 31, 1999, $2.9 million during fiscal year 1999, $121,000 during fiscal
year 1998 and $95,000 during fiscal year 1997. During the year ended June 30,
1999, we used $2.3 million for the acquisition of ProNet GmbH and related
marketing rights.
Cash used for financing activities was $724,000 for the nine months ended
March 31, 2000, related to the repayment of a line of credit used in the
acquisition of ProNet GmbH. Cash provided by financing activities was $1.5
million during the nine months ended March 31, 1999 and $1.4 million during
fiscal year 1999, primarily related to borrowings on our bank line of credit
related to our acquisition. Cash used by financing activities was $799,000
during fiscal year 1998 and $1.8 million during fiscal year 1997.
We believe that the net proceeds from this offering, our existing cash and
cash generated from operations will be adequate to meet our anticipated cash
needs through at least the next 12 months. Our future capital requirements will
depend on many factors, including the timing and amount of our net revenues and
research and development and infrastructure investments which will affect our
ability to generate additional cash.
25
<PAGE>
Thereafter, if cash generated from operations and financing activities is
insufficient to satisfy our working capital requirements, we may need to borrow
funds under our bank lines of credit, or seek additional funding through
additional bank borrowings, sales of securities or other means. There can be no
assurance that we will be able to raise any such capital on terms acceptable to
us if at all.
New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. We
have not yet determined the effect of SFAS No. 133 on our operations and
financial position. We will be required to implement SFAS No. 133 beginning in
fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We believe that our current revenue recognition policies comply
with SAB 101.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to interest rate risk is limited to the exposure related to our
cash and cash equivalents and our credit facilities, which is tied to market
interest rates. As of March 31, 2000, we had cash and cash equivalents of $4.1
million, which consisted of cash and short-term investments with original
maturities of 90 days or less, both domestically and internationally. We
believe our short-term investments will decline in value by an insignificant
amount if interest rates increase, and therefore would not have a material
effect on our financial condition or results of operations.
Foreign Currency Risk
We sell products internationally. As a result, our financial results could
be harmed by factors such as changes in foreign currency exchanges rates or
weak economic conditions in foreign markets. Because our international sales
are denominated in foreign currencies and are generally translated on a monthly
basis to U.S. dollars, we could be adversely affected by fluctuations in
foreign exchanges rates.
26
<PAGE>
CHANGE IN AUDITORS
KPMG LLP was previously the principal accountants for Lantronix, Inc. In
1998, the firm's appointment as principal accountants was terminated and Ernst
& Young LLP was engaged as principal accountants. The decision to change
accountants was approved by the board of directors.
In connection with the audit of the fiscal year ended June 30, 1997, there
were no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statements disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused
them to make reference in connection with their opinion to the subject matter
of the disagreement.
The audit report of KPMG LLP on the consolidated financial statements of
Lantronix, Inc. for the year ended June 30, 1997, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
27
<PAGE>
BUSINESS
Overview
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Our Device Servers and Multiport Device Servers are fully integrated
systems that contain memory, processors, operating systems, software
applications and communication ports. As a result, users can gain instant
access to critical information, manage devices in real-time and manage and
control devices over the Internet or other networks. We have developed
networking solutions for devices such as bar code scanners, building HVAC
systems, elevators, manufacturing equipment, process control equipment, vending
machines, thermostats, security cameras, medical instruments, temperature
sensors, card readers and point of sale terminals. We sell our products, which
also include print servers and other devices through multiple channels
including OEMs, systems integrators, distributors and VARs to a wide variety of
end-markets, including industrial automation, healthcare, security/access
control, retail/point of sale, commercial/information technology and
telecommunications.
Industry Background and Trends
The emergence of the Internet has increased users' access to information and
the speed at which users are able to interact with new information. As Internet
technology applications have become more advanced, users have become able to
conduct business in real-time over the Internet and other networks. This trend
has escalated demand for real-time access to devices over the Internet for a
broad range of applications at all levels of technological sophistication.
The majority of electronic devices in existence today are not connected to
the Internet or other networks. Instead, these devices, if networked, primarily
communicate through proprietary closed control systems. These systems collect
data from the physical world and convert that data into electrical signals.
These signals can be used to effect responses based on preprogrammed rules and
logic. These systems have traditionally required a PC gateway solution, where
the intelligence is based in the central controller and complex wiring and
customization are required for communication. Examples of these systems include
point of sale devices, bar code scanners, security systems, elevators,
manufacturing equipment and medical instruments. Moreover, any intelligent
action that must be taken as a result of information provided by these devices,
such as ordering additional inventory, requires action by a human being. Today,
manufacturers, VARs, systems integrators and end-users are increasingly
demanding cost-efficient solutions to enable electronic devices to be connected
and controlled and to be able to respond automatically and intelligently to
data inputs over the Internet or other networks.
Device server technology can enhance the full spectrum of electronic
devices, from ordinary devices such as vending machines to highly sophisticated
devices such as security systems, by reducing hardware and software costs,
reducing labor costs, increasing access to information and increasing the
overall speed and efficiency of completing tasks. For example, a traditional
vending machine requires a human being to routinely drive out to the vending
machine site, perform routine maintenance, collect cash and to check, stock and
order new inventory. By connecting the vending machine to the Internet using
device server technology, the vending machine could automatically monitor its
inventory and operational status, send purchase orders to suppliers, and
request maintenance visits as needed. The vending machine could also adjust
prices automatically and even process credit card payments instead of requiring
cash. Moreover, the vending machine could accurately monitor consumer
preferences for use by snack food companies to measure demand or set pricing.
Device server technology can also benefit more complex applications such as
security systems. Traditionally, security systems have had security panels
located at entrances where permitted entrants input a code or swipe a badge for
access to the building. Typically, these security panels are connected to
central, on-site control panels through extensive wiring which in turn is
connected to a local server, which in turn is connected to the security
company's main server. Together these devices determine if the person
requesting access should be admitted to the building. By implementing device
server technology at the point of entry, the
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local server, control panel and system specific wiring could be eliminated
because the device server could communicate directly with the main server via
the Internet. In addition, this Internet access enables a host of control
options and potential efficiencies. For example, the security system could be
constantly monitored via the Internet instead of by using a telephone line that
could be tampered with, the end-user could change specific employee access to
the point of entry remotely, and end users could switch security companies
easily because no proprietary security company hardware would exist on site and
the device servers can be remotely reprogrammed.
Demand for device servers is being driven by the need for cost effective
networking solutions for devices which are already installed and are not
designed to have Internet access as well as devices currently being developed
by OEMs and system integrators. As with the computer industry's move away from
centralized computing architectures, we believe that across a broad range of
applications, the control industry is moving away from customized, wiring-
intensive and closed interconnection schemes among various system components,
towards open, interoperable, distribution architectures in which the control
intelligence resides among the sensors and actuators in an intelligent network.
In terms of the installed base of devices, device server technology can enable
Internet access to almost any electronic device that has a serial port. In
terms of devices currently being developed, device server technology can be
embedded in many electronic devices, including devices that contains a
microprocessor. Cahners In-stat Group, an independent research company,
estimates that the number of microprocessors embedded in electronic devices is
expected to increase from over 4.96 million units as of December 31, 1999 to
7.36 million units by December 31, 2000. As competition to be the first-to-
market with Internet-enabled products intensifies we believe OEMs and systems
integrators, whose core competencies typically do not include networking
expertise, are increasingly seeking out third-party providers of networking
capabilities that can meet end-user demand.
The Lantronix Solution
We are a leading provider of intelligent network device servers that enables
almost any electronic devices to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet and other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. We offer a broad range of products for various currently installed
devices that lack built-in network functionality. Our products are designed to
connect to many of these devices at a fraction of the cost of replacing the
existing equipment or wiring each device to a conventional PC that would act as
a gateway to the network. We also offer products that are used by OEMs to
provide Internet connectivity in their current and future product lines.
Because our products are based on open standards, OEMs can avoid potentially
complicated hardware and software integration issues and can network-enable
their products quickly and seamlessly.
Our Device Servers can be segmented into two major categories: external and
embedded. Our external products are primarily used to network-enable the
installed base of electronic devices, though we also offer manufacturers a
turnkey solution for new devices. Our embedded products are designed into new
electronic devices. By offering both product lines, we allow manufacturers to
uniformly connect the end-users' new and existing equipment.
We believe our Device Servers enable our customers and end-users to compete
more effectively by allowing them to improve their business models by
automating tasks previously performed by human resources, increasing control
and creating cost efficiencies. We currently offer our Device Servers in many
markets, including industrial automation, healthcare, security access/control,
retail/point of sale, commercial/information technology, and
telecommunications. We believe our products offer end-users and manufacturers
the following key advantages:
. Fully Integrated Solution. Our Device Servers are fully integrated with
hardware, firmware, protocols, application software and a real-time
operating system. Our Device Server technology is based on widely
accepted industry standards, such as TCP/IP, HTTP, SNMP and Telnet, which
we believe will provide Internet and other network compatibility today
and in the future. We believe our solution enables OEMs to quickly
integrate the products they manufacture, significantly reducing their
time-to-market. We also believe that our products offer a turnkey
solution to our end-user customers.
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. Remote Real-Time Solution. By enabling our end-users to communicate in a
remote real-time environment over the Internet or other networks, our
Device Servers facilitate increased user efficiencies. Our products can
significantly reduce labor costs as well as eliminate the need for
expensive gateways and redundant wiring used to network many devices. For
example, the restaurant industry has traditionally used a point of sale
system that communicates to an internal database which in turn
communicates to a manager at a remote site for inventory and procurement
review. Our remote solution could simplify this process by continuously
communicating data directly from the restaurant point of sale devices to
the restaurant's suppliers and food distributors, and order supplies as
needed, thereby reducing the costs in a restaurant's procurement chain.
. Open, Standards-based Architecture. We have an open architecture that
enables our products to be compatible and interoperable with a variety of
devices manufactured by different OEMs and across different platforms.
Unlike products that use a proprietary system, we believe our Device
Servers are flexible and easily facilitate communication between devices
with various architectures. In addition, our open architecture gives our
customers the ability to modify and customize our products. For example,
we offer our customers a development environment we call our Software
Developers Kit that allows our customers to customize our products with
the commonly used "C" programming language. We offer a variety of support
programs to assist our customers in developing these custom applications.
. No Gateway Requirement to Network Devices. Unlike many of our
competitors, we are able to network electronic devices without the need
for a proprietary PC or server gateway. Because our technology enables
intelligent action to occur at the device level instead of at the
gateway, end users can communicate directly with devices over the
Internet.
. Improved Reliability. Our Device Server technology is highly reliable
because there is no single point of failure. Because our Device Servers
contain a built-in Web server and software, each of our Device Servers
operates independently and does not rely on a centrally located gateway
or server. In addition, by using its built-in processor power, our Device
Servers have the capability of tracking the status of the electronic
device and can report problems before they occur.
Our Strategy
Our objective is to be the leading global provider for network-enabling
devices. The following elements are central to our strategy:
. Build our Sales Channel Relationships. We plan to continue to develop
relationships with OEMs, VARs and system integrators that are leaders in
our targeted industry markets. Currently we have relationships with
approximately 1,400 customers. We will seek to strengthen and expand our
relationships as well as aggressively increase our customer base by
providing timely, cost effective networking solutions and customer
service.
. Target Complementary Alliances and Strategic Acquisitions. We plan to
continue to enter into complementary alliances and make strategic
acquisitions of both companies and key technologies which we believe will
have synergistic benefits with our existing customer base and product
lines. For example, we are involved in the Universal Plug and Play Forum
with Microsoft, Intel, Hewlett Packard and other technology companies. In
addition, in 1998 we acquired ProNet GmbH, a German supplier of
industrial application device servers. We believe this strategy will have
the potential to enable us to increase our market share in what is
currently a fragmented device server market as well as gain access to
larger product and customer bases.
. Invest Significantly in Research and Development. We intend to spend
significantly greater sums on our research and development efforts over
the next two years to develop additional cost efficient Device Server
solutions and other technologies, in order to meet changing client needs.
We believe that we have substantial expertise in developing network-
enabling technology, and we intend to use this expertise to continue to
deliver products with high-functionality at competitive prices.
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. Extend Existing Customer Relationships to Expand Future Revenue
Streams. We intend to extend our existing customer relationships by
providing Device Server solutions for a greater percentage of the
products and services our customers currently offer, and also by
providing solutions for our customers' new products and services. For
example, our customers include many OEMs which develop products in a wide
variety of industries. To the extent that we provide Device Server
technology solutions for an OEM within a specific industry, we expect to
be able to provide similar solutions in the other industries that the OEM
services. In addition, as demand for real-time connectivity continues to
grow, we believe our customers will increasingly demand highly integrated
embedded networking solutions for their new products. We expect to be
able to grow with our customers by providing continually enhanced
embedded and external device server solutions to better suit our
customers' needs.
. Leverage our Application Expertise. We have substantial experience in
developing Device Server application solutions, and have developed
software applications that can be used across our product lines to serve
our customers' diverse needs. As we further penetrate our target markets,
we intend to continue to develop and refine our software applications,
providing us with a growing base of sophisticated software to help
develop new device applications.
. Establish Strong Brand Awareness. We believe Lantronix is a leading name
in the device server market. We intend to further develop brand awareness
by expanding our marketing relationships and programs. For example, we
intend to co-brand our products with select customers. We believe that
establishing brand recognition will help us establish wide acceptance of
our technology and products.
Products
We develop, market and support a variety of powerful, turnkey hardware and
software products that enable electronic devices to be connected over the
Internet or other networks. Our connectivity solutions are currently deployed
in industrial automation, healthcare, security access/control, retail/point of
sale, commercial/information technology, and telecommunication markets. Our
products are based on our integrated, open architecture Device Server
technology.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Net Revenues for
nine months ended
March 31, 2000 Primary Product
Product family (millions) Function Products
<C> <S> <C> <C>
Device Servers $17.0 Enable almost any External and
electronic device embedded
to become network- CoBox, MSS
enabled, allowing and UDS products.
the user to control
the device by way
of the Internet
using a wide range
of network
protocols.
- --------------------------------------------------------------------------------------
Multiport Device Servers $7.5 Enable multiple ETS and LRS
devices to become products.
network-enabled,
allowing the user
to control the
devices by way of
the Internet using
a wide range of
network protocols.
- --------------------------------------------------------------------------------------
Print Servers $5.2 Allow multiple EPS, MPS and
users to share LPS products.
printers anywhere
on an Ethernet
network using a
wide range of
network protocols.
- --------------------------------------------------------------------------------------
Other $2.9 Support our product Switches, hubs and
lines. other connectivity
peripherals.
</TABLE>
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Device Servers and Multiport Device Servers
We produce a wide variety of device servers. Both our Device Servers and our
Multiport Device Servers enable almost any electronic device to become network-
enabled, allowing the user to control the device by way of the Internet or
other networks. Our products range from our MSS, UDS and CoBox lines of single
and dual-port Device Servers, in sizes as small as a matchbook, to our ETS line
of rackmount and tabletop Multiport Device Servers.
Device Servers. Originally our Device Servers were designed using our Micro
Serial Server or MSS architecture. In 1998, we acquired ProNet GmbH, a supplier
of industrial applications and device servers. Using the acquired proprietary
CoBox architecture, we introduced a board-level Device Server, giving OEMs a
quick and compatible way to embed open standards-based Internet capability and
computing power into almost any electronic device. We also launched a line of
Device Servers for the industrial automation market, which are available in
industry-standard DIN Rail form factors, with support for traditional
industrial communications protocols including Modbus and SECS. Device Servers
are easy to manage using any standard web browser, due to a built-in HTTP
server and Java management program.
The table below sets forth our Device Servers, their type of connection, the
product description and their initial introduction date:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Connection Introduction
Product Name Type Description Date
<C> <C> <S> <C>
UDS 10 External RS-232, RS-485, RS-422 serial June 2000
standards. DB25 serial port. RJ45
connector. Flash ROM. Managed via
HTTP, DHCP, Telnet and SNMP.
- -------------------------------------------------------------------------------
CoBox Micro Embedded TTL serial. Ethernet RJ45 November 1999
connector. IP protocol stack. Flash
ROM. Managed via HTTP, Telnet and
SNMP.
- -------------------------------------------------------------------------------
MSS-VIA External Combines RS-232, RS-422 and RS-485 October 1999
interface with a 10/100 Ethernet
and integrated PC Card interface
for Wireless Connectivity. Flash
ROM for software upgrades.
Management via Telnet, SNMP, DHCP,
HTTP, DB9 Serial Console Port and
EZWebCon.
- -------------------------------------------------------------------------------
CoBox DinRail External RS-232, RS-485, & RS-422 serial March 1999
standards (switch selectable).
10BASE-T Ethernet interface (RJ45).
Master or slave functionality.
- -------------------------------------------------------------------------------
CoBox Modbus External RS-232, RS-485, RS-422 serial March 1999
standards. DB25 and DB9 serial
interfaces. RJ45 and AUI Ethernet
interfaces, STP/UTP Token Ring
interfaces. IP, Modbus RTU, Modbus
ASCII and Modbus TCP. Flash ROM.
Managed via Serial, Telnet, and
SNMP.
- -------------------------------------------------------------------------------
CoBox Mini Embedded Two TTL serial interfaces. Ethernet December 1998
and Token Ring available. IP
protocol stack. Flash ROM. Managed
via HTTP, Serial, Telnet and SNMP.
- -------------------------------------------------------------------------------
MSS100 External DB25 with full modern controls and November 1998
a 10/100 RJ45 network interface.
Flash ROM for software upgrades.
Management via HTTP, SNMP, DHCP,
Telnet and EZWebCon GUI.
- -------------------------------------------------------------------------------
CoBox External RS-232, RS-485, RS-422 serial October 1998
standards. DB25 and DB9 serial
interfaces. RJ45 and AUI Ethernet
interfaces, STP/UTP Token Ring
interfaces. Flash ROM. IP protocol
implementation. Managed via HTTP,
Telnet, Serial and SNMP.
- -------------------------------------------------------------------------------
MSS485 External RJ45/screw block serial interface March 1998
Flash ROM. Management via Telnet,
SNMP, DHCP and EZWebCon.
- -------------------------------------------------------------------------------
MSS1 External DB25 serial interface. Wide variety October 1995
of port and network configuration
options. Flash ROM Management via
Telnet, SNMP, DHCP, and EZWebCon.
- -------------------------------------------------------------------------------
LRS1 External RS-232 DB25 DTE asynchronous serial September 1995
ports. TCP/IP, IPX/SPX and
AppleTalk protocols. RIP and Static
routing. PPP, SLIP/CSLIP, and NAT
support. Supports V.90 and ISDN
modems. Provides secure access for
Dial-in, Dial-out, LAN-to-LAN,
Console Server and ISP.
</TABLE>
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Multiport Device Servers. We offer a broad line of Multiport Device Servers,
which are specialized devices that can network multiple devices while operating
independent of any proprietary host and supporting virtually every standard
networking protocol.
The table below sets forth our line of Multiport Servers, their number of
serial ports, the product description and their initial introduction date:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Product # of Introduction
Name Ports Description Date
<C> <C> <S> <C>
ETS32PR 32 10/100 RJ45 and AUI Ethernet ports. Full November 1998
modem controls on each port. Managed via
HTTP, SNMP, DHCP, Telnet and EZWebCon.
- -------------------------------------------------------------------------------
CoBox NTP 2 Connect GPS time source to an Ethernet or October 1998
Token Ring network. Supports NTP and
time/udp protocols. RS-232 and RS-422 serial
standards. Flash ROM. Managed via Serial and
Telnet.
- -------------------------------------------------------------------------------
ETS4P 4 10BASE-T and AUI Ethernet interfaces. September 1998
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP and EZWebCon.
- -------------------------------------------------------------------------------
ETS8P 8 10BASE-T and AUI Ethernet interfaces. May 1997
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP, and EZWebCon.
- -------------------------------------------------------------------------------
ETS16P 16 10BASE-T and AUI Ethernet interfaces. May 1997
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP and EZWebCon.
- -------------------------------------------------------------------------------
LRS32F 32 RJ45 serial ports support RS-423 and RS- May 1997
232C. Secure Console Server connections to
host systems. In-band/out-of-band
management. 10/100 and AUI network
interfaces.
- -------------------------------------------------------------------------------
LRS16F 16 RJ45 serial ports support RS-423 and RS- March 1996
232C. Secure Console Server connections to
host systems. In-band/out-of-band
management. 10/100 and AUI network
interfaces.
</TABLE>
Software Developers Kit. Many of our Device Servers can be easily customized
by an OEM or systems integrator to meet unique application requirements by
using our Software Developers Kit. Using the commonly used "C" programming
language, our customers can quickly customize the core operating system on a
variety of our Device Servers.
Comm Port Redirector. We provide customers with our Comm Port Redirector
software utility at no charge. When used in conjunction with Device Servers,
our Comm Port Redirector allows existing Windows-based software applications to
continue operating over a network without any modification, as if devices were
still locally attached.
Other Products. We also sell switches, hubs and other connectivity
peripherals that our customers may request in conjunction with our Device
Servers, Multiport Device Servers and Print Server products.
Print Servers. We offer our MPS, LPS and EPS lines of print servers, which
enable multiple users to share printers anywhere on an Ethernet network using a
wide range of network protocols. Our EPS product line supports TCP/IP, IPX,
AppleTalk, and LAT protocols. Within the individual EPS products, additional
protocols are supported. Our MPS and LPS product lines support TCP/IP, IPX,
NetBIOS/NetBEUI and LAT. In addition, our MPS product line supports AppleTalk.
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Customers
Our Device Server technology has a broad range of applications across a
variety of markets. Including industrial automation, healthcare,
security/access control, retail/point of sales, commercial/information
technologies and telecommunications. We primarily service these markets by
selling our products to OEMs, VARs and systems integrators. Our products are
sold either directly or through distributors.
Original Equipment Manufacturers. Our OEM customers manufacture products
that traditionally have not been networked, but for which consumers are
increasingly demanding networking capabilities. Typically, OEMs use our
external solutions to network-enable their installed base of products and our
embedded solutions to network-enable their current and future products. These
OEMs typically lack a core competency in networking but require solutions that
enable them to quickly introduce network solutions to their end-users. We allow
OEMs to outsource the development function of these networking solutions, and
as a result, reduce the OEMs' research and development costs, avoid integration
problems and bring newly networked products to market faster. We expect that
our sales to OEMs as a percentage of our sales will increase in the future.
Value Added Resellers/Systems Integrators. Our VAR and systems integrator
customers are typically seeking an easily integrated, open standards-based way
to connect a variety of devices to networks to address the needs of their
customers. Our products enable VARs and systems integrators to create value
added networking solutions for their customers.
Distributors. Our distributor customers resell our products to a variety of
customers including manufacturers, VARs, systems integrators and end-users. We
primarily use the distribution channel to service smaller VAR, systems
integrator and end-user customers that would not be cost effective for us to
service directly.
End-Users. Our end-users require solutions that will enable them to network
company-specific equipment or processes.
Case Studies
We believe our market includes applications such as semiconductor
manufacturing equipment, medical devices, security systems, retail kiosks, HVAC
systems and telephone switches, among others. Below are case studies depicting
the use of our products.
Industrial Automation. A semiconductor manufacturing facility uses our
device server technology to accurately manage capital equipment used for the
production of semiconductor wafers. Our Device Server Technology allows for the
remote measurement and control of etch and deposition, lithography and
metrology tools and for the precision management of industrial robotics. With
the use of our Device Server Technology, this highly technical machinery can be
connected, monitored and controlled by any PC over the LAN.
Retail/POS. One of our customers uses our Device Servers to deliver content
over the Internet to a network of kiosks located in numerous major retail
locations nationwide. Instead of spending the high capital costs associated
with networking each kiosk separately, our Device Servers enables our customer
to utilize the Ethernet infrastructure already in place within the retailer to
deliver content. In addition, our technology provides a secure connection to
our customer, completely encrypting our customer's data and separating it from
the retailer's within the same network.
Healthcare. A leading provider of handheld point-of-care blood analyzer
equipment uses our technology to enable doctors to get fast, accurate results
at the patient bedside instead of sending blood samples to an expensive
laboratory. Prior to being networked by our Device Server technology,
information from the blood analyzers had to be downloaded at local PCs located
throughout the hospital in order to transmit the data to the central data
station for analysis. With the use of our Device Servers, this data can be
transmitted directly from the blood analyzer to the central data station and
sent back to the blood analyzer without the need for local PCs.
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Security/Access Control. A leader in integrated security management systems
used our Device Server technology to connect their security system card readers
and keypads directly to a building's high-speed Ethernet network, enabling
their customers to remotely control and monitor security systems in multiple
buildings using networked PCs. Previously, the company relied on costly serial
lines and dedicated PCs to control their building access systems. In addition,
our technology enabled the customer to send data from the readers and keypads
upstream to multiple IP addresses for online monitoring by multiple security
personnel, automatic database logging and backup system coverage.
Commercial/Information Technology. A company that designs and manufactures
cost effective electronic and software products to meet the on-site and remote-
location control needs for the heating, ventilation and air conditioning
market, uses our Device Servers to control interior environments in multi-unit
apartment complexes, schools and hotels from a central location. As a result,
our client's customers are able to eliminate expensive wiring and gain the
benefits of controlling their HVAC systems over the Internet.
Telecommunications. A large telecommunications equipment manufacturer uses
our embedded device server technology in their telephone switches to enable
remote management of the equipment. Our Device Servers enable remote monitoring
of call logging data, automatic uploading of software upgrades and system
maintenance. Previously these actions were performed through on-site visits or
by people using slow modem connections.
Sales and Marketing
We maintain regional sales offices in Irvine, California, the Netherlands
and Singapore. Additionally, we have local sales offices in Germany,
Switzerland, the United Kingdom and the United States. As of March 31, 2000,
our direct sales force consisted of 36 sales professionals located worldwide.
We supplement our sales effort with marketing activities designed to build our
brand name and promote product awareness. These activities include magazine and
online advertising, public relations efforts and targeted mailings. We also
participate in trade shows and industry gatherings.
Manufacturing
Our manufacturing objective is to produce reliable, high quality products at
competitive prices and to achieve on-time delivery to our customers. We
outsource the manufacturing of our products, which enables us to concentrate
our resources on the design, engineering and marketing of our products where we
believe we have greater competitive advantages, and to eliminate the high cost
of owning and operating a manufacturing facility.
We currently outsource all of our product manufacturing to two third party
manufacturers. Our manufacturing is performed on a purchase order basis and the
manufacturers are not contractually obligated to accept our manufacturing
requests or deliver our requests within our desired schedules. We supply our
own raw materials and testing is performed by the manufacturers using test
equipment we supply to them. We buy some of our integrated circuits from sole
sources of supplies. We also employ quality control personnel who visit our
contract manufacturers' sites at regular intervals and independently test our
products. Please see "Risk Factors" for a discussion of the risks associated
with manufacturing.
Research and Development
Our research and development efforts are focused on the development of
technology and products that will enhance our position in our markets. We
intend to significantly expand our research and development team in the near
future. As of March 31, 2000, we employed 19 people in our research and
development organization. Our research and development expenses were $2.5
million for the year ended June 30, 1997, $1.8 million for the year ended June
30, 1998, and $2.6 million for the year ended June 30, 1999. These expenses
were $1.9 million for the nine months ended March 31, 1999 and $2.3 million for
the nine months ended March 31, 2000.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain a
leadership position. We intend to substantially increase our
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research and development expenditures over the next two years including planned
increases in personnel, material costs and depreciation resulting from higher
capital expenditures.
Gordian, Inc. develops certain intellectual property used in our MSS line of
products. Please see "Risk Factors--Our intellectual property protection might
be limited" for a discussion of the risks associated with our relationship with
Gordian.
Competition
The markets in which we compete are competitive and we expect competition to
intensify in the future. Our current and potential competitors include the
following:
. companies that network-enable devices, such as Digi International,
Echelon and Equinox;
. companies in the automation industries, such as Schneider and Siemens;
. companies with significant networking expertise and research and
development resources, including 3Com, Cisco Systems, Hewlett Packard,
IBM, Lucent and Nortel; and
. companies that produce semiconductors such as Cirrus Logic and National
Semiconductor.
Many of our current and potential competitors, alone or together with their
trade associations and partners, have significantly greater financial,
technical, marketing, service and other resources, greater name recognition,
broader product offerings, and longer operating histories.
We also compete with companies' in-house capabilities to network-enable
their products. Moreover, our current customers may, in the future, elect to
use their internal resources to create network capabilities for their products.
Our industry involves rapidly changing technology, frequent new product
introductions and evolving standards and protocols. To maintain or improve our
competitive position, we must continue to develop and introduce, on a timely
and cost-effective basis, new products and services. We must also maintain and
strengthen our relationships with OEMs, VARs and systems integrators.
The principal competitive factors that affect the market for our products
are:
. product quality, technological innovation, compatibility with standards
and protocols, reliability, functionality, ease of use, and
compatibility;
. price of our products; and
. potential customers' awareness and perception of our products as well as
device servers generally.
We offer an open architecture, meaning that much of our technology can be
licensed without royalties or licenses fees. As a result, our customers could
develop products that compete with our offerings. In addition, there is a risk
that our customers could develop and market their own applications based on our
technology without paying a fee to us.
If we are unable to compete successfully with new or existing competitors or
otherwise meet the competitive challenges we face, we could receive fewer
orders than we anticipate, lose existing customers, have reduced operating
margins and lose market share. This could harm our business and cause the price
of our stock to decline.
Intellectual Property Rights
We have developed proprietary methodologies, tools, processes and software
in connection with delivering our services. We rely on a combination of
copyright, trademark, trade secret laws, and contractual restrictions, such as
confidentiality agreements and licenses to establish and protect our
proprietary rights. As of March 31, 2000, we have had no patents issued in the
United States and one patent issued in Germany. We do not rely on
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patents to protect our proprietary rights. We have no patent applications
pending. Lantronix is our registered trademark in the United States. We have
also registered some of our trademarks and logos in foreign countries.
Trade secret and copyright laws afford us only limited protection. We
typically enter into confidentiality and non-disclosure agreements with our
employees. These agreements are intended to limit access to and distribution of
our proprietary information. In addition, we have entered into non-competition
agreements with certain of our key employees. We cannot be certain that the
steps we have taken in this regard will be adequate to deter misappropriation
of our proprietary information or that we will be able to detect unauthorized
use and take appropriate steps to enforce our intellectual property rights. In
addition, an adverse change in the laws protecting intellectual property could
harm our business.
Pursuant to an agreement dated February 29, 1989 between us and Gordian,
Inc., Gordian developed certain intellectual property used in our Micro Serial
Server line of products. These products represented and continue to represent a
significant portion of our revenues. Under the terms of this agreement Gordian
owns the rights to the intellectual property developed by it but has agreed
that for the term of the agreement it will not develop products for any other
party which will directly compete with a product Gordian developed for us. The
agreement with Gordian currently provides that we are required to pay royalties
in respect of sales of products covered by the agreement. In the fiscal year
ending June 30, 1999, we paid Gordian approximately $2.0 million in royalties
and for the nine months ended March 31, 2000 we paid Gordian approximately $1.5
million in royalties. In the event that the Gordian agreement is terminated, we
may lose our rights to the intellectual property developed under the Gordian
agreement and this might prevent us from marketing some or all of Micro Serial
Server line of products in the future. Although we believe that other products
developed by us using alternative technology can be substituted in the future
for the products sold by us using the technology developed by Gordian, Inc., in
the event our agreement with Gordian, Inc. there is no guarantee that we will
not lose customers and revenues and if this were to occur it would harm our
business.
United States and Foreign Government Regulation
Many of our products and the industries in which they are used are subject
to federal, state or local regulation in the United States. In addition, our
products are exported and our six wholly-owned subsidiaries are incorporated
outside of the United States. Therefore, we are subject to the regulation of
foreign governments. For example, wireless communication is highly regulated in
both the United States and elsewhere. Our products currently employ encryption
technology. The export of encryption software is restricted. We can not assure
you that these or other existing law or regulation will not adversely affect
us. In addition, future regulation could adversely affect our business,
operating results and financial condition.
Employees
As of March 31, 2000, we had 136 full-time employees, of which 109 were
located in the United States and 27 were located internationally. As of that
date, we had 19 employees in research and development, 36 in sales and
marketing department, and 29 in general and administrative employees. We have
not experienced any work stoppages and we believe that our relationship with
our employees is good. None of our employees are currently represented by a
labor union.
Facilities
Our headquarters are located in a leased facility in Irvine, California
consisting of approximately 28,872 square feet, a portion of which we sublease.
The lease for this facility expires on July 31, 2000. We lease approximately
556 square feet of property in Breda, Netherlands. This lease expires on June
30, 2000. We lease 1,233 square feet of property in Singapore. This lease
expires on February 2001. We lease 722 square feet in Oberursel, Germany. This
lease expires on December 31, 2000.
Legal Proceedings
We are not currently a party to any material legal proceedings. We are
involved from time-to-time in routine legal proceedings incidental to the
conduct of our business.
37
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth certain information concerning each of our
executive officers and directors and key employees as of May 15, 2000:
<TABLE>
<CAPTION>
Name Age Position(s)
- ------------------------ --- ---------------------------------------------------
<S> <C> <C>
Bernhard Bruscha........ 47 Chairman of the Board
Frederick G. Thiel...... 39 President and Chief Executive Officer
Steven V. Cotton........ 37 Chief Financial Officer and Chief Operating Officer
Johannes Rietschel...... 36 Chief Technology Officer
Richard A. Franzi....... 42 Vice President, Americas Sales
Mark Fondl.............. 45 Vice President, Automation
Richard Obermeyer....... 45 Vice President, Research and Development
Andrew Mitchell......... 44 Director of Pacific Rim Sales
Marcel van der Meijs.... 38 Director of Europe, Middle East, Africa Sales
Thomas W. Burton........ 53 Director
W. Brad Freeburg........ 45 Director
</TABLE>
Bernhard Bruscha has been the Chairman of the Board since he founded our
company in June 1989. Since 1991, Mr. Bruscha has served as Chief Executive
Officer of transtec AG, a computer systems manufacturer. Transtec is a leading
European direct computer reseller.
Frederick G. Thiel has served as our President and Chief Executive Officer
since April 1998. From 1996 to 1998, Mr. Thiel served as a Corporate Vice
President and General Manager, Storage Division for CMD Technology, a developer
of RAID storage controllers. From 1994 to 1996, Mr. Thiel served as the
Director of Worldwide Marketing for Standard Microsystem Corporation, a
manufacturer of networking technology. Mr. Thiel also serves as a director for
Patriot Scientific Corporation.
Steven V. Cotton has served as our Chief Financial Officer and Chief
Operating Officer since December 1999. From 1996 to 1999 Mr. Cotton served as
the Chief Financial Officer and Chief Operating Officer at M2 Automotive, an
automotive repair business. From 1991 to 1996, Mr. Cotton was a Senior Vice
President and Chief Financial Officer at Panda Management Company, a restaurant
management business.
Johannes Rietschel has served as our Chief Technology Officer since January
1999. From 1989 to 1998, Mr. Rietschel served as the President and Chief
Executive Officer of ProNet GmbH which we acquired in October 1998. Mr.
Rietschel serves on the board of directors of ICARO Software GmbH and IZY
Communications, Inc.
Richard A. Franzi has served as our Vice President, Americas Sales since
November 1999. In 1999, prior to joining Lantronix, Mr. Franzi served as Vice
President, Americas Sales for Network Computing Device, a software and hardware
manufacturer. From 1984 to 1998, Mr. Franzi worked for Tektronix, Inc., a
manufacturer of electronics products which has since been acquired by Network
Computing Devices, Inc. During his tenure at Tektronix, Mr. Franzi served in
the positions of Major Accounts Manager, Regional Sales Manager, Director
Western Sales Area and, most recently, Director of Sales Operations.
Mark Fondl has served as our Vice President, Automation since November 1999.
From 1996 to 1999, Mr. Fondl served as Vice President of Marketing for
Schneider Automation, a business specializing in industrial automation
applications and products. From 1991 to 1996, Mr. Fondl served as a Director of
Regional Sales for Siemens, an electrical engineering and electronics company.
38
<PAGE>
Richard Obermeyer has served as our Vice President, Research and
Development, since March 2000. From 1998 to 2000, Mr. Obermeyer worked as an
independent contract engineer. From 1995 to 1998, Mr. Obermeyer was Vice
President and Chief Technology Officer for Pacific Micro Data, Inc., a
manufacturer of RAID storage products.
Andrew Mitchell has served as our Director of Pacific Rim Sales since June
1999. From 1997 to 1999, Mr. Mitchell was a business development manager for D
Link, a networking company that specializes in switches, hubs and networking
cards. From 1996 to 1997, Mr. Mitchell was General Manager for Hartec Austrial,
an active networks products business. From 1991 to 1996, Mr. Mitchell served as
a network systems engineer and Regional Manager for Standard Microsystems
Corporation, a manufacturer of networking cards, hub and switch products.
Marcel van der Meijs has served as our Director of Europe, Middle East,
Africa Sales since August 1999. From 1998 to 1999, Mr. van der Meijs served as
the Director of European Sales and Marketing for HID Corporation, a business
specializing in access control readers. From 1995 to 1998, Mr. van der Meijs
served as a sales manager for Maas Security, a company specializing in security
devices.
Thomas W. Burton has been a member of our board of directors since our
inception in 1989. Mr. Burton, an attorney, has operated his own law office,
Thomas W. Burton, PLC since June 1999. From January 1994 to June 1999, Mr.
Burton served as legal counsel to the law firm of Cummins & White LLP.
W. Brad Freeburg, one of our founders, has been a member of our board of
directors since our inception in 1989 and served as our President and Chief
Executive Officer from 1989 to 1998.
Committees of the Board of Directors
Our audit committee is currently comprised of and . The audit
committee makes recommendations to the board of directors regarding the
selection of our independent public accountants, reviews the results and scope
of the audit and other services provided by our independent public accountants
and reviews and evaluates our control functions.
Our compensation committee is currently comprised of and . The
compensation committee makes recommendations regarding our various incentive
compensation and benefit plans and determines salaries for our executive
officers and incentive compensation for our employees and consultants.
Board Composition
Our Board of Directors currently consists of three directors. Our
certificate of incorporation and bylaws that become effective upon the
completion of this offering provide that our board of directors will be divided
into three classes, Class I, Class II and Class III, with each class serving
staggered three-year terms. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This staggered classification of the board of directors might have
the effect of delaying or preventing changes in control or management. There
are no family relationships among any of our directors, officers or key
employees.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee was, at any time since our
formation, an officer or employee of ours. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Director Compensation
Each of our directors is paid $5,000 per year and $750 for each meeting
attended. We do not provide compensation for committee participation or special
assignments of the board of directors. Each of our
39
<PAGE>
non-employee directors who joins the board of directors after the completion of
this offering, will be granted an option to purchase 25,000 shares of common
stock upon their election to our board of directors. In addition, each of these
directors will be granted options to purchase 10,000 shares of common stock for
each year of service thereafter. These options will fully vest upon grant.
Executive Compensation
The following table sets forth the compensation paid by us during the year
ended June 30, 1999, to our Chief Executive Officer and to our other executive
officer whose total annual salary and bonus exceeded $100,000. This prospectus
refers to these executives as the Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C> <C>
Frederick G. Thiel........................... $160,000 $53,760 696,000
Chief Executive Officer and President
Johannes Rietschel........................... 155,000 -- --
Chief Technology Officer
</TABLE>
In addition, one person who served as an executive officer during the year
ended June 30, 1999, and who received compensation in excess of $100,000 during
that year, has since terminated her employment with us.
Steven V. Cotton, our Chief Financial Officer and Chief Operating Officer,
began his employment with us in December 1999. His annual salary is $185,000.
Option Grants in Last Fiscal Year
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable
-------------------------------------- Value at
Percent Assumed Annual
of Rates of Stock
Total Price
Number of Options Appreciation
Securities Granted for Options
Underlying in Term(4)
Options Fiscal Exercise Expiration ---------------
Name Granted(1) 1999(2) Price(3) Date 0% 5% 10%
---- ---------- ------- -------- ---------- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel.... 696,000 45.4% $0.175 12/01/2008 $ $ $
Johannes Rietschel.... -- -- -- -- -- -- --
</TABLE>
- --------
(1) Options were granted under our 1994 Nonstatutory Stock Option Plan and
vest on September 1, 2000.
(2) Based on an aggregate of 1,532,012 options granted by us in the year ended
June 30, 1999 to our employees, directors and consultants, including the
Named Executive Officers.
(3) Options were granted at an exercise price equal to the fair market value
per share of common stock on the grant date, as determined by our board of
directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant, or ten years. In accordance with the rules of
the Securities and Exchange Commission, the following table also sets
forth the potential realizable value over the term of the options, the
period from the grant date to the expiration date, based on assumed rates
of stock appreciation of 0%, 5% and 10% compounded annually. These amounts
do not represent our estimate of future stock price performance. Actual
realizable values, if any, of stock options will depend on the future
performance of the common stock.
40
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information for each of the Named Executive
Officers concerning option exercises for the fiscal year ended June 30, 1999,
and exercisable and unexercisable options held at June 30, 1999.
The "Value of Unexercised In-the-Money Options at June 30, 1999" is based on
a value of $ per share of our common stock, which is the assumed initial
public offering price, less the per share exercise price, multiplied by the
number of shares issued upon exercise of the option. All options were granted
under our 1993 Stock Option Plan or our 1994 Nonstatutory Stock Option Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised in-
Options at the-Money Options at
June 30, 1999 June 30, 1999
------------------------- -------------------------
Shares
Acquired
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel...... -- -- 350,404 1,435,020
Johannes Rietschel...... -- -- -- -- -- --
</TABLE>
Employee Benefit Plans
1993 Incentive Stock Option Plan. Our 1993 Incentive Stock Option Plan
provides for the grant of incentive stock options to key employees and
affiliates. Our board of directors administers the 1993 Plan and determines the
terms and conditions of all grants, including the exercise price, the duration
of the option and the form of payment upon exercise of the option. No option
granted under the 1993 Plan is transferable or assignable other than by will.
Upon completion of this offering, the 1993 Plan will terminate except with
respect to outstanding options granted under the plan. No further option grants
will be made under this plan. In the event we are acquired in a merger or asset
purchase, each outstanding option granted under the 1993 Plan may be assumed or
substituted for by the successor corporation. In the event that the successor
corporation refuses to assume or issue an equivalent option for each
outstanding option, the options shall become fully vested and exercisable
provided, however, the options are not subject to other limitations imposed by
the board of directors at the time of the grant.
No optionee may, at the time any option is granted under the 1993 Plan, own
stock possessing more than ten percent of the total combined voting power of
all classes of stock of the corporation or of its parent or subsidiary
corporations unless, if at the time such option is granted, the option price is
at least 110% of the fair market value of the stock and the option expires five
years from the date of the grant.
The aggregate number of shares of common stock which may be issued upon the
exercise of incentive stock options granted under this 1993 Plan shall not
exceed 3,600,000 shares. As of May 19, 2000, 3,540,279 shares have been issued
under the 1993 Plan.
1994 Nonstatutory Stock Option Plan. Our 1994 Nonstatutory Stock Option Plan
provides for the grant of nonstatutory stock options to employees, officers,
directors and affiliates. Our board of directors administers the 1994 Plan and
has sole authority to determine the conditions of option grants including the
exercise price, the duration of the option and the form of payment upon
exercise. No options granted under the 1994 Plan are transferable or assignable
other than by will.
Upon completion of this offering, the 1994 Plan will terminate except with
respect to outstanding options granted under the plan. No further option grants
will be made under this plan.
In the event we are acquired in a merger or asset purchase, each outstanding
option granted under the 1994 Nonstatutory Stock Option Plan may be assumed or
substituted for by the successor corporation. In the
41
<PAGE>
event that the successor corporation refuses to assume or issue an equivalent
option for each outstanding option, the options shall become fully vested and
exercisable provided, however, the options are not subject to other limitations
imposed by the board of directors at the time of the grant.
The aggregate number of shares of common stock which may be issued upon the
exercise of nonstatutory stock options granted under the 1994 Plan shall not
exceed 8,000,000 shares. To date, 3,081,736 shares have been issued under the
1994 Plan.
2000 Stock Plan
Our board of directors adopted our 2000 Stock Plan in May 2000. A total of
1,000,000 shares of common stock were reserved for issuance under the 2000
Stock Plan. The number of shares available for issuance increases annually on
the first day of each new year beginning with the year 2001. The increase is
equal to the lesser of 5% of the outstanding shares of common stock on the
first day of the year, 1,000,000 shares or an amount as the board of directors
may determine. Employees may be granted incentive stock options. Employees,
directors and consultants may be granted nonstatutory stock options and stock
purchase rights, or SPRs.
Plan. Our board of directors, or a committee of the board, will administer
the 2000 Stock Plan. The stock plan administrator has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability of the
options and the form of consideration payable upon exercise.
Options. The exercise price of all incentive stock options granted under the
2000 Stock Plan must be at least equal to the fair market value of the common
stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 2000 Stock Plan may not exceed ten years.
If the optionee ceases to be an employee, director or consultant of the
company, the optionee generally must exercise an option granted under the 2000
Stock Plan at the time set forth in the optionee's option agreement. If the
option terminates because of death or disability, the optionee must exercise an
option within 12 months of such termination. In no event may an optionee
exercise an option after the expiration of the option's term.
SPRs. The administrator determines the exercise price of SPRs granted under
the 2000 Stock Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant us a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's service with us for any
reason, including death or disability. The purchase price for shares we
repurchase is the original price paid by the purchaser. The price may be paid
by cancellation of any indebtedness of the purchaser to us. The repurchase
option lapses at a rate that the administrator determines.
Outside Director Options. The Stock Plan provides for an initial automatic
grant of an option to purchase 25,000 shares of common stock to a director who
first becomes an outside director on or after our initial public offering. The
2000 Stock Plan defines an outside director as a director who is not an
employee. Each outside director will also be automatically granted an option to
purchase 10,000 shares of common stock following each annual meeting of the
stockholders beginning after the end of our fiscal year 2001, if immediately
after such meeting, he or she shall continue to serve on the board and has
served on the board of directors for at least the preceding six months.
The exercise price of options granted to outside directors is a 100% of the
fair market value of our common stock on the date of grant.
42
<PAGE>
2000 Employee Stock Purchase Plan. The board of directors adopted our
Purchase Plan in May 2000. A total of 750,000 shares of common stock has been
reserved for issuance under the Purchase Plan. In addition, the Purchase Plan
provides for annual increases in the number of shares available for issuance
under the Purchase Plan on the first day of each fiscal year, beginning in
2001, equal to the lesser of 2% of the outstanding shares of common stock on
the first day of the fiscal year, 150,000 shares or an amount as the board of
directors may determine.
The board of directors, or a committee appointed by the board, administers
the Purchase Plan. The board or its committee has full and exclusive authority
to interpret the terms of the Purchase Plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by
us, or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Purchase Plan if such an employee:
. immediately after the grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive 24 month offering periods. The
offering periods generally start on the first trading day on or after August 1
and February 1, except for the first offering period which will start on the
first trading day on or after the effective date of this offering and will end
on the last trading day on or before July 30, 2002.
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's compensation. Compensation
is defined as the participant's base straight time gross earnings, bonuses and
commissions but excludes shift premium payments, incentive compensation,
incentive payments and other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period or end of the
offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us. The
maximum number of shares a participant may purchase during a single offering
period is 25,000 shares.
The Purchase Plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the Purchase Plan at any time, except
that, subject to certain exceptions described in the Purchase Plan, no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.
Limitations of Liability and Indemnification Matters
Our certificate of incorporation that will be in effect at the time of the
completion of this offering limits the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
43
<PAGE>
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us arising out of such person's services as our
director or executive officer, any of our subsidiaries or any other company or
enterprise to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
44
<PAGE>
CERTAIN TRANSACTIONS
Our Formation
We were initially formed as "Lantronix," a California corporation, in June
1989 and have been primarily engaged in the design and distribution of
networking products. In January 1992, we formed Lantronix International Inc., a
U.S. Virgin Islands corporation to conduct our international sales.
In October 1998 we acquired ProNet GmbH, a supplier of industrial
application device servers. We have changed this entity's name to Lantronix
Deutschland GmbH. At the time of this acquisition, ProNet GmbH owned 65% of
Acola GmbH, a sales organization. We subsequently purchased the remaining
capital stock of Acola GmbH and transferred ownership of Acola GmbH to
Lantronix Europe GmbH, a wholly owned subsidiary formed to sell our products in
Europe. We now conduct substantially all of our European sales activities
through Acola GmbH and Lantronix Europe GmbH.
Recently we have formed Lantronix UK Ltd. and Lantronix Singapore to conduct
international sales.
In March 2000, we established Lantronix International AG Switzerland, as our
wholly owned subsidiary. We subsequently transferred ownership of Lantronix
Europe GmbH, Lantronix Deutschland GmbH, Lantronix UK Ltd. and Lantronix
Singapore to Lantronix International AG Switzerland.
Stock Transactions
In connection with our acquisition of ProNet GmbH in October 1998, Johannes
Rietchsel, our Chief Technology officer, and his wife purchased 3,437,988
shares of our common stock for cash of $602,000, the deemed fair market value
of our common stock on the date of purchase.
Indemnification and Employment Agreements
We have entered into indemnification agreements with each of our directors
and officers, see "Management--Limitations of Liability and Indemnification
Matters."
Employment Agreements
We entered into an employment agreement in April 1998 with Frederick G.
Thiel, who serves as our Chief Executive Officer. The agreement provides that
Mr. Thiel's employment is at-will and sets forth an annual base salary of
$160,000. Mr. Thiel's agreement also provides that he be granted certain stock
options under our 1993 Incentive Stock Option Plan and 1994 Nonstatutory Stock
Option Plan. If we terminate Mr. Thiel without cause, or if Mr. Thiel resigns
with "good reason" after a change in control of Lantronix, Mr. Thiel will
receive his current base salary and certain benefits for a period of 15 months.
Mr. Thiel's severance provisions terminate upon the closing of a public
offering of our stock pursuant to an effective registration statement filed
with the SEC. Mr. Thiel is also subject to confidentiality and noncompete
restrictions under his employment agreement. Our agreement with Mr. Thiel
terminates in April 2001.
We entered into an employment agreement in December 1999 with Steven V.
Cotton, who serves as our Chief Financial Officer and Chief Operating Officer.
The agreement provides that Mr. Cotton's employment is at-will and sets his
annual base salary at $185,000. Mr. Cotton's agreement also provides that he be
granted stock options under our 1994 Nonstatutory Stock Option Plan. If we
terminate Mr. Cotton without cause, or if Mr. Cotton resigns with "good reason"
after a change in control of Lantronix, Mr. Cotton will receive his current
base salary and certain benefits. Mr. Cotton is subject to confidentiality and
noncompete restrictions under his employment agreement.
We entered into an employment agreement in September 1998 with Johannes
Rietschel, our Chief Technology Officer. The agreement provides that Mr.
Rietschel's employment is at-will and sets his annual base salary at $155,000
per year. Mr. Rietschel is subject to confidentiality and noncompete
restrictions under his employment agreement. Our agreement with Mr. Rietschel
terminates on December 31, 2001.
45
<PAGE>
Related Party Transactions
Bernhard Bruscha, our Chairman of the Board, is the majority shareholder and
Chief Executive Officer of transtec AG, a computer systems manufacturer.
Transtec is a major customer of ours, accounting for $2,485,651 of net revenues
in the nine months ended March 31, 2000, $3,752,623 of net revenues in the year
ended June 30, 1999, $5,063,647 of net revenues in the year ended June 30, 1998
and $5,036,867 of net revenues in the year ended June 30, 1997.
In addition, we entered into a software maintenance contract with transtec
AG in January 1999 under which we receive $90,000 in maintenance fees per year
through December 2003.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of May 18, 2000 and as adjusted to reflect the
sale of the shares of common stock offered by this prospectus for the
following individuals or groups:
. each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Lantronix, Inc., 15353 Barranca Parkway, Irvine, California 92619.
Except as otherwise noted, and subject to applicable community property laws,
to our knowledge, the persons named in this table have sole voting and
investing power with respect to all of the shares of common stock held by them.
Options to purchase shares of our common stock that are exercisable within
sixty days of , 2000 are deemed to be beneficially owned by the persons
holding these options or warrants for the purpose of computing percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing any other person's ownership percentage.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially
Prior to the Number of Owned After the
Offering(1) Shares Offering
------------------ Being -----------------
Name Number Percent Offered(2) Number Percentage
- ---- ---------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Bernhard Bruscha.............. 22,506,720 77.6%
Johannes Rietschel(3)......... 3,437,988 11.9
W. Brad Freeburg(4)........... 1,939,720 6.7
Frederick Thiel(5) ........... 472,232 1.6
Thomas Burton(6).............. 100,000 *
Steven V. Cotton(7)........... 48,572 *
All directors and executive
officers as a group (six
persons)(8).................. 28,505,232 96.1%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting and investment power with respect to
securities. Beneficial ownership also includes shares subject to options
currently exercisable or exercisable within 60 days of the date of this
table.
(2) These shares will be sold in this offering only in the event the
underwriters exercise their overallotment option.
(3) Includes shares owned by his spouse.
(4) Includes 60,000 shares of common stock issuable upon exercise of a stock
option exercisable within 60 days of May 18, 2000.
(5) Consists of 472,232 shares of common stock issuable upon exercise of a
stock option exercisable within 60 days of May 18, 2000.
(6) Consists of 100,000 shares of common stock issuable upon exercise of a
stock option exercisable within 60 days of May 18, 2000.
(7) Consists of 48,572 shares of common stock issuable upon exercise of a
stock option exercisable within 60 days of May 18, 2000.
(8) Consists of 680,804 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of May 18, 2000.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 200,000,000 shares of common
stock, $0.0001 par value and 5,000,000 shares of preferred stock, $0.0001 par
value. From time to time, our board of directors might establish the rights and
preferences of the preferred stock. As of March 31, 2000, 28,993,820 shares of
common stock and no shares of preferred stock were issued and outstanding and
held by stockholders. The following description of our capital stock is, by
necessity, not complete. We encourage you to refer to our certificate of
incorporation and bylaws which will be in effect upon the closing of this
offering, which are included as exhibits to the registration statement of which
this prospectus forms a part, and applicable provisions of Delaware law for a
more complete description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that might be applicable to any
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared time to time by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are
entitled to share in our assets remaining after the payment of liabilities and
the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by the rights of the holders of shares of any
series of preferred stock which we might designate in the future.
Preferred Stock
Following the completion of this offering, our board of directors will have
the authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, which may be superior to the
rights of the common stock. We cannot state with certainty the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. Nonetheless, the effects might include, among
other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of the company without
further action by the stockholders.
We currently have no plans to issue any shares of preferred stock.
Charter and Bylaw Provisions and Delaware Law
Provisions of Delaware law and our certificate of incorporation and bylaws
which will be in effect upon completion of the offering could make the
following more difficult:
. the acquisition of our company by means of a tender offer;
. acquisition of our company by means of a proxy contest or otherwise; or
. the removal of our company incumbent officers and directors.
48
<PAGE>
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of
increased protection of its potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging proposals because negotiation of the
proposals could result in an improvement of their terms.
Election and Removal of Directors
Following the completion of this offering, our board of directors will be
divided into three classes. The directors in each class will serve for a three-
year term, with our stockholders electing one class each year. See
"Management--Board Composition." This system of electing and removing directors
might tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company, because it generally makes it more
difficult for stockholders to replace a majority of the directors.
Indemnification of Directors
Our certificate of incorporation will limit the liability of our directors.
See "Management--Limitations of Liabilities and Indemnification Matters."
Stockholder Meetings
Under our bylaws, after the completion of this offering only the board of
directors, the chairman of the board, the president and the holders of a
majority of the outstanding capital stock may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws will establish advance notice procedures for stockholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent
Our certificate of incorporation will eliminate the right of stockholders to
act by written consent without a meeting.
No Cumulative Voting
Our certificate of incorporation and bylaws will not provide for cumulative
voting in the election of directors.
49
<PAGE>
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
our company. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management of Lantronix.
Amendment of Charter Provisions
The amendment of many of the provisions described above would require
approval by holders of at least 66 2/3% of the outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options, in the public market following this offering could adversely affect
market prices prevailing from time to time and could impair our ability to
raise capital through sale of our equity securities. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding shares of
common stock based upon shares outstanding as of March 31, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options that do not expire prior to completion of this offering. Of
these shares, the shares sold in this offering will be freely tradable
without restriction under the Securities Act of 1933, except for any shares
held by our "affiliates" as Rule 144 under the Securities Act defines that
term. The remaining shares of common stock held by existing stockholders
are "Restricted Shares" as Rule 144 defines that term. All of such Restricted
Shares are subject to lock-up agreements providing that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell or otherwise
dispose of any common stock or any securities that are convertible into common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of FleetBoston Robertson Stephens Inc. or Lantronix. As a
result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of
these shares will be resellable until 181 days after the date of this
prospectus. Beginning 181 days after the date of this prospectus, approximately
Restricted Shares will be eligible for sale in the public market, subject
in some cases to volume restrictions under Rule 144 or repurchase rights in
favor of Lantronix. In March 2001, approximately Restricted Shares will
be eligible for sale in the public market, all of which are subject to volume
limitations under Rule 144. In addition, as of March 31, 2000, there were
outstanding options to purchase shares of common stock. All such options
are subject to lock-up agreements. FleetBoston Robertson Stephens Inc. may, in
their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
Rule 144
In general, under Rule 144, as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates," would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
Lantronix at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with some restrictions, including the holding
period requirement, of Rule 144. Any employee,
51
<PAGE>
officer or director of or consultant to Lantronix who purchased shares pursuant
to a written compensatory plan or contact may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares. Most Rule 701 shares are subject to
lock-up agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after
the offering upon obtaining the prior written consent of FleetBoston Robertson
Stephens.
After this offering, we intend to file a registration statement on Form S-8
registering shares of common stock subject to outstanding options or reserved
for future issuance under our stock plans. As of , 2000, options to
purchase a total of shares were outstanding and shares were
reserved for future issuance under our stock plans. Common stock issued upon
exercise of outstanding vested options or issued pursuant to our employee stock
purchase plan, other than common stock issued to our affiliates is available
for immediate resale in the open market.
52
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and DLJdirect Inc., have severally agreed with us, subject to the
terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock set forth below opposite their respective
names. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- -------
<S> <C>
FleetBoston Robertson Stephens Inc. .................................
Donaldson, Lufkin & Jenrette Securities Corporation..................
DLJdirect Inc........................................................
-----
Total..............................................................
=====
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less
a concession of not in excess of $ per share, of which $ may be reallowed
to other dealers. After this offering, the public offering price, concession
and reallowance to dealers may be reduced by the representatives. No such
reduction shall change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus has been determined through negotiations among the
representatives and us. Among the factors considered in such negotiations were
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option
Lantronix and the selling stockholders have granted to the underwriters an
option, exercisable during the 30-day period after the date of this prospectus,
to purchase up to additional shares of common stock to cover over-
allotments, if any, at the public offering price less the underwriting discount
set forth on the cover page of this prospectus. If the underwriters exercise
their over-allotment option to purchase any of the additional shares of
common stock, the underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof as the number
of shares to be purchased by each of them bears to the total number of shares
of common stock offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered hereby are being sold. We will be obligated, pursuant to the over-
allotment option, to sell shares to the underwriters to the extent the over-
allotment option is exercised. The underwriters may exercise the over-allotment
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered in this offering.
53
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by Lantronix and the Selling Stockholders:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
------ --------- ---------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
payable by Lantronix............................... $ $ $
Underwriting discounts and commission payable by the
selling shareholders upon exercise of the over
allotment option................................... --
</TABLE>
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Each executive officer and director of Lantronix and substantially all of
our other shareholders have agreed, subject to specified exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of common stock or any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock owned as of the date of this
prospectus or thereafter acquired directly by those holders or with respect to
which they have the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. This restriction terminates after the close
of trading of the shares on the 180th day of (and including) the day the shares
commenced trading on the Nasdaq National Market. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time or from time to time
before the termination of the 180-day period, without notice, release all or
any portion of the securities subject to lock-up agreements. There are no
existing agreements between the representatives and any of our shareholders who
have executed a lock-up agreement providing consent to the sale of shares prior
to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the lock-
up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of shares in this
offering, the issuance of our common stock upon the exercise of outstanding
options or warrants, and the issuance of options under existing stock option
and incentive plans provided that those options do not vest prior to the
expiration of the lock-up period. See "Shares Eligible for Future Sale."
Listing
We have applied for quotation on the Nasdaq National Market under the symbol
"LTRX."
Stabilization
The representatives have advised us that, pursuant to Regulation M under the
Securities Act of 1933, some persons participating in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market
54
<PAGE>
price of the shares of common stock at a level above that which might otherwise
prevail in the open market. A "stabilizing bid" is a bid for or the purchase of
shares of common stock on behalf of the underwriters for the purpose of fixing
or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member was purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Directed Share Program
At our request, certain of the Underwriters have reserved up to five percent
of the shares of common stock, or"Directed Shares", for sale at the initial
public offering price to persons who are directors, officers or employees of
Lantronix, or who are otherwise associated with Lantronix and its affiliates,
and who have advised Lantronix of their desire to purchase such shares. The
number of shares of common stock available for sale to the general public will
be reduced to the extent of sales of the Directed Shares to any of the persons
for whom they have been reserved. Any shares not so purchased will be offered
by the underwriters on the same basis as all other shares of common stock
offered hereby. We have agreed to indemnify the Underwriters against certain
liabilities and expenses, including liabilities under the Securities Act, in
connection with the sales of Directed Shares.
55
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Lantronix by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with this offering will
be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at June 30, 1998 and 1999 and March 31, 2000
and for the years ended June 30, 1998 and 1999 and the nine months ended March
31, 2000 as set forth in their reports. We've included our financial statements
and schedule in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports given on their authority as experts in
accounting and auditing.
The consolidated financial statements and schedule of Lantronix, Inc. for
the year ended June 30, 1997 have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules which are part of the Registration Statement. The rules
and regulations of the Securities and Exchange Commission allow us to omit
certain information included in the Registration Statement from this
prospectus. Accordingly, any statements made in this prospectus as to the
contents of any contract, agreement, or other document are not necessarily
complete. With respect to each such contract, agreement, or other document
filed as an exhibit to the Registration Statement, we refer you to the exhibit
for a more complete description of the matter involved, and each statement in
this prospectus shall be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the Registration Statement or any
reports, statements, or other information in the files at the following public
reference facilities of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Securities and Exchange Commission. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of its public reference rooms. Our filings, including the
Registration Statement, will also be available to you on the Internet website
maintained by the Securities and Exchange Commission at http://www.sec.gov. We
intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each year containing unaudited interim
financial information.
56
<PAGE>
LANTRONIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Report of KPMG LLP, Independent Auditors.................................. F-3
Financial Statements
Consolidated Balance Sheets at June 30, 1998 and 1999 and March 31,
2000................................................................... F-4
Consolidated Income Statements for the Years ended June 30, 1997, 1998
and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended June
30, 1997, 1998 and 1999 and the nine months ended March 31, 2000....... F-6
Consolidated Statements of Cash Flows for the Years ended June 30, 1997,
1998 and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000................................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated balance sheets of Lantronix,
Inc. as of June 30, 1998 and 1999 and March 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended June 30, 1998 and 1999 and the nine months ended March 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lantronix,
Inc. at June 30, 1998 and 1999 and March 31, 2000, and the consolidated results
of its operations and its cash flows for the years ended June 30, 1998 and 1999
and the nine months ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Orange County, California
May 15, 2000, except for
Note 9, as to which the
date is May , 2000
The foregoing report is in the form that will be signed upon completion of
the re-incorporation described in Note 9 to the consolidated financial
statements.
/s/ Ernst & Young LLP
Orange County, California
May 18, 2000
F-2
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Lantronix, Inc. for the year ended June
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Lantronix, Inc. for the year ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
August 13, 1997
F-3
<PAGE>
LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-------------- March 31,
1998 1999 2000
------ ------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,759 $ 5,833 $ 4,118
Accounts receivable, (net of allowance for doubtful
accounts of $452, $203 and $154 at June 30, 1998
and 1999 and March 31, 2000, respectively)........ 3,760 4,314 5,222
Inventories........................................ 2,484 3,306 4,123
Deferred income taxes.............................. 1,062 1,220 1,709
Prepaid expenses and other current assets.......... 134 251 355
------ ------- -------
Total current assets........................... 9,199 14,924 15,527
Property and equipment, net.......................... 583 876 1,158
Intangible assets, net............................... -- 1,399 789
Other assets......................................... 18 93 53
------ ------- -------
Total assets................................... $9,800 $17,292 $17,527
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $1,031 $ 2,547 $ 2,245
Accrued payroll and related expenses............... 330 629 796
Accrued commissions payable........................ -- 672 525
Accrued warranty costs............................. 496 619 525
Income taxes payable............................... 537 583 403
Other current liabilities.......................... 478 999 848
Bank line of credit................................ -- 766 --
------ ------- -------
Total current liabilities...................... 2,872 6,815 5,342
Capital lease obligations, net of current portion.... -- 97 110
Minority interest.................................... -- 68 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 5 million
shares authorized; none issued and outstanding.... -- -- --
Common stock, $0.0001 par value; 200 million shares
authorized; 25,209,028, 28,745,512 and 28,993,820
shares issued and outstanding at June 30, 1998 and
1999 and March 31, 2000, respectively............. 3 3 3
Additional paid-in capital......................... 2,339 2,944 10,657
Deferred compensation.............................. -- -- (7,084)
Retained earnings.................................. 4,586 7,372 8,507
Accumulated other comprehensive loss............... -- (7) (8)
------ ------- -------
Total stockholders' equity..................... 6,928 10,312 12,075
------ ------- -------
Total liabilities and stockholders' equity..... $9,800 $17,292 $17,527
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
LANTRONIX, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................... $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues............... 20,430 16,812 16,824 12,846 15,644
------- ------- ------- ------- -------
Gross profit................... 10,250 11,488 16,156 10,311 16,987
------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative.............. 7,455 7,857 9,768 6,494 11,904
Research and development..... 2,471 1,770 2,615 1,897 2,330
Amortization of deferred
compensation................ -- -- -- -- 587
------- ------- ------- ------- -------
Total operating expenses....... 9,926 9,627 12,383 8,391 14,821
------- ------- ------- ------- -------
Income from operations......... 324 1,861 3,773 1,920 2,166
Minority interest.............. -- -- (30) (57) (49)
Interest income (expense),
net........................... (168) (5) 151 121 154
Other income (expense), net.... 9 1 (10) (106) (55)
------- ------- ------- ------- -------
Income before income taxes..... 165 1,857 3,884 1,878 2,216
Provision (benefit) for income
taxes......................... (37) 554 1,098 556 1,081
------- ------- ------- ------- -------
Net income..................... $ 202 $ 1,303 $ 2,786 $ 1,322 $ 1,135
======= ======= ======= ======= =======
Earnings per share:
Basic........................ $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.04
======= ======= ======= ======= =======
Diluted...................... $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.03
======= ======= ======= ======= =======
Weighted average shares:
Basic........................ 25,128 25,207 26,977 26,964 28,870
======= ======= ======= ======= =======
Diluted...................... 25,626 27,128 29,251 29,329 33,567
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-In Deferred Retained Comprehensive Stockholders'
Shares Amount Capital Compensation Earnings Loss Equity
---------- ------ ---------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... 25,050,760 $ 3 $ 2,323 $ -- $3,081 $ -- $ 5,407
Repurchase of common
stock................. (16,000) -- (3) -- -- -- (3)
Stock options
exercised............. 169,600 -- 18 -- -- -- 18
Net income............. -- -- -- -- 202 -- 202
-------
Comprehensive income... 202
---------- --- ------- ------- ------ ---- -------
Balance at June 30,
1997................... 25,204,360 3 2,338 -- 3,283 -- 5,624
Stock options
exercised............. 4,668 -- 1 -- -- -- 1
Net income............. -- -- -- -- 1,303 -- 1,303
-------
Comprehensive income... 1,303
---------- --- ------- ------- ------ ---- -------
Balance at June 30,
1998................... 25,209,028 3 2,339 -- 4,586 -- 6,928
Sale of common stock... 3,522,004 -- 602 -- -- -- 602
Stock options
exercised............. 14,480 -- 3 -- -- -- 3
Foreign currency
translation
adjustment............ -- -- -- -- -- (7) (7)
Net income............. -- -- -- -- 2,786 -- 2,786
-------
Comprehensive income... 2,779
---------- --- ------- ------- ------ ---- -------
Balance at June 30,
1999................... 28,745,512 3 2,944 -- 7,372 (7) 10,312
Stock options
exercised............. 248,308 -- 42 -- -- -- 42
Deferred compensation
related to grant of
stock options......... -- -- 7,671 (7,671) -- -- --
Amortization of
deferred
compensation.......... -- -- -- 587 -- -- 587
Foreign currency
translation
adjustment............ -- -- -- -- -- (1) (1)
Net income............. -- -- -- -- 1,135 -- 1,135
-------
Comprehensive income... 1,134
---------- --- ------- ------- ------ ---- -------
Balance at March 31,
2000................... 28,993,820 $ 3 $10,657 $(7,084) $8,507 $ (8) $12,075
========== === ======= ======= ====== ==== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
-------- ------ ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $ 202 $1,303 $ 2,786 $ 1,322 $ 1,135
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation................. 490 441 378 409 248
Amortization of intangible
assets...................... -- -- 595 391 610
Amortization of deferred
compensation................ -- -- -- -- 587
Loss on disposal of assets... 1 8 3 -- --
Provision for doubtful
accounts.................... 36 396 (136) 81 (11)
Deferred income taxes........ (284) (173) (158) (80) (490)
Changes in operating assets
and liabilities, net of
acquisitions in 1999:
Accounts receivable........ 1,038 (190) 93 (574) (897)
Inventories................ 4,140 840 (592) (182) (817)
Prepaid expenses and other
current assets............ 135 38 111 24 (104)
Other assets............... 7 -- (76) (759) 40
Accounts payable........... (4,074) (677) 1,002 577 (302)
Income taxes payable....... -- -- 46 197 (180)
Other current liabilities.. 132 520 1,513 2,306 (262)
Minority interest.......... -- -- 30 110 49
-------- ------ ------- ------- -------
Net cash provided by (used
in) operating activities.. 1,823 2,506 5,595 3,822 (394)
Cash flows from investing
activities:
Acquisition of marketing
rights....................... -- -- (1,694) (1,694) --
Acquisitions, net of cash
acquired..................... -- -- (655) (655) (116)
Purchases of property and
equipment, net............... (95) (121) (543) (261) (480)
-------- ------ ------- ------- -------
Net cash used in investing
activities................ (95) (121) (2,892) (2,610) (596)
Cash flows from financing
activities:
Net (repayment of) proceeds
from bank lines of credit.... (1,800) (800) 766 876 (766)
Sale of common stock.......... -- -- 602 602 --
Stock options exercised....... 18 1 3 3 42
Repurchase of common stock.... (3) -- -- -- --
-------- ------ ------- ------- -------
Net cash provided by (used
in) financing activities.. (1,785) (799) 1,371 1,481 (724)
-------- ------ ------- ------- -------
Effect of exchange rates on
cash.......................... -- -- -- (7) (1)
Net (decrease) increase in
cash.......................... (57) 1,586 4,074 2,686 (1,715)
Cash and cash equivalents at
beginning of period........... 230 173 1,759 1,759 5,833
-------- ------ ------- ------- -------
Cash and cash equivalents at
end of period................. $ 173 $1,759 $ 5,833 $ 4,445 $ 4,118
======== ====== ======= ======= =======
Supplemental disclosure of cash
flow information:
Interest paid................. $ 171 $ 5 $ 23 $ 1 $ 5
Income taxes paid............. $ 193 $ 671 $ 781 $ 781 $ 1,662
</TABLE>
See accompanying notes.
F-7
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1998, 1999 and March 31, 2000
1. Summary of Significant Accounting Policies
The Company
Lantronix, Inc. (the Company) was incorporated in California in June 1989
and is engaged primarily in the design and distribution of networking and
Internet connectivity products on a worldwide basis. The actual assembly and a
significant portion of the engineering of the Company's products is outsourced
to third parties.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Certain amounts reported in prior years have been reclassified to conform to
the fiscal year 2000 presentation.
The Company's operations are subject to certain risks and uncertainties,
including rapid technological changes, success of the Company's product
marketing and product distribution strategies, the need to manage growth, the
need to retain key personnel and protect intellectual property, and the
availability of additional capital financing on terms acceptable to the
Company.
Revenue Recognition
Revenue is recognized upon product shipment. The Company grants certain
distributors limited rights to return products and provides price protection
for inventories held by resellers at the time of published price reductions.
The Company establishes an estimated allowance for future product returns based
on historical returns experience when the related revenue is recorded and
provides for appropriate price protection reserves when pricing adjustments are
approved.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with financial
institutions. The Company's accounts receivable are derived from revenues
earned from customers located primarily in the United States and Europe. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. Credit losses
have historically been within management's expectations. The Company generally
does not require collateral or other security from its customers.
Warranty
Upon shipment to its customers, the Company provides for the estimated cost
to repair or replace products to be returned under warranty. The Company's
warranty period is generally five years from the date of shipment.
Foreign Currency Translation
The financial statements of foreign subsidiaries whose functional currency
is not the U.S. dollar have been translated to U.S. dollars in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52, Foreign Currency
Translation. Foreign currency assets and liabilities are remeasured into U.S.
dollars at the end-of-period exchange rates. Revenues and expenses are
translated at average exchange rates in effect during
F-8
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
each period, except for those expenses related to balance sheet amounts which
are translated at historical exchange rates. Exchange gains and losses from
foreign currency translations are reported as a separate component of
stockholders' equity.
Exchange gains and losses from foreign currency transactions are recognized
in the consolidated income statement and historically have not been material.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of ninety days or less.
Comprehensive Income
FASB Statement No. 130, Reporting Comprehensive Income, requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. The Company's
only component of other comprehensive income is the foreign currency
translation adjustment.
Income Taxes
Income taxes are computed under the liability method. This method requires
the recognition of deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The impact on deferred taxes of changes in
tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and are reflected in the consolidated
financial statements in the period of enactment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. As a result,
estimates are required to provide for doubtful accounts, product returns,
product obsolescence and warranty returns, as well as other matters.
Historically, amounts incurred under these programs have not varied
significantly from estimated amounts. However, future results may differ from
current estimates.
401(k) Plan
The Company has a savings plan (the Plan) which is qualified under Section
401(k) of the Internal Revenue Code. Eligible employees may elect to make
contributions to the Plan through salary deferrals up to 15% of their base pay,
subject to limitations. The Company's contributions are discretionary and are
subject to limitations. For the years ended June 30, 1997, 1998 and 1999 and
the nine months ended March 31, 1999 (unaudited) and 2000, the Company
contributed $0.50 for each $1.00 of employee salary deferral contributions up
to a maximum of 6% of the employee's annual gross wages, subject to
limitations. Selling, general and administrative expense includes approximately
$71,000, $80,000, $93,000, $64,000 and $90,000 for the Company's contributions
for the years ended June 30, 1997, 1998 and 1999 and the nine months ended
March 31, 1999 (unaudited) and 2000, respectively.
F-9
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development Costs
Costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred. The Company
believes its current process for developing products is essentially completed
concurrently with the establishment of technological feasibility. Product costs
incurred after the establishment of technological feasibility have not been
material and, therefore, have been expensed.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $613,000, $934,000, $929,000, $656,000 and $589,000 for the years
ended June 30, 1997, 1998 and 1999 and the nine months ended March 31, 1999
(unaudited) and 2000, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over the estimated useful lives
of the related assets, generally three to seven years.
Intangible Assets
Intangible assets consist of marketing rights and patents. Intangible assets
are amortized on a straight-line basis over periods not exceeding five years.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
Stock-Based Compensation
The Company accounts for its employee stock compensation arrangements using
the intrinsic value method prescribed under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has adopted the disclosure only option of FASB Statement No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 requires
that companies that do not choose to account for stock-based compensation as
prescribed by the statement, shall disclose the pro forma effects on earnings
as if SFAS No. 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value due to the relatively short maturity
of these instruments.
F-10
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by adjusting outstanding shares assuming any
dilutive effects of options.
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
------ ------ ------ ----------- ------
(In thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator: Net income................. $ 202 $1,303 $2,786 $1,322 $1,135
Denominator for basic earnings per
share:
Weighted average shares
outstanding........................ 25,128 25,207 26,977 26,964 28,870
Effect of dilutive securities:
Stock options....................... 498 1,921 2,274 2,365 4,697
------ ------ ------ ------ ------
Denominator for diluted earnings per
common share......................... 25,626 27,128 29,251 29,329 33,567
====== ====== ====== ====== ======
Basic earnings per share.............. $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.04
====== ====== ====== ====== ======
Diluted earnings per share............ $ 0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.03
====== ====== ====== ====== ======
</TABLE>
Segment Information
FASB Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has only one reportable
segment.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
The Company has not yet determined the effect of SFAS No. 133 on the operations
and financial position of the Company. The Company will be required to
implement SFAS No. 133 beginning in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Lantronix believes that its current revenue recognition policies
comply with SAB 101.
Unaudited Interim Results
The accompanying consolidated statements of income and cash flows for the
nine months ended March 31, 1999 are unaudited. In the opinion of management,
these financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the Company's
consolidated results of operations and cash flows for the interim period
presented. The data for the nine months ended March 31, 1999 included in notes
to the consolidated financial statements is also unaudited.
F-11
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Components of Balance Sheet
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1998 1999 2000
------- ------ ---------
(In thousands)
<S> <C> <C> <C>
Raw materials................................... $ 2,199 $2,527 $ 3,482
Finished goods.................................. 1,426 1,546 1,907
------- ------ -------
3,625 4,073 5,389
Reserve for excess and obsolete inventory....... (1,141) (767) (1,266)
------- ------ -------
$ 2,484 $3,306 $ 4,123
======= ====== =======
</TABLE>
Property and Equipment
A summary of property and equipment, at cost, follows:
<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1998 1999 2000
------- ------- ---------
(In thousands)
<S> <C> <C> <C>
Computer and office equipment.................. $ 1,419 $ 1,858 $ 2,481
Furniture and fixtures......................... 581 657 704
Production and warehouse equipment............. 418 513 540
Transportation equipment....................... 109 108 154
------- ------- -------
2,527 3,136 3,879
Accumulated depreciation....................... (1,944) (2,260) (2,721)
------- ------- -------
$ 583 $ 876 $ 1,158
======= ======= =======
</TABLE>
Intangible Assets
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
-------- ---------
(In thousands)
<S> <C> <C>
Marketing rights........................................ $1,694 $ 1,694
Patents................................................. 300 300
------ -------
1,994 1,994
Accumulated amortization................................ (595) (1,205)
------ -------
$1,399 $ 789
====== =======
</TABLE>
Pursuant to an agreement dated September 27, 1998, the Company purchased
marketing rights from an individual which allow the Company to sell products in
certain geographical regions. Per the terms of the agreement, the Company paid
$1,694,170 for the marketing rights. Additionally, the Company pays a sales
commission to the same individual for sales of certain products made to various
customers through December 31, 2000. The initial payment is being amortized
over a period of 27 months. The commission payments are expensed in the period
of the related product sale. Commissions paid and amortization of marketing
rights during the year ended June 30, 1999 and the nine months ended March 31,
1999 (unaudited) and 2000 were $601,651, $720,000 and $2,135,029, respectively.
F-12
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Acquisitions
On October 5, 1998, the Company purchased Adele, a German holding company,
and simultaneously changed its name to Lantronix GmbH. On October 8, 1998,
Lantronix GmbH purchased 100% of the stock of ProNet GmbH (ProNet), which
included a 65% investment in Acola GmbH. The transaction was accounted for as a
purchase and the purchase price was allocated to the acquired tangible and
intangible assets and liabilities at their estimated fair value at the dates of
acquisition.
The following table sets forth the net assets acquired and liabilities
assumed by the Company in connection with these acquisitions (In thousands):
<TABLE>
<S> <C>
Fair values of assets acquired..................................... $2,266
Liabilities assumed................................................ (924)
------
Cash paid by the Company........................................... $1,342
======
</TABLE>
The following summary, prepared on an unaudited pro forma basis, presents
the results of operations of the Company as if the acquisitions had been
completed as of July 1, 1997:
<TABLE>
<CAPTION>
June 30,
---------------
1998 1999
------- -------
(In thousands,
except per
share data)
(unaudited)
<S> <C> <C>
Net revenues.............................................. $31,354 $35,473
Net income................................................ $ 1,743 $ 3,311
Basic earnings per share.................................. $ 0.07 $ 0.12
Diluted earnings per share................................ $ 0.06 $ 0.11
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what actually would have occurred if ProNet had been owned for the entire
periods presented or a projection of the Company's results of operations for
any future period.
In September 1998, the Company sold 3,437,988 shares of common stock to
certain former shareholders of ProNet for an amount representing the deemed
fair market value of the common stock on the date of purchase.
During the nine-month period ended March 31, 2000, the Company acquired the
remaining 35% interest of Acola GmbH. The Company paid $115,920 to the minority
shareholder, increasing the Company's ownership in Acola GmbH to 100%. The
Company accounted for the acquisition of the minority interest using the
purchase method. The purchase price approximated the book value of minority
interest recorded on the Company's consolidated balance sheet on the
acquisition date.
4. Bank Lines of Credit
As of March 31, 2000, the Company had a bank line of credit which provides
for borrowings of up to $5,000,000, subject to borrowing base limitations, at
the banks prime interest rate (9% at March 31, 2000) plus 2% per annum.
Borrowings are collateralized by a continuing security interest in all the
assets of the Company. As of March 31, 2000, no borrowings were outstanding
under this line of credit. The line of credit expires on December 2, 2000 and
requires the Company to maintain compliance with certain covenants and
conditions. As of March 31, 2000, the Company was in compliance with these
covenants and conditions.
F-13
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal year 1999, the Company established an unsecured $1,200,000
line of credit with a German bank to fund a portion of the acquisitions
described in Note 3. In September 1999, the Company repaid all borrowings under
the line of credit and the line of credit expires on March 31, 2001.
Outstanding borrowings are payable at a fixed rate which is renegotiated every
six months (3.45% as of June 30, 1999).
5. Stockholders' Equity
Stock Option Plans
Under the Company's 1993 Incentive Stock Option Plan (the 1993 Plan), the
Company has reserved 3,000,000 shares of common stock for the granting of
options. Such options are to be granted at or above the fair market value of
the Company's stock on the date of grant. All stock options are to vest over a
period determined by the Board of Directors (generally four years) and expire
not more than ten years from the date of grant. As of March 31, 2000, 126,432
options were available for grant.
Under the Company's 1994 Nonstatutory Stock Option Plan (the 1994 Plan), the
Company has reserved 10,000,000 shares of common stock for grant at prices and
vesting periods to be determined by the Company's Board of Directors. In
certain cases, the Company has granted options which became fully vested on the
date granted. As of March 31, 2000, 6,933,556 options were available for grant.
A summary of all stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
options price
--------- --------
<S> <C> <C>
Outstanding at June 30, 1996............................ 1,862,128 $0.18
Granted............................................... 201,800 0.19
Canceled.............................................. 617,760 0.23
Exercised............................................. 169,600 0.11
--------- -----
Outstanding at June 30, 1997............................ 1,276,568 0.15
Granted............................................... 1,294,224 0.18
Canceled.............................................. 17,300 0.18
Exercised............................................. 4,668 0.25
--------- -----
Outstanding at June 30, 1998............................ 2,548,824 0.11
Granted............................................... 1,532,012 0.50
Canceled.............................................. 152,800 0.17
Exercised............................................. 14,480 0.21
--------- -----
Outstanding at June 30, 1999............................ 3,913,556 0.29
Granted............................................... 1,892,040 0.50
Canceled.............................................. 54,332 0.18
Exercised............................................. 248,308 0.17
--------- -----
Outstanding at March 31, 2000........................... 5,502,956 $0.37
========= =====
Exercisable at June 30, 1998............................ 2,242,624
=========
Exercisable at June 30, 1999............................ 2,442,624
=========
Exercisable at March 31, 2000........................... 2,420,584
=========
</TABLE>
F-14
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average exercise price of options outstanding and of options
exercisable as of March 31, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- --------------------------
Number of Weighted average Weighted Weighted
options remaining average Options average
outstanding contractual life exercise price exercisable exercise price
----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0 to $0.14............. 832,580 5.11 $0.07 672,320 $0.09
$0.18 to $0.29.......... 1,942,324 7.67 0.19 1,075,404 0.19
$0.50................... 1,972,000 9.59 0.50 84,852 0.50
$0.79................... 756,052 8.53 0.79 588,008 0.79
</TABLE>
At March 31, 2000, 12,562,944 shares of the Company's common stock are
reserved for issuance pursuant to the stock option plans.
In connection with the issuance of stock options to employees during the
nine months ended March 31, 2000, the Company has recorded deferred
compensation in the aggregate amount of approximately $7,671,000, representing
the difference between the deemed fair value of the Company's common stock and
the exercise price of the stock options at the date of grant. The Company is
amortizing the deferred compensation expense over the shorter of the period in
which the employee provides services or the applicable vesting period, which is
typically 48 months. For the nine-month period ended March 31, 2000,
amortization expense was approximately $587,000. Deferred compensation is
decreased in the period of forfeiture arising from the early termination of an
option holder's services. No compensation expense related to stock options that
existed for any other period has been recorded. The weighted average grant date
fair value of options granted during the years ended June 30, 1997, 1998 and
1999 and the nine months ended March 31, 2000 was $0.05, $0.05, $0.14 and
$4.77, respectively.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
No. 123. The fair value of these options was estimated at the date of grant
using the minimum value option pricing method with the following weighted-
average assumptions: risk-free interest rates of 6.5%, and a weighted-average
expected life of the option of five years. Volatility and dividend yields are
not factors in the Company's minimum value calculation.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Years ended Nine months ended
June 30, March 31,
------------------- ------------------
1997 1998 1999 1999 2000
----- ------ ------ ----------- ------
(In thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Pro forma net income................ $ 188 $1,283 $2,738 $1,285 $1,086
Pro forma basic earnings per share.. $0.01 $ 0.05 $ 0.10 $ 0.05 $ 0.04
Pro forma diluted earnings per
share.............................. $0.01 $ 0.05 $ 0.09 $ 0.04 $ 0.03
</TABLE>
F-15
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years ended June Nine months ended
30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
----- ----- ------ ----------- ------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal.......................... $ 246 $ 524 $ 817 $414 $1,148
State............................ 1 203 329 167 349
Foreign.......................... -- -- 110 55 74
----- ----- ------ ---- ------
Total current.................. 247 727 1,256 636 1,571
Deferred
Federal.......................... (241) (122) (161) (82) (359)
State............................ (43) (51) 3 2 (131)
----- ----- ------ ---- ------
Total deferred................. (284) (173) (158) (80) (490)
----- ----- ------ ---- ------
Total...................... $ (37) $ 554 $1,098 $556 $1,081
===== ===== ====== ==== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-------------- March 31,
1998 1999 2000
------ ------ ---------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Reserves not currently deductible................ $1,063 $ 962 $ 606
State taxes...................................... 51 29 --
Inventory capitalization......................... 46 111 948
Depreciation..................................... 26 118 131
Federal tax loss carryforwards and tax credits... 332 -- 24
------ ------ ------
1,518 1,220 1,709
Valuation allowance................................ (456) -- --
------ ------ ------
Net deferred tax assets............................ $1,062 $1,220 $1,709
====== ====== ======
</TABLE>
The Company removed its valuation allowance on its deferred tax assets at
June 30, 1999, based upon management's estimate that it is more likely than not
that the Company will realize its entire net deferred tax asset.
F-16
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the income tax provision to taxes computed at the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years ended June Nine months ended
30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
----- ----- ------ ----------- ------
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax statutory
rate............................ $ 56 $ 631 $1,321 $ 639 $ 753
State taxes (net of federal tax
benefit)........................ 10 100 219 111 144
Provision for (reduction of)
valuation allowance............. 169 -- (456) (231) --
Permanent differences............ -- -- -- -- 36
Research and development credit.. (94) (19) -- -- (13)
Foreign sales corporation
benefit......................... (129) (166) (53) (27) (42)
Foreign taxes.................... -- -- 109 55 74
Net foreign losses without
benefit......................... -- -- -- -- 73
Other............................ (49) 8 (42) 9 56
----- ----- ------ ----- ------
$(37) $ 554 $1,098 $ 556 $1,081
===== ===== ====== ===== ======
</TABLE>
7. Commitments and Contingencies
Leases
The Company leases office equipment and its office and warehouse facility
under noncancelable operating leases. The Company began subleasing a portion of
the office and warehouse facility in June of 1998.
As of March 31, 2000, the Company has recorded $150,500 of property held
under capital leases, less $20,400 in accumulated amortization.
The following schedule represents minimum lease payments remaining under
capital leases, future minimum lease obligations for all noncancelable
operating leases, and aggregate sublease rentals to be received as of March 31,
2000.
<TABLE>
<CAPTION>
Sublease Operating Capital
-------- --------- -------
(In thousands)
<S> <C> <C> <C>
Quarter ending June 30, 2000.................... $67 $119 $ 9
Year ending June 30:
2001.......................................... -- 43 38
2002.......................................... -- 4 38
2003.......................................... -- 4 38
2004.......................................... -- 1 38
2005.......................................... -- -- 3
--- ---- ----
Total minimum lease payments................ $67 $171 164
=== ====
Less imputed interest (at approximately
7.75%)..................................... (28)
----
Present value of minimum lease payments..... 136
Less current portion........................ (26)
----
Total long-term capital lease
obligations.............................. $110
====
</TABLE>
F-17
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense, including month-to-month rentals, totaled approximately
$380,000, $474,000, $643,000, $482,000 and $438,000 for years ended June 30,
1997, 1998 and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000, respectively. Sublease income totaled approximately $276,000, $207,000
and $211,000 for the years ended June 30, 1999 and the nine months ended March
31, 1999 (unaudited) and 2000, respectively.
Royalties
The Company outsources a substantial portion of its engineering and
production development activities under contract. Certain development contracts
contain royalty provisions based upon sales and/or margin activity of the
underlying products. Approximately $1,381,000, $1,539,000 $2,011,000,
$1,231,000 and $1,488,000 is included in cost of sales in the accompanying
consolidated income statements for the years ended June 30, 1997, 1998 and 1999
and the nine months ended March 31, 1999 (unaudited) and 2000, respectively,
relating to royalties paid on applicable product sales. As of June 30, 1998 and
1999 and March 31, 2000, accrued royalties were approximately $301,000,
$293,000 and $280,000, respectively, and are included in other current
liabilities in the accompanying consolidated balance sheets.
Litigation
The Company is party to certain claims and litigation arising in the normal
course of business. Management believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
8. Segment, Geographic, Significant Customer and Supplier Information
Revenue by Product Family
The Company designs and markets three major distinct product families within
one industry segment: network and Internet connectivity products, which consist
primarily of device, multiport device, and print servers.
Net revenues by product family is provided below for the year ended June 30,
1999 and the nine months ended March 31, 1999 (unaudited) and 2000. Revenues by
product family prior to the year ended June 30, 1999 are not readily
determinable.
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31,
June 30, -------------------
1999 1999 2000
---------- ----------- -------
(In thousands)
------------------------------
(unaudited)
<S> <C> <C> <C>
Device servers.............................. $11,595 $ 6,768 $17,043
Multiport device servers.................... 9,146 6,500 7,520
Print servers............................... 8,466 6,805 5,159
Other....................................... 3,773 3,084 2,909
------- ------- -------
Total net revenues...................... $32,980 $23,157 $32,631
======= ======= =======
</TABLE>
F-18
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue by Geographic Area
Net revenues by geographic area is provided below for the year ended June
30, 1999 and the nine months ended March 31, 1999 (unaudited) and 2000. Revenue
by geographic area is based on where products are shipped.
<TABLE>
<CAPTION>
Nine months ended March
Year ended 31,
June 30, ------------------------
1999 1999 2000
----------- ----------- -----------
(Amounts in thousands)
-------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States......................... $21,780 66% $15,562 67% $21,410 66%
Europe................................ 9,530 29% 6,422 28% 9,590 29%
Other................................. 1,670 5% 1,173 5% 1,631 5%
------- --- ------- --- ------- ---
$32,980 100% $23,157 100% $32,631 100%
======= === ======= === ======= ===
</TABLE>
Revenues to customers outside of the United States approximated 38% for the
years ended June 30, 1997 and 1998, principally from sales to European value-
added resellers.
Accounts receivable attributable to international sales represented
approximately 23%, 22%, and 24% of total accounts receivable at June 30, 1998
and 1999 and at March 31, 2000, respectively.
Substantially all of the Company's long-lived assets are located in the
United States.
Significant Customer Information
Two domestic customers accounted for approximately 26%, 35%, 27%, 29%, and
23% of the Company's net revenues for the years ended June 30, 1997, 1998 and
1999 and the nine months ended March 31, 1999 (unaudited) and 2000,
respectively. Accounts receivable attributable to these two domestic customers
accounted for approximately 46%, 32%, and 32% of total accounts receivable at
June 30, 1998 and 1999 and at March 31, 2000, respectively.
One international customer, a related party due to common ownership by the
Company's major stockholder, accounted for approximately 14%, 18%, 11%, 10% and
6% of the Company's net revenues the years ended June 30, 1997, 1998 and 1999,
and the nine months ended March 31, 1999 (unaudited) and 2000, respectively.
Included in accounts receivable in the accompanying consolidated balance sheets
are approximately $219,000, $158,000 and $152,000 due from this related party
at June 30, 1998 and 1999 and March 31, 2000, respectively. The Company also
has an agreement with the same related international customer for the provision
of technical support services to the Company at the rate of $7,500 per month
($5,000 per month through December 1998). Pursuant to the terms of the
agreement, the Company paid $60,000, $60,000, $75,000, $52,500 and $67,500
during the years ended June 30, 1997, 1998 and 1999 and the nine months ended
March 31, 1999 (unaudited) and 2000, respectively.
9. Subsequent Events
In May 2000, the Company's Board of Directors authorized the re-
incorporation of the Company in the State of Delaware. The par value and shares
of common stock authorized, issued and outstanding at each balance sheet date
presented, and for each period presented in the consolidated statement of
stockholders' equity have been retroactively adjusted to reflect the re-
incorporation.
In May 2000, the Company's Board of Directors authorized the filing of a
Registration Statement with the Securities and Exchange Commission, which would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering.
F-19
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 2000, the Company's Board of Directors, subject to stockholder
approval, approved the increase in authorized shares of common stock to
200,000,000 shares. The Company's Board of Directors also approved a four-for-
one stock split to be effective upon the filing of re-incorporation in
Delaware. All references to common share and per common share data in the
accompanying financial statements have been retroactively restated to reflect
the effects of this stock split. Additionally, following the completion of the
proposed initial public offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of preferred stock. The
accompanying financial statements have been retroactively restated to reflect
the authorized preferred stock.
In May 2000, the Board of Directors granted options under the 1993 Plan
(Note 5) to employees to purchase 853,511 shares of the Company's common stock
at an exercise price of $6.00 per share. In connection with this option grant,
the Company will record deferred compensation aggregating $2.2 million that
will be amortized to the statement of income over the vesting period of the
options.
In May 2000, the Company's Board of Directors approved the 2000 Stock Plan
(the Stock Plan) effective upon the completion of the proposed initial public
offering. A total of 1,000,000 shares of the Company's common stock were
reserved for issuance pursuant to option grants under the Stock Plan. The
number of shares available for issuance increases annually commencing in 2001.
The Stock Plan also provides an initial automatic grant of an option to
purchase 25,000 shares of common stock to a director who first becomes an
outside director after the Company's initial public offering. Each outside
director will automatically be granted an option to purchase 10,000 shares of
common stock annually, subject to certain eligibility requirements.
In May 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan) effective upon the completion of the proposed
initial public offering. A total of 750,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The number of shares available
for issuance pursuant to the Plan increases annually commencing in 2001. The
Purchase Plan permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's compensation, as defined. Amounts
deducted and accumulated by the participants are to be used to purchase shares
of common stock at the end of each offering period, as defined, at 85% of the
lower of the fair market value of the common stock at the beginning or end of
the offering period.
F-20
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses payable by Lantronix in
connection with the registration of the common stock hereunder. All of the
amounts shown are estimates except for the SEC registration fee and the NASD
filing fee.
<TABLE>
<CAPTION>
Amount To
Be Paid
---------
<S> <C>
SEC Registration Fee............................................. $30,360
NASD Filing Fee Nasdaq National Market Listing Fee............... 12,000
Printing and Engraving Expenses.................................. *
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Transfer Agent and Registrar Fees and Expenses................... *
Miscellaneous Expenses........................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General
Corporation Law. We have also entered into agreements with our directors and
executive officers that require Lantronix among other things to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities including liabilities under the
Securities Act.
Item 15. Recent Sales of Unregistered Securities
The registrant has sold and issued the following securities since March 19,
1997:
(1) In February 1997, we issued and sold an aggregate of 396 shares of our
common stock for an aggregate purchase price of $445.40 to an
employee.
(2) In June 1997, we issued and sold an aggregate of 42,400 shares of our
common stock for an aggregate purchase price of $18,444.00 to an
employee individually and as the custodian of two minor children.
(3) In November 1997, we issued and sold an aggregate of 771 shares of our
common stock for an aggregate purchase price of $578.25 to an
employee.
(4) In August 1998, we issued and sold an aggregate of 875 shares of our
common stock for an aggregate purchase price of $720.00 to an
employee.
(5) In September 1998, we issued and sold an aggregate of 214,874 shares
of our common stock for an aggregate purchase price of $150,411.94 to
the spouse of an employee.
(6) In September 1998, we issued and sold an aggregate of 644,623 shares
of our common stock for an aggregate purchase price of $451,235.90 to
an employee.
II-1
<PAGE>
(7) From April 1999 to July 1999, we issued and sold an aggregate of
53,960 shares of our common stock for an aggregate purchase price of
$36,371.00 to an employee. This employee also received a grant of
21,004 options.
(9) In September 1999, we issued and sold an aggregate of 2,745 shares of
our common stock for an aggregate purchase price of $2,227.36 to an
employee.
(10) In March 2000, we issued and sold an aggregate of 6666 shares of our
common stock for an aggregate purchase price of $4666.20 to an
employee.
(11) In April 2000, we issued and sold an aggregate of 1451 shares of our
common stock for an aggregate purchase price of $1268.96 to an
employee.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act or,
with respect to issuances to employees and consultants, Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment purposes only and not with
a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the instruments representing such
securities issued in such transactions. All recipients either received adequate
information about Lantronix or had adequate access to, through their
relationships with Lantronix, to such information.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of registrant.
3.2 Form of Certificate of Incorporation of registrant to be filed upon
the closing of the offering made under the registration statement.
3.3* Bylaws of the registrant.
3.4 Bylaws of registant to be filed upon the closing of the offering made
under the registration statement.
4.1* Form of registrant's common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement entered into by registrant with each
of its directors and executive officers.
10.2* 1993 Stock Option Plan and forms of agreements thereunder.
1994 Nonstatutory Stock Option Plan and forms of agreements
10.3* thereunder.
10.4* 2000 Stock Plan and forms of agreements thereunder.
10.5* 2000 Employee Stock Purchase Plan.
10.6* Form of Warranty.
10.7 Employment Agreement bewteen registrant and Fredenrick Thiel.
10.8 Employment Agreement between registrant and Steven Cotton.
10.9 Employment Agreement between registrant and Johannes Rietschel.
21.1 Subsdiaries of registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
23.2 Consent of KPMG LLP, independent auditors.
24.1 Power of Attorney (see page II-4).
27.1* Financial Data Schedule.
99.1 Auditor's Letter
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings
Insofar as indemnification by Lantronix for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Lantronix, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Lantronix of expenses incurred or paid by a director, officer or controlling
person of Lantronix in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by Lantronix is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by Lantronix pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration statement as of
the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Lantronix has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 19th day of May, 2000.
LANTRONIX, INC.
/s/ Frederick G. Thiel
By: _________________________________
Frederick G. Thiel
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Frederick Thiel and Steven V. Cotton and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same Offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto in all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bernhard Bruscha Chairman of the Board May 19, 2000
______________________________________
Bernhard Bruscha
/s/ Frederick G. Thiel Chief Executive Officer, May 19, 2000
______________________________________ President (Principal
Frederick G. Thiel Executive Officer)
/s/ Steven V. Cotton Chief Financial Officer May 19, 2000
______________________________________ and Chief Operating
Steven V. Cotton Officer (Principal
Financial and Accounting
Officer)
/s/ Thomas W. Burton Director May 19, 2000
______________________________________
Thomas W. Burton
/s/ W. Brad Freeburg Director May 19, 2000
______________________________________
W. Brad Freeburg
</TABLE>
II-4
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Lantronix Inc. at
June 30, 1998 and 1999 and March 31, 2000, and for the years ended June 30,
1998 and 1999 and the nine months ended March 31, 2000, and have issued our
report thereon dated May 15, 2000 (except for Note 9, as to which the date is
May , 2000), included elsewhere in this Registration Statement. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, as it
relates to the years ended June 30, 1998 and 1999 and the nine months ended
March 31, 2000, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
Ernst & Young LLP
Orange County, California
May 15, 2000
The foregoing report is in the form that will be signed upon the completion
of the re-incorporation described in Note 9 to the consolidated financial
statements.
/s/ Ernst & Young LLP
Orange County, California
May 18, 2000
S-1
<PAGE>
SCHEDULE II
LANTRONIX, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Charged
Balance (recovered)
at to Costs Charged Balance
Beginning and to Other End of
of Period Expenses Accounts Deductions Period
Description --------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for doubtful
accounts ................. $ 166 $ 36 $-- $ -- $ 202
Reserve for excess and
obsolete inventory........ 606 1,517 -- 888 1,235
Accrued warranties......... 301 630 -- 642 289
------ ------ --- ------ ------
Total................... $1,073 $2,183 $-- $1,530 $1,726
====== ====== === ====== ======
Year ended June 30, 1998:
Allowance for doubtful
accounts ................. $ 202 $ 396 $-- $ 146 $ 452
Reserve for excess and
obsolete inventory........ 1,235 1,163 -- 1,257 1,141
Accrued warranties......... 289 297 -- 90 496
------ ------ --- ------ ------
Total................... $1,726 $1,856 $-- $1,493 $2,089
====== ====== === ====== ======
Year ended June 30, 1999:
Allowance for doubtful
accounts ................. $ 452 $ (136) $-- $ 113 $ 203
Reserve for excess and
obsolete inventory........ 1,141 637 -- 1,011 767
Accrued warranties......... 496 153 -- 30 619
------ ------ --- ------ ------
Total................... $2,089 $ 654 $-- $1,154 $1,589
====== ====== === ====== ======
Nine-month period ended March
31, 2000:
Allowance for doubtful
accounts ................. $ 203 $ (11) $-- $ 38 $ 154
Reserve for excess and
obsolete inventory........ 767 869 -- 371 1,266
Accrued warranties......... 619 129 -- 223 525
------ ------ --- ------ ------
Total................... $1,589 $ 987 $-- $ 632 $1,944
====== ====== === ====== ======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of registrant.
3.2 Form of Certificate of Incorporation of registrant to be filed upon
the closing of the offering made under the registration statement.
3.3* Bylaws of the registrant.
3.4 Bylaws of registrant to be filed upon the closing of the offering made
under the registration statement.
4.1* Form of registrant's common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement entered into by registrant with each
of its directors and executive officers.
10.2* 1993 Stock Option Plan and Forms of Agreements thereunder.
10.3* 1994 Nonstatutory Stock Option Plan and forms of agreements
thereunder.
10.4* 2000 Stock Plan and forms of agreements thereunder.
10.5* 2000 Employee Stock Purchase Plan.
10.6* Form of Warranty.
10.7 Employment Agreement between registrant and Frederick Thiel.
10.8 Employment Agreement between registrant and Steven Cotton.
10.9 Employment Agreement between registrant and Johannes Rietschel
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of KPMG LLP, independent auditors.
24.1 Power of Attorney (see page II-4).
27.1* Financial Data Schedule.
99.1 Auditor's Letter
</TABLE>
- --------
* To be filed by amendment.
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EXHIBIT 1.1
Underwriting Agreement
[___________]
FleetBoston Robertson Stephens Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
As Representatives of the several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. Lantronix, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
of its Common Stock, par value $[___] per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. [In addition, the Company has granted to the Underwriters an option
to purchase up to an additional [___] Common Shares and the Selling Stockholder
granted to the Underwriters an option to purchase up to an additional [___]
Common Shares, the Selling Stockholder selling up to the amount set forth
opposite such Selling Stockholder's name in Schedule B, all as provided in
Section 2. The additional [___] Common Shares to be sold by the Company and the
additional [___] Common Shares to be sold by the Selling Stockholder pursuant to
such option are collectively called the "Option Shares".] The Firm Shares and,
if and to the extent such option is exercised, the Option Shares are
collectively called the "Shares". FleetBoston Robertson Stephens Inc.
("Robertson Stephens") and Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") have agreed to act as representatives of the several Underwriters (in
such capacity, the "Representatives") in connection with the offering and sale
of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus, subject to completion, to be
used in connection with the public offering and sale of the Shares. Each such
prospectus, subject to completion, used in connection with such public offering
is called a "preliminary prospectus". Such registration statement, as amended,
including the financial statements, exhibits and schedules thereto, in the form
in which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"), including any information deemed to be a part thereof at the
time of effectiveness pursuant to Rule 430A under the Securities Act, is called
the "Registration Statement". Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the
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"Rule 462(b) Registration Statement", and from and after the date and time of
filing of the Rule 462(b) Registration Statement the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. Such
prospectus, in the form first used by the Underwriters to confirm sales of the
Shares, is called the "Prospectus". All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). As a
part of this offering contemplated by this Agreement Robertson Stephens has
agreed to reserve out of the Shares set forth opposite its name on the Schedule
II to this Agreement, up to _________________ shares, for sale to the Company's
employees, officers, and directors and other parties associated with the Company
(collectively, "Participants"), as set fourth in the Prospectus under the
heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by
Robertson Stephens pursuant to the Directed Share Program (the "Directed
Shares") will be sold by Robertson Stephens pursuant to this Agreement at the
public offering price. Any Directed Shares not orally confirmed for purchase by
any Participants as of 7:00 am California time on the first day trading of the
shares commences will be offered to the public by Robertson Stephens as set
fourth in the Prospectus.
The Company and the Selling Stockholder hereby confirm their
respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties of the Company.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Each preliminary
prospectus, as of its date, and the Prospectus, as amended or supplemented, as
of its date and at all subsequent times through the 30th day after the date
hereof, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has delivered
to the Representatives two complete conformed copies of the Registration
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without
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exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares To Be Sold by the Company. The Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
(h) Independent Accountants. Ernst & Young LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) and supporting schedules filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Summary--Summary Selected Financial
Data", "Selected
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Financial Data" and "Capitalization" fairly present the information set forth
therein on a basis consistent with that of the audited financial statements
contained in the Registration Statement.
(j) Company's Accounting System. The Company and each of its subsidiaries
maintain a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21 to the Registration Statement.
(l) Incorporation and Good Standing of the Company and its Subsidiaries.
Each of the Company and its subsidiaries has been duly organized and is validly
existing as a corporation or limited liability company, as the case may be, in
good standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making Other
Distributions. No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(p) Stock Exchange Listing. The Shares have been approved for listing on
the Nasdaq National Market, subject only to official notice of issuance.
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(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(r) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(s) No Defaults or Violations. Neither the Company nor any subsidiary is
in violation or default of (i) any provision of its charter or by-laws, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(v) Title to Properties. The Company and each of its subsidiaries has good
and marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1[(A)](i) above, in each case free
and clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such subsidiary.
(w) Tax Law Compliance. The Company and its consolidated subsidiaries have
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to
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be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them. The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to in Section 1[(A)](i) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax liability
of the Company or any of its consolidated subsidiaries has not been finally
determined. The Company is not aware of any tax deficiency that has been or
might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(x) Intellectual Property Rights. Each of the Company and its subsidiaries
owns or possesses adequate rights to use all patents, patent rights or licenses,
inventions, collaborative research agreements, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(y) Y2K. There are no Y2K issues related to the Company, or any of its
subsidiaries, that (i) are of a character required to be described or referred
to in the Registration Statement or Prospectus by the Securities Act which have
not been accurately described in the Registration Statement or Prospectus or
(ii) might reasonably be expected to result in any Material Adverse Change or
that might materially affect their properties, assets or rights.
(z) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of the Investment Company Act and
will conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the
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Company nor any subsidiary has been denied any insurance coverage which it has
sought or for which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a Material
Adverse Change.
(dd) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Each officer and director of the company and each
beneficial owner of any of the outstanding issued share capital of the Company
has agreed to sign an agreement substantially in the form attached hereto as
Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for
the Underwriters a complete and accurate list of all securityholders of the
Company and the number and type of securities held by each securityholder. The
Company has provided to counsel for the Underwriters true, accurate and complete
copies of all of the Lock-up Agreements presently in effect or effected hereby.
The Company hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of Robertson
Stephens.
(ff) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
(gg) No Unlawful Contributions or Other Payments. Neither the Company nor
any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(hh) Environmental Laws. Except as otherwise disclosed in the Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, except where the failure to comply would not result in a Material
Adverse Change, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company is not currently aware that it will be required to
make future material capital expenditures to comply with Environmental Laws and
(iv) no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
(ii) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
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which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfounded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(jj) Financial Projections. The statements, (including the assumptions
described therein) included in the Registration Statement and the Prospectus
under the headings "Summary of Significant Projections and Assumptions" and
"Financial Projections" (i) are within the coverage of Rule 175(b) under the Act
to the extent such data constitute forward looking statements as defined in Rule
175(c) and (ii) were made by the Company with a reasonable basis and reflect the
Company's good faith estimate of the matters described therein.
(kk) Consents Required in Connection with the Directed Share Program. No
consent, approval, authorization or order of, or qualification with, any
governmental body or agency, other than those obtained, is required in
connection with the offering of the Directed Shares in any jurisdiction where
the Directed Shares are being offered.
(ll) No Improper Influence in Connection with the Directed Share Program.
The Company has not offered, or caused Robertson Stephens to offer, Shares to
any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the
customer's or supplier's level or type of business with the Company or (ii) a
trade journalist or publication to write or publish favorable information about
the Company or its products.
B. Representations and Warranties of the Selling Stockholder. The Selling
Stockholder represents, warrants and covenants to each Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i) Custody
Agreement signed by such Selling Stockholder and [___], as custodian (the
"Custodian"), relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "Custody Agreement") and (ii) Power of Attorney appointing
certain individuals named therein as such Selling Stockholder's attorneys-in-
fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to
the transactions contemplated hereby and by the Prospectus (the "Power of
Attorney"), of such Selling Stockholder has been duly authorized, executed and
delivered by such Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles. Each
Selling Stockholder agrees that the Shares to be sold by such Selling
Stockholder on deposit with the Custodian is subject to the interests of the
Underwriters, that the arrangements made for such custody are to that extent
irrevocable, and that the obligations of such Selling Stockholder hereunder
shall not be terminated, except as provided in this Agreement or in the Custody
Agreement, by any act of the Selling Stockholder, by operation of law, by death
or incapacity of such Selling Stockholder or by the occurrence of any other
event. If such Selling
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Stockholder should die or become incapacitated, or in any other event should
occur, before the delivery of the Shares to be sold by such Selling Stockholder
hereunder, the documents evidencing the Shares to be sold by such Selling
Stockholder then on deposit with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether or
not the Custodian shall have received notice thereof.
(c) Title to Shares to be Sold. Such Selling Stockholder is the lawful
owner of the Shares to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Shares, as provided herein, such
Selling Stockholder will convey good and marketable title to such Shares, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(d) All Authorizations Obtained. Such Selling Stockholder has, and on the
First Closing Date and the Second Closing Date (as defined below) will have,
good and valid title to all of the Company Shares which may be sold by such
Selling Stockholder pursuant to this Agreement on such date and the legal right
and power, and all authorizations and approvals required by law to enter into
this Agreement and its Custody Agreement and Power of Attorney, to sell,
transfer and deliver all of the Shares which may be sold by such Selling
Stockholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(e) No Further Consents, Authorization or Approvals. No consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation by such Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the Securities
Act and such as may be required under the federal and provincial securities laws
of Canada or the blue sky laws or any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters and such other
approvals as have been obtained.
(f) Non-Contravention. Neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach or
violation of, or constitute a default under any law or the terms of any
indenture or other agreement or instrument to which such Selling Stockholder is
party or bound, any judgment, order or decree applicable to such Selling
Stockholder or any court or regulatory body, administrative agency, governmental
body or arbitrator having jurisdiction over such Selling Stockholder.
(g) No Registration or Other Similar Rights. Such Selling Stockholder does
not have any registration or other similar rights to have any equity or debt
securities registered for sale by the Company under the Registration Statement
or included in the offering contemplated by this Agreement, except for such
rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
(h) No Preemptive, Co-sale or other Rights. Such Selling Stockholder does
not have, or has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Stockholder to the Underwriters pursuant to this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to acquire, and
does not have any right or arrangement to acquire, any capital stock, right,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus.
(i) Disclosure Made by Such Selling Stockholder in the Prospectus. All
information furnished by or on behalf of such Selling Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date (as defined below) will be, true,
correct, and complete in all material respects, and does not, and on the First
Closing Date and the Second Closing Date will not, contain any untrue statement
of a material fact or omit to state any material fact necessary to make such
information not misleading. Such Selling Stockholder confirms as accurate the
number of shares of Company Shares set forth opposite such Selling Stockholder's
name
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in the Prospectus under the caption "Principal and Selling Stockholder" (both
prior to and after giving effect to the sale of the Shares).
(j) No Price Stabilization or Manipulation. Such Selling Stockholder has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(k) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the sale by the Selling Stockholder
of the Shares.
(l) Distribution of Offering Materials by the Selling Stockholder. The
Selling Stockholder have not distributed and will not distribute, prior to the
later of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares by such Selling Stockholder other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(m) Confirmation of Company Representations and Warranties. Such Selling
Stockholder has no reason to believe that the representations and warranties of
the Company contained in Section 1(A) hereof are not true and correct, is
familiar with the Registration Statement and the Prospectus and has no knowledge
of any material fact, condition or information not disclosed in the Registration
Statement or the Prospectus which has had or may result in a Material Adverse
Change on the condition, financial or otherwise, or on the earnings, business,
operation or prospects, whether or not arising from transactions in the ordinary
course of business of the Company and its subsidiaries, considered as one
entity, and is not prompted to sell the Shares to be sold by such Selling
Stockholder by any information concerning the Company which is not set forth in
the Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price per
----------
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor shall be made by the Company and the
Representatives at 8:00 a.m. San Francisco time, at the offices of Wilson,
Sonsini, Goodrich & Rosati (or at such other place as may be agreed upon among
the Representatives and the Company), (i) on the third (3rd) full business day
following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
2(g) and 3(e) hereof, the Representatives may, in their sole discretion,
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postpone the Closing Date until no later that two (2) full business days
following delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company and the
Selling Stockholder hereby grant an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of [___] Option Shares
from the Company and the Selling Stockholder at the purchase price per share to
be paid by the Underwriters for the Firm Shares. The option granted hereunder is
for use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Shares. The option granted hereunder
may be exercised at any time upon notice by the Representatives to the Company
and the Selling Stockholder, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, (i) each
Underwriter agrees, severally and not jointly, to purchase the number of Option
Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number of
Firm Shares and (ii) the Company and the Selling Stockholder agree, severally
and not jointly, to sell the number of Option Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may determine)
that bears the same proportion to the total number of Option Shares to be sold
as the number of Option Shares set forth in Schedule B opposite the name of such
Selling Stockholder (or, in the case of the Company, as the number of Option
Shares to be sold by the Company as set forth in the paragraph "Introductory" of
this Agreement) bears to the total number of Option Shares. The Representatives
may cancel the option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Selling Stockholder.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company and the Selling Stockholder that the Underwriters intend to offer for
sale to the public, as described in the Prospectus, their respective portions of
the Shares as soon after this Agreement has been executed and the Registration
Statement has been declared effective as the Representatives, in its sole
judgment, has determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company. Payment for
the shares to be sold by the Selling Stockholder shall be made, if applicable,
at the Second Closing date by wire transfer of immediately available funds to
the custodian.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
FleetBoston Robertson Stephens Inc., individually and not as the Representatives
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
The Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Shares to be sold by such Selling Stockholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder hereunder and to hold such amounts for the account of such Selling
Stockholder with the Custodian under the Custody Agreement.
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(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company and
the Selling Stockholder shall also deliver, or cause to be delivered, a credit
representing the Option Shares the Underwriters have agreed to purchase at the
First Closing Date (or the Second Closing Date, as the case may be), to an
account or accounts at The Depository Trust Company as designated by the
Representatives for the accounts of the Representatives and the several
Underwriters, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. Time shall be of
the essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
Section 3. Covenants of the Company and the Selling Stockholder.
A. Covenants of the Company. The Company further covenants and agrees with
each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such
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statements, reports and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) cause Robertson Stephens to be added
to such policy such that up to $500,000 of its expenses pursuant to Section 7(a)
shall be paid directly by such insurer.
(g) Notice of Subsequent Events. If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which, in your opinion, the market price of the Company Shares has
been or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending September 30, 2001 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not offer, sell or contract to sell, or otherwise dispose of or enter into any
transaction which is designed to, or could be
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expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise by the
Company or any affiliate of the Company or any person in privity with the
Company or any affiliate of the Company) directly or indirectly, or announce the
offering of, any other Common Shares or any securities convertible into, or
exchangeable for, Common Shares; provided, however, that the Company may (i)
issue and sell Common Shares pursuant to any director or employee stock option
plan, stock ownership plan or dividend reinvestment plan of the Company in
effect at the date of the Prospectus and described in the Prospectus so long as
none of those shares may be transferred and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus. These restrictions
terminate after the close of trading of the Shares on the 180th day of (and
including) the day the Shares commenced trading on the Nasdaq National Market
(the "Lock-Up Period").
(m) Future Reports to the Representatives. During the period of five years
hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
(n) Directed Share Program. The Company (i) will comply with all
applicable securities and other applicable laws, rules and regulations in each
jurisdiction in which the Directed Shares are offered in connection with the
Directed Share Program and (ii) will pay all reasonable fees and disbursements
of counsel incurred by the Underwriters in connection with the Directed Share
Program and any stamp duties, similar taxes or duties or other taxes, if any,
incurred by the underwriters in connection with the Directed Share Program.
B. Covenants of the Selling Stockholder. The Selling Stockholder further
covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Stockholder will not, during the Lock-Up Period, make a disposition of
Securities (as defined in Exhibit A hereto) now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or shareholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, (iii) with respect to dispositions of Common Shares
acquired on the open market or (iv) with the prior written consent of
FleetBoston Robertson Stephens Inc. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a disposition of Securities during the Lock-Up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction.
(b) Delivery of Forms W-8 and W-9. To deliver to the Representatives prior
to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the
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Selling Stockholder is a non-United States person) or Form W-9 (if the Selling
Stockholder is a United States Person).
(c) Notification of Untrue Statements, etc. If, at any time prior to the
date on which the distribution of the Common Shares as contemplated herein and
in the Prospectus has been completed, as determined by the Representatives, such
Selling Stockholder has knowledge of the occurrence of any event as a result of
which the Prospectus or the Registration Statement, in each case as then amended
or supplemented, would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, such Selling
Stockholder will promptly notify the Company and the Representatives.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholder set forth in Section 1 hereof as of the date hereof and as of the
First Closing Date as though then made and, with respect to the Option Shares,
as of the Second Closing Date as though then made, to the timely performance by
the Company and the Selling Stockholder of their covenants and other obligations
hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, LLC. The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later date as shall be consented to in writing by you; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, and the Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel; and the
National Association of Securities Dealers, LLC shall have raised no objection
to the fairness and reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be,
(i) there shall not have been any Material Adverse Change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise
from that set forth in the Registration Statement or Prospectus, which, in
your sole judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus; and
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Wilson, Sonsini, Goodrich & Rosati, counsel for the Company, substantially in
the form of Exhibit B attached hereto, dated the First Closing Date, or the
Second Closing Date, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the State of
California and Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company, the
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Selling Stockholder and of government officials, in which case their opinion is
to state that they are so relying and that they have no knowledge of any
material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) Opinion of Intellectual property Counsel for the Company. You shall
have received on the First Closing Date, or the Second Closing Date, as the case
may be, an opinion of Stetina, Brunda, Carred & Brucker, intellectual property
counsel for the Company substantially in the form of Exhibit C attached hereto.
(1) Opinion of Foreign Counsel for the CompanyOn each of the First Closing
Date and the Second Closing Date, the Representatives shall have received the
favorable opinion of [German Counsel], foreign counsel for the Company, dated as
of such Closing Date, to the effect that:
(i) Lantronix GmbH has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and authority to own or
lease, as the case may be, and to operate its properties and conduct its
business as described in the Prospectus, and has all necessary authorizations in
Germany to enable it to do business as a foreign corporation in those
jurisdictions in which it conducts business and which are described in the
Prospectus; and
(ii) All the outstanding shares of capital stock of Lantronix GmbH
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of Lantronix GmbH are owned by the Company
either directly or through wholly owned subsidiary free and clear of any
perfected security interest and, to the knowledge of such counsel, after due
inquiry, any other security interest, claim, lien or encumbrance
(f) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of Exhibit
D hereto. The Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(g) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Ernst & Young LLP addressed to the Underwriters, dated the First Closing Date or
the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of June 30, 2000 and related
consolidated statements of operations, shareholders' equity, and cash flows for
the twelve (12) months ended June 30, 2000, (iii) state that in the course of
such review, nothing came to their attention
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that leads them to believe that any material modifications need to be made to
any of the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across the
periods presented,] and address other matters agreed upon by Ernst & Young LLP
and you. In addition, you shall have received from Ernst & Young LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of June 30, 2000, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(h) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the First Closing
Date or the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the First Closing Date or
the Second Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Securities Act and in all material respects
conformed to the requirements of the Securities Act, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
did not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and, since the effective date
of the Registration Statement, there has occurred no event required to be
set forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (a)
any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (c)
any obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding indebtedness
of the Company or any of its subsidiaries that is material to the Company
and its subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of its subsidiaries, or (f) any loss or damage (whether or
not insured) to the property of the Company or any of its subsidiaries
which has been sustained or will have been sustained which has a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(i) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached hereto from each officer and director of the
Company, the Selling Stockholder and each beneficial owner of one or more
percent of the outstanding issued share capital of the Company.
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(j) Opinion of Counsel for the Selling Stockholder. You shall have
received on the First Closing Date and the Second Closing Date, as the case may
be, an opinion of NAME OF SELLING STOCKHOLDER'S COUNSEL, counsel for the Selling
Stockholder substantially in the form of Exhibit E hereto.
In rendering such opinion, such counsel may rely as to questions of
law not involving the laws of the United States or State of [SELLING
STOCKHOLDER'S STATE] and Delaware upon opinions of local counsel and as to
questions of fact upon representations or certificates of the Selling
Stockholder or officers of the Selling Stockholder (when the Selling Stockholder
is not a natural person), and of governmental officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy of any material misstatement or
inaccuracy in any such opinion, representation or certificate so relied upon
shall be delivered to you, as Representative of the Underwriters, and to
Underwriters' Counsel.
(k) Selling Stockholder's Certificate. On each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives shall
received a written certificate executed by the Attorney-in-Fact of the Selling
Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(l) Selling Stockholder's Documents. At least three business days prior to
the date hereof, the Company and the Selling Stockholder shall have furnished
for review by the Representatives copies of the Powers of Attorney and Custody
Agreements executed by the Selling Stockholder and such further information,
certificates and documents as the Representatives may reasonably request.
(m) Stock Exchange Listing. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(n) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(o) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Stockholder at any time
on or prior to the First Closing Date and, with respect to the Option Shares, at
any time prior to the Second Closing Date, which termination shall be without
liability on the part of any party to any other party, except that Section 5
(Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses),
Section 7 (Indemnification and Contribution) and Section 10 (Representations and
Indemnities to Survive Delivery) shall at all times be effective and shall
survive such termination.
Section 5. Payment of Expenses. The Company and the Selling Stockholder,
jointly and severally, agree to pay all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in connection
with the transactions contemplated hereby, including without
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limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all costs and expenses
incurred by Underwriters counsel in connection with the Directed Share Program,
(vii) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Shares for offer and sale under the state securities or blue sky laws or the
provincial securities laws of Canada or any other country, and, if requested by
the Representatives, preparing and printing a "Blue Sky Survey", an
"International Blue Sky Survey" or other memorandum, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (viii) the filing fees incident to, and the reasonable fees and
expenses of counsel for the Underwriters in connection with, the National
Association of Securities Dealers, LLC review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (ix) the
fees and expenses associated with listing the Common Shares on the Nasdaq
National Market, (x) all costs and expenses incident to the travel and
accommodation of the Company's employees on the "roadshow", and (xi) all other
fees, costs and expenses referred to in Item 13 of Part II of the Registration
Statement. Except as provided in this Section 5, Section 6, and Section 7
hereof, the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
The Selling Stockholder further agrees with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholder, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Stockholder to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 5 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Stockholder, on the other hand.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 8, Section 9 or
Section 15, or if the sale to the Underwriters of the Shares on the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company or the Selling Stockholder to perform any agreement
herein or to comply with any provision hereof, the Company agrees to reimburse
the Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel and accommodation expenses,
postage, facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters.
(1) Each of the Company and the Selling Stockholder, jointly and
severally, agrees to indemnify and hold harmless each Underwriter, its officers
and employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or
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regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A under the Securities Act, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
and the Selling Stockholder contained herein; or (iv) in whole or in part upon
any failure of the Company and the Selling Stockholder to perform their
respective obligations hereunder or under law; or (v) any untrue statement or
alleged untrue statement of any material fact contained in any audio or visual
materials provided by the Company or based upon written information furnished by
or on behalf of the Company including, without limitation, slides, videos, films
or tape recordings, used in connection with the marketing of the Shares or (vi)
any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon any
matter covered by clause (i), (ii), (iii), (iv) or (v) above, provided that the
Company and the Selling Stockholder shall not be liable under this clause (vi)
to the extent that a court of competent jurisdiction shall have determined by a
final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by Robertson
Stephens) as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company and the Selling
Stockholder by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto). The indemnity agreement set forth in this Section 7(a)
shall be in addition to any liabilities that the Company and the Selling
Stockholder may otherwise have.
(b) Indemnification of the Company, its Directors, Officers and Selling
Stockholder. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Stockholder and each person, if
any, who controls the Company within the meaning of the Securities Act or the
Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer, Selling
Stockholder or controlling person may become subject, under the Securities Act,
the Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company and the
Selling Stockholder by the Representatives expressly for use therein; and to
reimburse the Company and, the Selling Stockholder, or any such director,
officer or controlling person for any legal and other expense reasonably
incurred by
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the Company and the Selling Stockholder, or any such director, officer or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The indemnity agreement set forth in this Section 7(b) shall be in
addition to any liabilities that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. Each of the Company and the
Selling Stockholder and each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act, hereby acknowledges that the
only information that the Underwriters have furnished to the Company expressly
for use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) are the statements set forth
in the table in the first paragraph and the second, fourth and thirteenth
paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise under the
indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Robertson Stephens in the case of Section 7(b) and Section
8), representing the indemnified parties who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 60 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
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with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by such party on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the such party on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Stockholder on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company, the Selling Stockholder and Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 7(f)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7(f). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 7(f) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this Section 7(f) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than forty-five
(45) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, the Selling
Stockholder or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 7.
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(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
(j) Indemnification for Directed Share Program. The Company agrees to
indemnify and hold harmless Robertson Stephens and its affiliates and each
person, if any, who controls Robertson Stephens or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act ("Robertson Stephens Entities"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any material prepared by or with the
consent of the Company for distribution to participants in connection with the
Directed Share Program, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) the failure of any participant to pay
for and accept delivery of Directed Shares that the participant has agreed to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program other than losses, claims, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of Robertson Stephens Entities.
Section 8. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on Schedule A bears to the aggregate number of
----------
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 5, Section 6 and Section 7
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. This Agreement may be
terminated by the Representatives by notice given to the Company and the Selling
Stockholder if (a) at any time after the execution and delivery of this
Agreement and prior to the First Closing Date (i) trading or quotation in any of
the Company's securities shall have been suspended or limited by the Commission
or by the Nasdaq Stock Market, or trading in securities generally on either the
Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been
23
<PAGE>
generally established on any of such stock exchanges by the Commission or the
National Association of Securities Dealers, LLC; (ii) a general banking
moratorium shall have been declared by any of federal, New York, Delaware or
California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any change in the United States or international financial markets, or any
substantial change or development involving a prospective change in United
States' or international political, financial or economic conditions, as in the
judgment of the Representatives is material and adverse and makes it
impracticable or inadvisable to market the Common Shares in the manner and on
the terms contemplated in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured or (b) in the case of any of
the events specified 9(a)(i)-(v), such event singly or together with any other
event, makes it, in your judgement, impracticable or inadvisable to market the
Common Shares in the manner and on the terms contemplated in the Prospectus. Any
termination pursuant to this Section 9 shall be without liability on the part of
(x) the Company or the Selling Stockholder to any Underwriter, except that the
Company and the Selling Stockholder shall be obligated to reimburse the expenses
of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof,
(y) any Underwriter to the Company or any person controlling the Company, or (z)
of any party hereto to any other party except that the provisions of Section 7
shall at all times be effective and shall survive such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or any person controlling the company, of its
officers, and of the several Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or the Company or any of its or their
partners, officers or directors or any controlling person, as the case may be,
and will survive delivery of and payment for the Shares sold hereunder and any
termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
FLEETBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2675
Attention: General Counsel
If to the Company:
Lantronix
15353 Barranca Parkway
Irvine, California 92618
Facsimile: (949) 453-3990
Attention: Steven Cotton
[If to the Selling Stockholder:]
[Custodian]
[address]
Facsimile: [___]
Attention: [___]
24
<PAGE>
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 8 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the personal jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
Section 15. Failure of the Selling Stockholder to Sell and Deliver Common
Shares. If the Selling Stockholder shall fail to sell and deliver to the
Underwriters the Shares to be sold and delivered by such Selling Stockholder
pursuant to this Agreement at the First Closing Date or the Second Closing Date,
then the Underwriters shall have the right, by written notice from the
Representatives to the Company and the Selling Stockholder, to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
Section 16. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
25
<PAGE>
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
26
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
LANTRONIX
By:
-------------------------
Fred Thiel
Chief Executive Officer
SELLING STOCKHOLDER
By:
--------------------------------
Attorney-in-fact for the Selling
named in Schedule B hereto
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
FLEETBOSTON ROBERTSON STEPHENS INC.
FLEETBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
By FLEETBOSTON ROBERTSON STEPHENS INC.
By:
-----------------------------
Mitch Whiteford
27
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Common
Underwriters Shares To be Purchased
- --------------------------------------------------------------------------------------------------------------
<S> <C>
FLEETBOSTON ROBERTSON STEPHENS INC................................................. [___]
................................................................................... [___]
[___].............................................................................. [___]
[___].............................................................................. [___]
[___].............................................................................. [___]
Total......................................................................... [___]
</TABLE>
S-A
<PAGE>
Exhibit A
Lock-Up Agreement
May 1, 2000
FleetBoston Robertson Stephens Inc.
Donaldson Lufkin & Jenrette
As Representatives of the Several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: Lantronix (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain
shares of Common Stock of the Company ("Common Stock") or securities convertible
into or exchangeable or exercisable for Common Stock. The Company proposes to
carry out a public offering of Common Stock (the "Offering") for which you will
act as the representatives (the "Representatives") of the underwriters. The
undersigned recognizes that the Offering will be of benefit to the undersigned
and will benefit the Company by, among other things, raising additional capital
for its operations. The undersigned acknowledges that you and the other
underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to sales or purchases of
Common Stock acquired on the open market, (iv) with respect to shares received
in the Directed Share Program or (v) with the prior written consent of
FleetBoston Robertson Stephens Inc. The foregoing restrictions will terminate
after the close of trading of the Common Stock on the 180th day of (and
including) the day the Common Stock commenced trading on the Nasdaq National
Market (the "Lock-Up" Period). The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held by
the undersigned except in compliance with the foregoing restrictions.
A-1
<PAGE>
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned. In the event the Offering has not occurred on or before October
31, 2000, this Lock-Up Agreement shall be of no further force or effect.
Dated
------------------------------
-------------------------------------
Printed Name of Holder
By:
----------------------------------
Signature
-------------------------------------
Printed Name of Person Signing
(and indicate capacity of person
if signing as custodian, trustee,
or on behalf of an entity)
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company and each Significant Subsidiary (as that term is defined
in Regulation S-X of the Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its properties or
the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a Material
Adverse Effect. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than [list subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein, the issued and outstanding shares of capital stock of
the Company outstanding prior to the issuance of the Shares have been duly and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right arising under the certificate of incorporation or Delaware
General Corporation Law, co-sale right, right of first refusal or other
similar right, other than any registration rights described in Opinion (xix)
hereof;
(v) All issued and outstanding shares of capital stock of each Significant
Subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right arising under the
certificate of incorporation or Delaware General Corporation Law, co-sale
right, right of first refusal or other similar right, other than any
registration rights described in Opinion (xix) hereof and are owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be issued
by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, right of first refusal or
other similar right, other than any registration rights described in Opinion
(xix) hereof.
(vii) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to be
issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and, assuming due authorization, execution and delivery by you, is
a valid and binding agreement of the Company, enforceable in accordance with
its terms, except as rights to indemnification hereunder may be limited by
applicable law and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally or by general equitable principles
(whether relief is sought in a proceeding at law or in equity;
(ix) The Registration Statement has become effective under the Act and, to
such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been
B-1
<PAGE>
issued and no proceedings for that purpose have been instituted or are pending
or threatened under the Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares or
the Option Shares have been validly registered under the Securities Act and
the Rules and Regulations of the Exchange Act and the applicable rules and
regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including supporting
schedules) and financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with Delaware
law;
(xiii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be described or referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement which are not described
or referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification with
any court, government or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries, or over any of their properties or
operations is necessary in connection with the consummation by the Company of
the transactions herein contemplated, except (i) such as have been obtained
under the Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters, (iii) such as may be required
by the National Association of Securities Dealers, LLC and (iv) such as may be
required under the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act, other than those described
therein;
B-2
<PAGE>
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective charter
or bylaws, or (b) in material breach of any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries, or over any of their properties
or operations; and
(xix) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Company Shares or other securities of
the Company have registration rights with respect to securities of the Company
and, except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such counsel to
registration of such shares of Company Shares or other securities, because of
the filing of the Registration Statement by the Company have, with respect to
the offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
(xx) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-3
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of
Intellectual Property Counsel for the Company
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) As to the statements under the captions "Risk Factors -- Dependence
on Patents and Proprietary Rights" and "Business -- Intellectual Property
and Proprietary Rights," nothing has come to the attention of such counsel
which caused them to believe that the above-mentioned sections of the
Registration Statement and any amendment or supplement thereto made
available and reviewed by such counsel, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on
the Closing Date and on any later date on which Option Stock are to be
purchased, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
(ii) Such counsel knows of no material action, suit, claim or proceeding
relating to patents, patent rights or licenses, trademarks or trademark
rights, copyrights, collaborative research, licenses or royalty
arrangements or agreements or trade secrets, know-how or proprietary
techniques, including processes and substances, owned by or affecting the
business or operations of the Company which are pending or threatened
against the Company or any of its officers or directors.
(iii) The Company is listed in the records of the United States Patent and
Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications"). To the knowledge
of such counsel, there are no claims of third parties to any ownership
interest or lien with respect to any of the Patents or Applications. Such
counsel is not aware of any material defect in form in the preparation or
filing of the Applications on behalf of the Company. To the knowledge of
such counsel, the Applications are being pursued by the Company. To the
knowledge of such counsel, the Company owns as its sole property the
Patents and pending Applications;
(iv) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a
schedule to such opinion (the "Foreign Patents") and each of the
applications listed on a schedule to such opinion (the "Foreign
Applications"). Such counsel knows of no claims of third parties to any
ownership interest or lien with respect to the Foreign Patents or Foreign
Applications. Such counsel is not aware of any material defect of form in
the preparation or filing of the Foreign Applications on behalf of the
Company. To the knowledge of such counsel, the Foreign Applications are
being pursued by the Company. To the knowledge of such counsel, the Company
owns as its sole property the Foreign Patents and pending Foreign
Applications; and
(v) Such counsel knows of no reason why the Patents or Foreign Patents are
not valid as issued. Such counsel has no knowledge of any reason why any
patent to be issued as a result of any Application or Foreign Application
would not be valid or would not afford the Company useful patent protection
with respect thereto;
C-1
<PAGE>
Exhibit D
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The Firm Shares have been duly authorized and, upon issuance and
delivery and payment therefor in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop order
proceedings with respect thereto have been instituted or threatened or are
pending under the Securities Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Shares have
been validly registered under the Securities Act and the Rules and Regulations
of the Exchange Act and the applicable rules and regulations of the Commission
thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Wilson, Sonsini, Goodrich & Rosati and
Stetina, Brunda, Carred & Brucker, each dated the date hereof, and furnished to
you in accordance with the provisions of the Underwriting Agreement. Such
opinions appear on their face to be appropriately responsive to the requirements
of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
D-1
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
of
LANTRONIX
I
The name of this corporation is LANTRONIX.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California, other than the banking business, the trust company business, or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III
The name and address in the State of California of this corporation's
initial agent for service of process is:
Brad Freeburg
40 North Vista del Sol
Laguna Beach, CA 92677
IV
This corporation is authorized to issue only one class of shares of stock.
The total number of shares which this corporation is authorized to issue is:
2,500,000.
V
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
VI
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
corporation and its stockholders through bylaw provisions or through agreements
with the agents, or both, in excess of the indemnification otherwise permitted
by Section 317 of the Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the Corporations Code.
Dated: June 20, 1989.
/s/ Eva Collins
-------------------------
Eva Collins, Incorporator
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
LANTRONIX, INC.
I.
The name of this corporation is Lantronix, Inc. (the "Corporation").
II.
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
III.
The purpose of this Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
IV.
The Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock, par value $0.0001 per share (the "Common
Stock"), and Preferred Stock, par value $0.0001 per share (the "Preferred
Stock"). The total number of shares of Common Stock the Corporation shall have
authority to issue shall be 200,000,000, and the total number of shares of
Preferred Stock the Company shall have the authority to issue shall be
5,000,000.
The relative rights, preferences, privileges and restrictions granted to or
imposed on the respective classes of the shares of capital stock or the holders
thereof are as follows:
1. Voting Rights.
-------------
(a) Except as otherwise required by law or by this Certificate of
Incorporation, the holder of each share of Common Stock issued and outstanding
shall have one vote and the holder of each share of Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Preferred Stock could be converted at the record date
for determination of the stockholders entitled to vote on such matters, or, if
no such record date is established, at the date such vote is taken or any
written consent of stockholders is solicited, such votes to be counted together
with all other shares of stock of the Corporation having general voting power
and not separately as a class. Holders of Common Stock and Preferred Stock shall
be entitled to notice of any stockholders' meeting in accordance with the Bylaws
<PAGE>
of the Corporation. Fractional votes by the holders of Preferred Stock shall
not, however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Preferred Stock held by each holder
could be converted) be rounded to the nearest whole number.
(b) The holders of the Preferred and Common Stock shall vote for the
Corporation's Board of Directors as follows: all members elected by the holders
of the Preferred and Common Stock, voting together as a class. Any director
designated under this Section 1(b) may be removed from the Board only at the
written request of the holders which designated such director in accordance with
this Section 1(b). In the event of the death, resignation, removal or inability
to serve of any designees, the resulting vacancy on the Board shall be filled by
an individual designated by the holders who designated the vacating director.
V.
To the fullest extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment, modification nor repeal of this Article, nor the
adoption of any provision of this Certificate of Incorporation inconsistent with
this Article, shall eliminate, reduce or adversely affect, any right or
protection of a director of the Corporation existing hereunder with respect to
any act or omission occurring prior to such amendment, modification, repeal or
adoption of an inconsistent provision.
VI.
Effective upon the closing of a firm commitment underwritten public
offering of Common Stock of the Corporation, no action that is required or
permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
VII.
Effective upon the closing of a firm commitment underwritten public
offering of Common Stock of the Corporation, no stockholder will be permitted to
cumulate votes at any election of directors.
VIII.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the Corporation, the
Board of Directors shall be divided into three classes, the members of each
class to serve for a term of three years; provided that the directors shall be
elected as follows: at the first annual meeting of the stockholders held
following the closing of a firm commitment underwritten public offering of
Common Stock of the
-2-
<PAGE>
Corporation, the directors in the first class shall be elected for a term of
three years, at the second annual meeting following such date, the directors in
the second class shall be elected for a term of three years, and at the third
annual meeting following such date, the directors in the third class shall be
elected for a term of three years. The Board of Directors by resolution shall
nominate the directors to be elected for each class. At subsequent annual
meetings of stockholders, a number of directors shall be elected equal to the
number of directors with terms expiring at that annual meeting. Directors
elected at each such subsequent annual meeting shall be elected for a term
expiring with the annual meeting of stockholders three years thereafter.
IX.
The Board of Directors of the Corporation is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, but the stockholders may make
additional by-laws and may alter or repeal any by-law whether adopted by them or
otherwise.
Notwithstanding any other provision of this Certificate of Incorporation,
the Bylaws of the Corporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of stock of the Corporation required
by law, this Certificate of Incorporation or any Preferred Stock designation,
the affirmative vote of sixty-six and two-thirds percent (66-2/3%) of the voting
power of the then outstanding shares of the voting stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required for the modification, amendment or repeal of
Section 2.2 (Annual Meeting), Section 2.3 (Special Meeting), Section 2.5
(Advance Notice of Stockholder Nominees and Stockholder Business), Section 3.3
(Election and Term of Office of Directors) and Section 3.4 (Resignation and
Vacancies) of the Bylaws of the Corporation or of Article VIII or this Article
IX of this Certificate of Incorporation.
X.
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the Corporation.
XI.
The Corporation is to have perpetual existence.
XII.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
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<PAGE>
XIII.
Advance notice of new business at stockholders' meetings and stockholder
proposals and stockholder nominations for the election of directors shall be
given in the manner and to the extent provided in the Bylaws of the Corporation.
XIV.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the Corporation.
XV.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by the laws of the State of Delaware, and all rights
conferred herein are granted subject to this reservation.
XVI.
The name and mailing address of the incorporator are as follows:
_________________
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
-4-
<PAGE>
The undersigned incorporator hereby acknowledges that the above Certificate
of Incorporation of Lantronix, Inc., is her act and deed and that the facts
stated therein are true.
Dated: ____________, 2000
--------------------------
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<PAGE>
EXHIBIT 3.4
BYLAWS
OF
LANTRONIX, INC.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES.......................................................................................... 1
1.1 REGISTERED OFFICE........................................................................................ 1
1.2 OTHER OFFICES............................................................................................ 1
ARTICLE II MEETINGS OF STOCKHOLDERS.................................................................................. 1
2.1 PLACE OF MEETINGS........................................................................................ 1
2.2 ANNUAL MEETING........................................................................................... 1
2.3 SPECIAL MEETING.......................................................................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS......................................................................... 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.......................................... 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............................................................. 4
2.7 QUORUM................................................................................................... 4
2.8 ADJOURNED MEETING; NOTICE................................................................................ 5
2.9 VOTING................................................................................................... 5
2.10 WAIVER OF NOTICE......................................................................................... 5
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................................................. 6
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING............................................................... 6
2.13 PROXIES.................................................................................................. 7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.................................................................... 7
ARTICLE III DIRECTORS................................................................................................ 7
3.1 POWERS................................................................................................... 7
3.2 NUMBER OF DIRECTORS...................................................................................... 8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................................................................. 8
3.4 RESIGNATION AND VACANCIES................................................................................ 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................................................................. 9
3.6 REGULAR MEETINGS......................................................................................... 9
3.7 SPECIAL MEETINGS; NOTICE................................................................................. 9
3.8 QUORUM................................................................................................... 9
3.9 WAIVER OF NOTICE......................................................................................... 10
3.10 ADJOURNMENT.............................................................................................. 10
3.11 NOTICE OF ADJOURNMENT.................................................................................... 10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........................................................ 10
3.13 FEES AND COMPENSATION OF DIRECTORS....................................................................... 10
3.14 APPROVAL OF LOANS TO OFFICERS............................................................................ 11
ARTICLE IV COMMITTEES................................................................................................ 11
4.1 COMMITTEES OF DIRECTORS.................................................................................. 11
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.2 MEETINGS AND ACTION OF COMMITTEES......................................................................... 12
4.3 COMMITTEE MINUTES......................................................................................... 12
ARTICLE V OFFICERS.................................................................................................... 12
5.1 OFFICERS.................................................................................................. 12
5.2 ELECTION OF OFFICERS...................................................................................... 12
5.3 SUBORDINATE OFFICERS...................................................................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS....................................................................... 13
5.5 VACANCIES IN OFFICES...................................................................................... 13
5.6 CHAIRMAN OF THE BOARD..................................................................................... 13
5.7 PRESIDENT................................................................................................. 13
5.8 VICE PRESIDENTS........................................................................................... 13
5.9 SECRETARY................................................................................................. 14
5.10 CHIEF FINANCIAL OFFICER................................................................................... 14
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS......................................... 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................................................. 15
6.2 INDEMNIFICATION OF OTHERS.................................................................................. 15
6.3 INSURANCE.................................................................................................. 15
ARTICLE VII RECORDS AND REPORTS....................................................................................... 16
7.1 MAINTENANCE AND INSPECTION OF RECORDS...................................................................... 16
7.2 INSPECTION BY DIRECTORS.................................................................................... 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................................................................... 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............................................................. 16
7.5 CERTIFICATION AND INSPECTION OF BYLAWS..................................................................... 17
ARTICLE VIII GENERAL MATTERS.......................................................................................... 17
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING...................................................... 17
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................................................................. 17
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.......................................................... 17
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES........................................................... 18
8.5 SPECIAL DESIGNATION ON CERTIFICATES........................................................................ 18
8.6 LOST CERTIFICATES.......................................................................................... 19
8.7 CONSTRUCTION; DEFINITIONS.................................................................................. 19
ARTICLE IX AMENDMENTS................................................................................................. 19
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS................................................................... 19
</TABLE>
-ii-
<PAGE>
BYLAWS
------
OF
--
LANTRONIX, INC.
---------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The Board of Directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the Board of Directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the chairman of the board, the chief executive officer or
the president of the Company or the holders of shares entitled to cast not less
than 10% of the votes at the meeting; provided that after such time as the
Company shall have outstanding securities designated as qualified for trading as
a national
<PAGE>
market security on the National Association of Securities Dealers
Automatic Quotation System (or any successor national market system), a special
meeting of the stockholders may only be called by the Board of Directors, the
chairman of the board, the chief executive officer or the president of the
Company.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the Board of Directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the corporation entitled to vote in
the election of directors at the meeting who complies with the notice procedures
set forth in this Section and who was a stockholder of record at the time of the
giving of such notice. Such nominations, other than those made by or at the
direction of the Board of Directors or by any nominating committee or person
appointed by the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation not less than sixty (60) days nor more than one
hundred twenty (120) days prior to the scheduled meeting regardless of any
postponements, deferrals or adjournments of that meeting to a later date;
provided, however, that in the event less than seventy (70) days notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. For purposes
of this Section 2.5 "public disclosure" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or a comparable
national news service or in a document publicly filed by the corporation with
the Securities and Exchange Commission. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors
-2-
<PAGE>
pursuant to applicable rules and regulations of the Securities and Exchange
Commission promulgated under the Securities Exchange Act of 1934, as amended,
and (v) such person's written consent to being named as a nominee and to serving
as a director if elected; and (b) as to the stockholder giving the notice: (i)
the name and address, as they appear on the corporation's books, of such
stockholder, (ii) the class and number of shares of the corporation which are
beneficially owned by such stockholder on the date of such stockholder notice,
and (iii) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming such person
or persons) relating to the nomination. At the request of the Board of Directors
any person nominated by the Board of Directors for election as a director shall
furnish to the Secretary of the corporation that information required to be set
forth in the stockholder's notice of nomination which pertains to the nominee or
required by the corporation to determine the eligibility of such proposed
nominee to serve as director of the corporation. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this Section. The chairman of the meeting shall, if
the facts warrant, determine and declare at the meeting that a nomination was
not made in accordance with the procedures prescribed by these bylaws, and if
the chairman should so determine, the chairman shall so declare at the meeting
and the defective nomination shall be disregarded.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder that was a stockholder of
record at the time of the giving of the relevant notice as provided below.
Business to be brought before an annual meeting by a stockholder shall not be
considered properly brought if the stockholder has not given timely notice
thereof in writing to the Secretary of the corporation or if such business is
not a proper matter for stockholder action under the General Corporation Law of
the State of Delaware. To be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the corporation
not less than sixty (60) nor more than one hundred twenty (120) days prior to
the scheduled meeting regardless of any postponements, deferrals or adjournments
of that meeting to a later date; provided, however, that in the event that less
than seventy (70) days notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (iii) the
class and number of shares of the corporation which are beneficially owned by
the stockholder and by any other stockholders known by such stockholder to be
supporting such proposal on the date of such stockholder notice, (iv) any
material interest of the stockholder in such business, and (v) any other
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<PAGE>
information that is required by law to be provided by the stockholder in his
capacity as a proponent of a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholders' meeting,
stockholders must provide notice as required by the regulations promulgated
under the Securities Exchange Act of 1934, as amended. Notwithstanding anything
in these bylaws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section. The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section, and, if the chairman
should so determine, the chairman shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
-4-
<PAGE>
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of the State of Delaware (relating to voting rights of fiduciaries, pledgors and
joint owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
At a stockholders' meeting at which directors are to be elected, a
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the stockholder has given notice prior
to commencement of the voting of the stockholders' intention to cumulate votes.
If any stockholder has given such a notice, then every stockholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that stockholder's shares are
normally entitled or (ii) by distributing the stockholder's votes on the same
principle among any or all of the candidates, as the stockholder thinks fit.
The candidates receiving the highest number of affirmative votes, up to the
number of directors to be elected, shall be elected; votes against any candidate
and votes withheld shall have no legal effect.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation, no
stockholder will be permitted to cumulate votes at any election of directors.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of the State of Delaware or of the certificate of incorporation
or these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of
-5-
<PAGE>
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing and, who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of holders to take the action were delivered to the corporation as
provided in Section 228(c) of the General Corporation Law of the State of
Delaware. If the action which is consented to is such as would have required
the filing of a certificate under any section of the General Corporation Law of
the State of Delaware if such action had been voted on by stockholders at a
meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of the State of Delaware.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation, no
action that is required or permitted to be taken by the stockholders at any
annual or special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the Board of Directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the Board of Directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of
-6-
<PAGE>
business on the business day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.13 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
the State of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of the State of
Delaware and any limitations in the certificate of incorporation and these
bylaws relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation
-7-
<PAGE>
shall be managed and all corporate powers shall be exercised by or under the
direction of the Board of Directors.
3.2 NUMBER OF DIRECTORS
-------------------
The Board of Directors shall be between five to nine until changed by
amendment of this Section 3.2 duly approved by a majority of the directors then
in office. No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy or a newly created directorship, shall hold office until the
expiration of the term of the class of directors for which elected and until a
successor has been elected and qualified.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation, the
Board of Directors shall be divided into three classes, the members of each
class to serve for a term of three years; provided that the directors shall be
elected as follows: at the first annual meeting of the stockholders held
following the closing of a firm commitment underwritten public offering of
Common Stock of the corporation, the directors in the first class shall be
elected for a term of three years, at the second annual meeting following such
date, the directors in the second class shall be elected for a term of three
years, and at the third annual meeting following such date, the directors in the
third class shall be elected for a term of three years. The Board of Directors
by resolution shall nominate the directors to be elected for each class. At
subsequent annual meetings of stockholders, a number of directors shall be
elected equal to the number of directors with terms expiring at that annual
meeting. Directors elected at each such subsequent annual meeting shall be
elected for a term expiring with the annual meeting of stockholders three years
thereafter.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the Board of Directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the Board of Directors
may elect a successor to take office when the resignation becomes effective.
All vacancies and newly created directorships in the Board of Directors may
be filled by a majority of the remaining directors, even if less than a quorum,
or by a sole remaining director; provided, that whenever the holders of any
class or classes of stock or series thereof are entitled to elect one or more
directors by the provisions of the certificate of incorporation, vacancies and
newly created directorships of such class or classes or series may be filled by
a majority of the directors
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elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the Board of Directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the Board of Directors. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the Board of Directors may be held at any
place within or outside the State of Delaware that has been designated in the
notice of the meeting or, if not stated in the notice or if there is no notice,
at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the Board of Directors may be held without notice if
the times of such meetings are fixed by the Board of Directors.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the Board of Directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation, or by facsimile or electronic
mail. If the notice is mailed, it shall be deposited in the United States mail
at least four (4) days before the time of the holding of the meeting. If the
notice is delivered personally or by telephone or telegram or by facsimile or
electronic mail, it shall be delivered personally or by telephone or to the
telegraph company or by facsimile or electronic mail at least forty-eight (48)
hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not
specify the purpose or the place of the meeting, if the meeting is to be held at
the principal executive office of the corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision
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<PAGE>
done or made by a majority of the directors present at a duly held meeting at
which a quorum is present shall be regarded as the act of the Board of
Directors, subject to the provisions of the certificate of incorporation and
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the Board of Directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, provided that all members of the Board of Directors
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
Board of Directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the Board of Directors.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.13 shall not
be construed to preclude any director from serving
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<PAGE>
the corporation in any other capacity as an officer, agent, employee or
otherwise and receiving compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of one (1) or more directors of the corporation. The Board of
Directors may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. In the
absence or disqualification of a member of the committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in place of any such
absent or disqualified member. Any committee, to the extent provided in the
resolution of the Board of Directors, or in these bylaws, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it, but no
such committee shall have the power or authority to:
(a) approve or adopt, or recommend to the stockholders, any action or
matter expressly required by the General Corporation Law of the State of
Delaware to be submitted to stockholders for approval; or
(b) adopt, amend or repeal any bylaw of the corporation.
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<PAGE>
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES.
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary and a
chief financial officer. The corporation may also have, at the discretion of
the Board of Directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the Board of Directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The Board of Directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority and perform
such duties as are provided in these bylaws or as the Board of Directors may
from time to time determine.
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<PAGE>
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board of Directors at any regular or special meeting of the Board of Directors
or, except in case of an officer chosen by the Board of Directors, by any
officer upon whom such power of removal may be conferred by the Board of
Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned to the
chairman of the board by the Board of Directors or as may be prescribed by these
bylaws. If there is no president, then the chairman of the board shall also be
the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
or nonexistence of a chairman of the board, at all meetings of the Board of
Directors. The president shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the Board of Directors or, if not ranked, a
vice president designated by the Board of Directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such
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other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the Board of Directors. The chief financial officer shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the president and directors, whenever they request it, an account of
all of such person's transactions as chief financial officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or
these bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of the State of Delaware as the same now exists or
may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of the State of Delaware as the
same now exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit or proceeding,
in which such person was or is a party or is threatened to be made a party by
reason of the fact that such person is or was an employee or agent of the
corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) shall mean any person (i) who is
or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify such
person against such liability under the provisions of the General Corporation
Law of the State of Delaware.
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ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the Board of Directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in the State of Delaware or at its
principal place of business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The Board of Directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the Board of Directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted and which shall not be more than sixty (60) days before any such
action. In that case, only stockholders of record at the close of business on
the date so fixed are entitled to receive the dividend, distribution or
allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date so fixed, except as otherwise provided in the General
Corporation Law of the State of Delaware. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
If the Board of Directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The Board of Directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairperson or
vice-chairperson of the Board of Directors, or the president or vice-president,
and by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
the State of Delaware, in lieu of the foregoing requirements there may be set
forth on the face or back of the certificate that the corporation shall issue to
represent such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests the powers, the
designations, the preferences and the relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
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8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The Board of
Directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates or uncertificated shares on such terms and conditions as the board
may require; the board may require indemnification of the corporation secured by
a bond or other adequate security sufficient to protect the corporation against
any claim that may be made against it, including any expense or liability, on
account of the alleged loss, theft or destruction of the certificate or the
issuance of the replacement certificate or uncertificated shares.
8.7 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of the State of
Delaware shall govern the construction of these bylaws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
----------------------------------------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the Board of Directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
-19-
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made on April , 1998 is between Lantronix, a California
corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine, California
92714, and Frederick G. Thiel, a married individual, ("Employee"), residing at
25906 Portafino Drive, Mission Viejo, California 92691, by virtue of the
following facts, events, circumstances and desires:
RECITALS
A WHEREAS, Employee desires to work for Employer and receive compensation,
and Employer desires to employ Employee:
B. WHEREAS, Employer is engaged in the business of developing and selling
switches and other peripheral devices used in local area networking computer
systems;
C. WHEREAS, Employee, in the course of employment, will obtain or develop
confidential information and trade secrets;
D. WHEREAS, Employee recognizes and acknowledges that Employer must
maintain and preserve all such confidential information and trade secrets for
the protection of its business, competitive position and goodwill; and
E. WHEREAS, Employer desires assurance that Employee will not compete with
it for
a reasonable period of time after termination of employment, and Employee is
willing to refrain from competition.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this agreement, and in consideration of Employee's employment and
continued employment by Employer, it is agreed as follows:
AGREEMENT
1. Term. Subject to this Agreement's terms and conditions, Employer agrees
to employ Employee, The employment term shall commence April _____, 1998 and
shall terminate April ____, 2001. The Employee will be employed by the Employer
until such time as either or both parties choose to discontinue the employment.
The employment relationship shall be that of an Employee at will.
2. Duties. While employed by Employer, Employee shall devote his entire
working time, skill and attention exclusively to the interests and business of
Employer, shall perform such duties as may be assigned to him from time to time
by Employer, shall comply to the best of his ability with all policies and
directives issued by Employer's Board of Directors, and shall in all rejects do
his utmost to further enhance and develop the best interests and welfare of the
Employer. Employee's specific title, responsibility, authority and reporting
shall be as detailed on Exhibit "1" attached hereto and incorporated herein.
1
<PAGE>
3. Compensation
3. l Base Salary. The Employer shall pay to the Employee as base
-----------
compensation the total sum of One Hundred Sixty Thousand Dollars ($160,000.00)
per year, payable at those intervals as the Employer shall pay other Executives,
commencing April _____, 1998. Said base salary shall be subject to annual review
by the Employer's Board of Directors.
3.2 Bonus. In addition to said base salary, Employee shall also
-----
receive a bonus amount calculated in accordance with the Executive Incentive
Compensation Program attached hereto and incorporated herewith as Exhibit "2"
Said bonus amount shall be paid quarterly and amount to up to 30% of the annual
base salary referenced in Paragraph 3.1 above.
3.3 Automobile Allowance. Employee shall receive an automobile
--------------------
allowance of $400 per month.
3.4 Insurance Coverage. Employer shall make available to Employee and
------------------
his dependents whatever coverages Employee shall elect under Employer's standard
corporate medical, dental, life and disability, insurance programs as each such
respective benefit is made available to any other Executive employee of Employer
at a comparable level within the organization.
3.5 Expenses. Employee shall be reimbursed by Employer for all
--------
reasonable entertainment promotion or other expenses advanced by him on behalf
of Employer.
3.6 Other Incentives. Employee shall be entitled to participate in
----------------
any other Employee incentive programs offered by Employer, including but not
limited to such proteins as a IRC Section 401(k) plan.
3.7 Vacation. Employee will initially be entitled to eighteen (18)
--------
days of vacation per year accrued ratably on a monthly basis. Vacation time that
has accrued but is unused at the end of the calendar year will be compensated at
the base salary rate.
3.8 Stock Options. Employer shall grant to Employee stock options as
-------------
indicated in the subparagraphs below. Employee and Employer shall cooperate with
one another to maximize the tax advantaged position of Employee with respect to
the options to be granted to the extent feasible all of the options shall be
from Employer's Qualified Incentive Stock Option Plan, either the existing 1993
Plan or a new plan, which Employer shall cause to be adopted by its Board of
Directors and Shareholders. To the extent the intended options cannot be fit
within a qualified plan, they shall be made from Employer's Non-Qualified Stock
Option Plan. Understanding these conceptual parameters, the stock options to
which Employee shall be entitled consist of:
3.8.1 One percent (1%) of the amount of shares of Employer's
common stock outstanding at execution of this Agreement, to vest over four
years, at the rate of 25% at the first anniversary hereof and ratably per month
thereafter;
2
<PAGE>
3.8.2 Two percent (2%) of the amount of shares of Employer's
common stock outstanding at. execution hereof, to vest at time of completion of
sale of Employer or completion of an initial public offering of Employer's
common stock; and
3.8.3 One half percent (1/2%) of the amount of shares of
Employer's common stock outstanding at execution hereof, to vest at completion
of a yet to be determined milestone. Said milestone to be adopted by mutual
agreement of Employee and a majority of Employer's Board of Directors.
4. Termination. The Employer shall have the right to terminate employment
without cause, upon three weeks prior notice, or for cause, immediately after
notice. Employee Shall have the advantage of certain severance benefits on
termination provided in that certain Severance Agreement attached hereto and
incorporated herein as Exhibit "5" The term "cause" shall mean:
4.1 Conduct on the Employee's part intended to or likely to injure
the Employer's business or reputation;
4.2 The Employee's perpetration of a crime involving moral turpitude,
whether relating to employment or otherwise;
4.3 Significant failure by the Employee to perform duties and
obligations as forth in this Agreement, resulting in substantial damage to the
Employer.
5. Confidential Information.
5.1 Definition. "Confidential information" means information that is
----------
proprietary to the Employer or proprietary to others and entrusted to the
Employer, whether or not trade secrets. Confidential information includes, but
is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past, current or anticipated
products. Confidential information also includes without limitation, Employer-
information concerning (a) price lists, (b) costs of production, and (c) raw
material costs, (d) selling costs, (e) delivery costs, (f) information
concerning new or proposed new products, including the nature and design of such
products and the plans for marketing such products, (g) internal procedures and
policies, (h) customer lists, account names, contacts, addresses and sales
activity, (i) names and addresses of suppliers and vendors, (j) tax and
financial information, (k) reserves, (1) intellectual property owned or leased
by the company, (m) banking relationships and arrangements (n) Employees, (o)
management personnel and policies, (p) quotation names, addresses, contacts and
quote workups, (q) all mailing lists, (r) company product training materials and
courses, and (s) company computer programs and printouts.
5.2 Prohibitions Against Use. During or subsequent to the termination
------------------------
of Employee's employment, whether termination is voluntary or involuntary;
Employee will not use or disclose, other than in connection with employment with
the company, any confidential information to any person not employed by the
company or not authorized by the company to receive confidential information
without the prior written consent of the company. Employee will use reasonable
and prudent care to safeguard and protect and prevent the unauthorized use and
disclosure of confidential information. The obligations contained in this
paragraph will survive for as long as the company in its sole judgment considers
the information to be confidential information.
3
<PAGE>
6. Protective Covenant/Non-Competition. While employed by Employer and after
such. employment until the second anniversary of such cessation of employment
(the "Non-compete Period"), whether-termination is voluntary or involuntary,
Employee agrees not to accept employment, consult with or otherwise become
associated or affiliated with any person, firm. association or other entity that
is directly or indirectly in competition with the services, products. business
or activities of Employer.
It is specifically agreed that during the Non-compete Period, Employee
shall not in any manner contact, solicit or cause to be solicited any of
Employer's customers, suppliers or clients or former or prospective customers or
suppliers for any purpose whatsoever, without the written consent of Employer.
Employee further agrees that during his employment and for one (1) year after
termination of his employment, he will not directly or indirectly, in any
manner, request or induce Employee of Employer to leave his employment with
Employer, unless expressly authorized or instructed to do so in writing by
Employer.
It is understood by both parties to this agreement that the protective
covenants meant for the reasonable protection of the business of Employer and
not to impair the ability of Employee to earn a living. Should any portion of
this covenant be construed by a court of law or equity as less than reasonable,
the parties agree to the establishment by such court of an obligation for the
protection of Employer's business that it deems reasonable.
7. Return of Property. All documents, drawings, lists, records or other
tenable or intangible thing relating to the business of Employer that Employee
originates or comes into the Employee's possession in any way during the
employment period shall remain the sole property, of Employer. Any copies,
abstracts or summaries of such items are likewise the sole property of Employer.
Employee shall not make copies or prepare abstracts or summaries of such items
except for the sole use and account of Employer and with the consent and
instruction of Employer's management. Upon termination of employment of
Employee, he or she shall immediately return to Employer all such items in his
or her possession, as well as all of Employer's property he or she has received
for assistance in performing work duties, including but not limited to those
items outlined above; as well as any of Employer's equipment or supplies.
Employee shall be liable for damages to Employer for any such property not so
returned.
8. Remedy. Employee acknowledges and agrees that the confidential
information, trade secrets and special `knowledge acquired by him or her during
his or her employment with Employer is valuable and unique, and that breach by
him or her of the provisions of this agreement will cause employer irreparable
injury and damage. It cannot be reasonably or adequately compensated by money
damages. Employee, therefore, expressly agrees that Employer shall be entitled
to injunctive or other equitable relief in order to prevent a breach of this
agreement or any part thereof, in addition to such other remedies legally
available to Employer. Employee expressly waives the claim or defense that
Employer has an adequate remedy at law.
9. Applicable Law. This agreement shall be governed, interpreted and
construed in accordance with the laws of the State of California.
4
<PAGE>
10. Severability. In the event that any portion of this agreement shall be
deemed unenforceable or void such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this agreement.
11. Entire Agreement. It is agreed that the provisions of the agreement
contain the entire agreement on the subject covered between the parties, and
cannot be modified orally, and can only be modified by written agreement signed
by Employee and Employer. This agreement shall be binding upon the parties and
their respective heirs, administrators and assigns.
12. Voluntary Agreement. I understand I will have access to confidential
information and customer accounts while employed by Employer. I further
acknowledge that I have freely and voluntarily entered into this Agreement.
which contains restrictions on my ability to complete with Lantronix for any
reason I recognize that Lantronix has provided me adequate consideration for my
agreement herein.
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
identified at the beginning of the agreement.
"EMPLOYEE"
/s/ Frederick G. Thiel
----------------------
Frederick G. Thiel
LANTRONIX
By: /s/ Bernhard Bruscha
-------------------------
Its:
--------------------------
5
<PAGE>
EXHIBIT "1"
TITLE: CEO
RESPONSIBILITIES: The responsibility of the CEO is to ensure the (1)
achievement of a reasonable interpretation of the
organizational results, beneficiaries, and cost of those
results as described in the board's ends policies, and (2)
avoidance of a reasonable interpretation of the unacceptable
conditions and actions described in the board's executive
limitation policies.
Ends policies are board policies that define the mission of
the company and the key priority result areas. These are
written as clearly measurable objectives with dates an
milestones.
Executive limitations are board policies that define and/or
limit activities and conditions for the operation of the
company, including budgets, financial conditions, staff
treatment, asset protection, staff compensation, and board
information.
AUTHORITY: The CEO is empowered to make all decisions, create all
policies, and authorize all engagements that, upon board
request, he can demonstrate to be consistent with a
reasonable interpretation of the board's ends and executive
limitations.
REPORTING: The CEO reports to the board of directors as a whole -- not
to any individual member of the board.
<PAGE>
EXHIBIT "2"
EXECUTIVE INCENTIVE COMPENSATION PROGRAM
----------------------------------------
The purpose of the Executive Incentive Compensation Plan is to enhance and
reinforce the goals of Lantronix (the "Company") for profitable growth and
continuance of a sound overall condition by providing selected employees with
additional financial rewards for attainment of such growth and stable financial
and operating condition. Final approval of the payment of any awards made under
the Plan is subject to the discretion of the Board of Directors.
The Plan will take into account two major categories in determining incentive
compensation:
. Corporate Financial Goals
-------------------------
. Individual Management Objectives
--------------------------------
Following is a matrix of the mix of annual incentive compensation elements for
selected management levels:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
LEVEL Financial MBO's % of $base
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CEO/President 60% 40% 30%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Weighting and Factors:
- ---------------------
Financial goals consist of revenues, gross margin and net operating income in
dollars and are weighed as follows:
Revenue 20%
Gross Margin 50%
Net 30%
Gross margin carries the greatest weight, due to its importance in providing the
fuel that powers the company.
<PAGE>
As a further incentive, each goal uses a step function factor with thresholds to
determine actual bonus amount as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Element Percentage of Goal Factor
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue Lesser than 85% 0.0x
------------------------------------------------------------------------
85-95% 0.5x
------------------------------------------------------------------------
96-110% 1.0x
------------------------------------------------------------------------
Greater than 110% 2.0x
- ------------------------------------------------------------------------------------------------------------
Gross Margin Lesser than 80% 0.0x
------------------------------------------------------------------------
81-90% 0.5x
------------------------------------------------------------------------
91-115% 1.0x
------------------------------------------------------------------------
Greater than 115% 2.0x
- ------------------------------------------------------------------------------------------------------------
Net Lesser than 60% 0.0x
------------------------------------------------------------------------
61-80% 0.5x
------------------------------------------------------------------------
81-120% 1.0x
------------------------------------------------------------------------
Greater than 120% 2.0x
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Example:
- -------
MBO Baseline $/qtr: $15,000 Fin. % 60% MBO % 40%
Period: Q3 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL TARGET ACTUAL RESULT/ BASELINE (R/F)*
GOALS: FACTOR BASELINE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $10,000 $10,500 105% $1,800 $1,8000.00
1.0 20%
- ---------------------------------------------------------------------------------------------------------------------
GROSS MARGIN $ 4,600 $ 5,500 120% $4,500 $ 9,000.00
2.0 50%
- ---------------------------------------------------------------------------------------------------------------------
PROFIT $ 1,100 $ 800 73% $2,700 $ 1,350.00
0.5 30%
- ---------------------------------------------------------------------------------------------------------------------
SUBTOTAL FINANCIAL $9,000 $12,150.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Rules:
- -----
13. Incentive compensation is to be paid quarterly based on targeted quarterly
financial goals and MBO's.
14. Circumstance beyond the control of the executive, or not contemplated by
the parties when setting goals, should not negatively affect the incentive
compensation calculation. As such circumstances arise, expectations as to the
potential effect should be negotiated between the executive and his
supervisor(s). Disputes should be resolved solely at the discretion of the Board
of Directors.
15. Financial goal targets should be based on the Board approved operating plan
and any periodic updates that may be made.
16. MBO's need to be specifically defined, measurable, subject to partial
credit or all or none, reasonably able to be accomplished, support the overall
goals of the Company and the Operating Plan, and negotiated and agreed to by
supervisor and executive.
9
<PAGE>
EXHIBIT "3"
LANTRONIX 1993 INCENTIVE STOCK OPTION PLAN
[To Be Attached]
<PAGE>
EXHIBIT "4"
LANTRONIX INCENTIVE STOCK OPTION AGREEMENT
[To Be Attached]
<PAGE>
EXHIBIT "5"
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") is made and entered into by
LANTRONIX, a California corporation ("Company"), and FREDERICK G. THIEL
("Executive")
RECITALS
WHEREAS, Executive is employed as Chief Executive Officer of the Company;
and
WHEREAS, the Company desires to provide certain benefits to Executive as
described herein as an incentive for Executive to continue to serve as an
officer of the Company.
AGREEMENT
NOW THEREFORE, in consideration of the promises and covenants set forth in
this Agreement and for other valuable consideration, the parties agree as
follows:
1. Termination or Resignation Following a Change in Control. If a
--------------------------------------------------------
"Change in Control" (as hereinafter defined) of the Company occurs after the
date hereof, and after such Change in Control either (i) the Company terminates
Executive without "Cause" ( as hereinafter defined) on or before the two year
anniversary of the date of the Change in Control, or (ii) Executive resigns with
"Good Reason" (as hereinafter defined on or before the two year anniversary of
the date of the Change in Control, then as a severance benefit and in lieu of
all other compensation or damages (except as set forth in Section 3 hereof)
the Company shall:
a. Continue to pay Executive his current base salary and automobile
allowance as in effect on the date of such termination or resignation through
the end of the month in which the applicable termination or resignation occurred
and continuing for a period of fifteen months, payable either monthly
installments within five days after the end of each month, or at the option of
Executive (i) 50% in a lump sum within 45 days after the date of termination or
resignation and (ii) 50% in fifteen equal monthly installments, commencing
within fifteen days following termination or resignation and continuing
thereafter on the same day of each month.
b. Pay Executive an amount equal to 125% of the average of the two
highest annual bonuses that were actually paid to Executive by the Company
(under all bonus plans available to Executive) during the three bonus years
preceding the date of termination or resignation, payable in a lump sum within
45 days after the date of termination or resignation;
1
<PAGE>
c. Continue to provide Executive at Company expense all medical,
disability and life insurance benefits provided to him immediately prior to the
date of such termination or resignation (or, at the option of Executive,
immediately prior to the date of the Change in Control) for a period of fifteen
months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Executive for such fifteen month period under the
Companies policies as then in effect or under applicable law, then the Company
shall pay Executive an amount equal to the monthly premiums paid on behalf of
Executive for such benefits at the time of such termination or resignation for a
period beginning on the date the Executive's participation in such benefits is
prohibited and ending on the date that is fifteen months following the date of
such termination or resignation, payable in monthly installments within five
days after the end of each month;
d. Accelerate the vesting of all unvested stock options granted to
Executive under the Company's stock options ,granted to Executive under the
Company's stock option or other benefit plans so that all such stock options
will vest and
e. Extend the post-termination exercise period for all unexercised
stock options granted to Executive under the Company's stock option and other
benefit plans so that all such stock options will be exercisable for the longer
of (A) the period ending fifteen months following the date of such termination
or resignation, or (B) the post-termination exercise period provided in such
plan; and
f. Reimbursement Executive for third party, out placement services
actually incurred by Executive in an amount not to exceed $15,000, provided such
expenses are accounted for by Executive m accordance with the policies and
procedures by the Company.
2. Definitions.
------------
a. Change in Control: For purposes of this Agreement, the term
-----------------
"Chang in Control; shall be deemed to have occurred if (i) any transaction (or
series of transactions) is consummated whereby all, or substantially all, of the
assets of the Company are sold, leased, exchanged or transferred, (ii) any
person or entity, or group or affiliated persons or entities (other than any
person who on the date of this Agreement is a director or officer of the
Company, or their heirs, family members or trusts), becomes, directly or
indirectly, the owner of securities of the Company which represent 50% or more
of the combined voting power or equity, of the Company's then outstanding
securities, (iii) any transaction is consummated whereby the Company merges or
consolidates with or into another entity and the owners of the Company
immediately prior to such merger or consolidation do not own, directly or
indirectly 50% or more of the combined voting power and equity of. the surviving
entity, or (iv) the shareholders of the company approve the dissolution or
liquidation of the Company.
b. Termination without Cause. The Company in its sole discretion may
-------------------------
termination Executive's employment at any time with or without Cause. For
purposes of this Agreement, the Company shall be deemed to have terminated
Executive without "Cause" following a Change in Control if Executive's
employment is terminated for any reason other than
2
<PAGE>
the following: (i) Executive commits a felony or possesses, uses or sells
illegal drugs; (ii) Executive significantly neglects, or materially inadequately
performs, his duties as a employee of the Company, (iii) Executive breaches a
fiduciary duty to the Company or its shareholders involving personal profit to
Executive; (iv) Executive is deceased: or (v) Executive is disabled.
Notwithstanding the foregoing, Executive shall be deemed to have been terminated
without Cause (except in the case of death) unless the Company delivers to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less a majority of the entire membership of the company's Board of Directors
finding that in the opinion of the Board Executive engaged in the applicable
conduct set forth in subsection (i), (if) or (iii) above or Executive is
disabled. For purposes of this Agreement Executive shall-be considered disabled
if he has been physically or mentally incapable of performing his duties
hereunder for (i) a continuous period of at least one hundred twenty (120) days
or (if) a total of one hundred fifth (150) days during any one hundred and
eighty (180) day period, and Executive has not recovered and returned to the
full time performance of his duties within thirty days after written notice is
given to him by the Company following such 120 day period or 180 day period, as
the case may be.
c. Resignation with Good Reason. Executive may resign at any time
----------------------------
with or without Good Reason. For purposes of the Agreement, Executive shall be
deemed to have resigned with "Good Reason" following a Change in Control if he
resigns within ninety days after the Company has taken any of the following
actions without Executive's express written consent; (i) the Company
"Substantially Lessens Executive's Title" (as defined on Exhibit A attached
hereto); (if) the Company assigns material duties To Executive's Senior
Authority (as defined on Exhibit A attached hereto); (if) the Company assigns
material duties to Executive which are materially inconsistent with Executive's
status as an office of the Company; (iii) the Company reduces Executive's base
salary or benefits from that in effect at the time of the Change in Control
(unless such reduction is in connection with a salary or benefit reduction
program of general application to officers of the Company); (iv) the Company
requires Executive to be based more than fifty (50) miles from his present
office location, except for required travel consistent with Executive's business
travel obligations; or (v) the Company fails to obtain the assumption of this
Agreement by any successor or assign of the Company.
3. The Company's Obligations Under This Agreement. Executive shall
----------------------------------------------
not be entitled to any of the benefits of Section 1 if the Company terminates
Executive's employment or if Executive resigns under circumstances other than as
specifically set forth in Section 1. The Benefits set forth in Section 1
constitute the sole obligations of the Company to Executive upon any termination
or resignation and are in lieu of any damages or other compensation that
Executive may claim under other Company policies or otherwise, except for
Executive's salary which has been carnal up to the date of termination or
resignation, compensation for any accrued and unused vacation up to the date of
termination or resignation, reimbursement for business expenses incurred up to
the date of termination or resignation (in accordance with the customary
policies of the Company), and any benefits that the Company is required to
provide to Executive after the date of termination or resignation under COBRA or
pursuant to any ERISA plans of the
3
<PAGE>
Company. The benefits on termination or resignation provided in this Agreement
are in substitution for any severance or termination benefits otherwise
agreeable under Company policies of general application. The benefits on
termination or resignation provided in this Agreement shall not be reduced by
any compensation or benefits received by Executive from any subsequent employer
or any other third party.
4. Withholding of Taxes; Tax Reporting. The Company may withhold
-----------------------------------
from any amounts payable under this Agreement all such Federal, state, city and
other taxes, and may file with appropriate governmental authorities all such
information, returns or other reports with respect to the tax consequences of
any amounts payable under this Agreement, as may, in its judgment, be required
by law.
5. Assignment. This Agreement may not be assigned by Executive. The
----------
Company shall be entitled to assign this Agreement to any successor in interest
to its business. The Company will obtain an assumption of this Agreement by any
successor or assign to all or substantially all of the business and/or assets of
the Company (whether direct or indirect, by acquisition, merger, consolidation
or otherwise), but the failure to obtain such assumption shall not prevent or
delay such acquisition, merger, consolidation or other transaction or relieve
the Company of its obligations under the Agreement. This Agreement shall bind
and inure to the benefit of the Company's successors and assigns, as well as
Executive heirs, executors, administrators, and legal representatives.
6. Notices. Any notice, request, demand or other communication
-------
required or permitted hereunder shall be deemed to be properly given when
personally served or three (3) days after deposit in the United States mail,
registered or certified, postage prepaid, return receipt requested, addressed to
the Company at its principal office or to Executive at his last known address.
Either party may change its address by written notice in accordance with the
Section 7.
7. Entire Agreement. This Agreement, together with the documents
----------------
referenced herein, contains the entire agreement of the parties hereto with
respect to the subject matter hereof it supersedes -any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, written, oral or
otherwise, have been made by any party, or anyone acting on behalf of any party,
which are not embodied herein, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. This Agreement may
not be modified or mended by oral agreement, but only by an agreement in writing
signed by the Company and Executive.
8. Attorneys' Fees. In the event of any arbitration arising out of
---------------
the subject matter hereof, the prevailing party shall be affiliated to recover
from the non-prevailing party its costs and expenses (including reasonable
attorney's fees) incurred in such arbitration.
4
<PAGE>
9. Arbitration. if any dispute hereafter arises between the parties
-----------
hereto and/or their agents or employees relating to the terms and provisions of
this Agreement or otherwise, including but not limited to any claim for breach
of any contract or covenant (express or implied), tort claims, claims for
discrimination or harassment (including, but not limited to race, sex, religion,
national origin, age, handicap or disability), claims for compensation or
benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any
federal, state or other governmental law, statute, regulation or ordinance
(except for claims involving worker's compensation benefits), then either party
may initiate arbitration proceedings in accordance with the Employment Rules of
JAMS ENDispute, as the exclusive remedy for such dispute and in lieu of any
court action, which is hereby consent to such arbitration, and any arbitration
award shall be final and binding. Neither party shall disclose the existence of
any dispute or the terms of any arbitration decision to any third party, other
than legal-counsel, accountants, financial advisors or as required by law.
10. Termination. Except as to any amounts already owed under this
-----------
Agreement due to a termination or resignation, this ,agreement shall terminate
upon the closing of a public offering of the Company's stock pursuant to an
effective registration statement filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933.
EXECUTIVE:
/s/ Frederick G. Thiel
----------------------
Frederick G. Thiel
COMPANY:
LANTRONIX
a California corporation
By: /s/ Bernhard Bruscha
--------------------
BERNHARD BRUSCHA
Its: Chairman
5
<PAGE>
EXHIBIT A
---------
(Frederick Thiel)
"Substantially Lessens Executive's Title" shall mean that the Executive
does not have the title of Chief Executive officer or some higher title.
The Company will be deemed to have Substantially Reduced Executive's Senior
Authority if Executive no longer has authority, for directing the business and
executive employees of the Company on a day-to-day basis.
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made on December 6, 1999, is between Lantronix, a
California corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine,
California 92618, and Steven Cotton, an individual, ("Employee"), residing at
6191 Gleneagles Circle, Huntington Beach, California, 92648, by virtue of the
following facts, events, circumstances and desires:
RECITALS
A. WHEREAS, Employee desires to work for Employer and receive
compensation, and Employer desires to employ Employee;
B. WHEREAS, Employer is engaged in the business of developing network
attached technology;
C. WHEREAS, Employee, in the course of employment, will obtain or
develop confidential information and trade secrets;
D. WHEREAS, Employee recognizes and acknowledges that Employer must
maintain and preserve all such confidential information and trade secrets for
the protection of its business, competitive position and goodwill; and
E. WHEREAS, Employer desires assurance that Employee will not compete
with it for a reasonable period of time after termination of employment, and
Employee is willing to refrain from competition.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this agreement, and in consideration of Employee's employment and
continued employment by Employer, it is agreed as follows:
AGREEMENT
1. Term. Subject to this Agreement's terms and conditions, Employer
agrees to employ Employee. The employment term shall commence December 9, 1999.
The Employer shall employ the Employee until such time as either or both parties
choose to discontinue the employment. The employment relationship shall be that
of an Employee-at-will.
2. Duties. While employed by Employer, Employee shall devote his entire
working time, skill and attention exclusively to the interests and business of
Employer, shall perform such duties as may be assigned to him from time to time
by Employer, shall comply to the best of his ability with all policies and
directives issued by the Chief Executive Officer or the Employer's Board of
Directors, and shall in all respects do his utmost to further enhance and
develop the best interests and welfare of the Employer. Employee's specific
title, responsibility, authority and reporting shall be as detailed on Exhibit
"1" attached hereto and incorporated herein.
1
<PAGE>
3. Compensation.
3.1 Base Salary. The Employer shall pay to the Employee as base
-----------
compensation the total sum of One Hundred Eighty Thousand Dollars ($180,000.00)
per year, payable at those intervals as the Employer shall pay other Executives.
Said base salary shall be subject to annual review by the Employer's Board of
Directors.
3.2 Bonus. In addition to said base salary, Employee shall also
-----
receive a bonus amount calculated in accordance with the Lantronix MBO
Incentive Program, revision 0.2x, attached hereto and incorporated herewith as
Exhibit "2A." Said bonus amount shall be paid quarterly and in an amount up to
30% of the annual base salary referenced in Paragraph 3.1 above.
3.3 Insurance Coverage. Employer shall make available to Employee
------------------
and his dependents whatever coverage Employee shall elect under Employer's
standard corporate medical, dental, life and disability insurance programs as
each such respective benefit is made available to any other Executive employee
of Employer at a comparable level within the organization.
3.4 Expenses. Employer shall reimburse employee for all reasonable
--------
entertainment, promotion or other expenses advanced by him on behalf of
Employer.
3.5 Other Incentives. Employee shall be entitled to participate in
----------------
any other Employee incentive programs offered by Employer, including but not
limited to such programs as a Section 401(k) plan.
3.6 Vacation. Employee will initially be entitled to twenty (20)
--------
days of vacation per year accrued ratably on a bi-weekly basis. Vacation time
may be accrued and used in accordance with the Employer's Vacation Policy.
3.7 Stock Options. Employer shall grant to Employee stock options
-------------
as indicated in the subparagraph(s) below:
3.7.1 85,000 Non-Qualified Stock Options to vest according to
the following schedule.
(i) 12,143 options to vest on Employee's first day of
employment.
(ii) 12,143 options to vest on the first anniversary of
Employee's date of employment.
(iii) The remaining 60,714 options to vest ratably per month
thereafter for a period of 60 months.
3.7.2 The Non-Statutory Stock Option Agreement is attached
hereto and incorporated herewith as Exhibit "3."
4. Termination. The Employer shall have the right to terminate
employment of Employee at any time, with or without cause. Employee shall have
the advantage of certain severance benefits on termination provided in that
certain Severance Agreement attached hereto and incorporated herein as Exhibit
"4."
4.1 Termination without Cause. For purposes of this Agreement, the
-------------------------
Company shall be deemed to have terminated Executive's employment without
"Cause" if Executive's employment is terminated for any reason other then the
following: (i) Executive commits a felony or possesses, uses or sells illegal
drugs; (ii) Executive significantly neglects, or materially inadequately
performs, his duties as an employee of the Company; (iii) Executive breaches a
fiduciary duty to the Company or its shareholders involving personal profit to
Executive; (iv) Executive is deceased; or (v) Executive is disabled.
Notwithstanding the foregoing, Executive shall be deemed to have been terminated
without Cause (except in the case of death) unless the Company delivers to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less a majority of the entire membership of the Company's
2
<PAGE>
Board of Directors finding that, in the opinion of the Board, Executive engaged
in the applicable conduct set forth in subsection (i), (ii) or (iii) above or
Executive is disabled. For purposes of this Agreement, Executive shall be
considered disabled if he has been physically or mentally incapable of
performing his essential job duties hereunder for (i) a continuous period of at
least one hundred twenty (120) days or (ii) a total of one hundred fifth (150)
days during any one hundred and eighty (180) day period, and Executive has not
recovered and returned to the full time performance of his duties within thirty
days after written notice is given to him by the Company following such 120 day
period or 180 day period, as the case may be.
5. Confidential Information.
5.1 Definition. "Confidential information" means information that
----------
is proprietary to the Employer or proprietary to others and entrusted to the
Employer, whether or not trade secrets. Confidential information includes, but
is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past, current or anticipated
products. Confidential information also includes, without limitation, Employer
information concerning (a) price lists, (b) costs of production, and (c) raw
material costs, (d) selling costs, (e) delivery costs, (f) information
concerning new or proposed new products, including the nature and design of such
products and the plans for marketing such products, (g) internal procedures and
policies, (h) customer lists, account names, contacts, addresses and sales
activity, (i) names and addresses of suppliers and vendors, (j) tax and
financial information, (k) reserves, (l) intellectual property owned or leased
by the company, (m) banking relationships and arrangements (n) Employees, (o)
management personnel and policies, (p) quotation names, addresses, contacts and
quote workups, (q) all mailing lists, (r) company product training materials and
courses, and (s) company computer programs and printouts.
5.2 Prohibitions Against Use. During or subsequent to the
------------------------
termination of Employee's employment, whether termination is voluntary or
involuntary, Employee will not use or disclose, other than in connection with
employment with the company, any confidential information to any person not
employed by the company or not authorized by the company to receive such
confidential information without the prior written consent of the company.
Employee will use reasonable and prudent care to safeguard and protect and
prevent the unauthorized use and disclosure of confidential information. The
obligations contained in this paragraph will survive for as long as the company
in its sole judgment considers the information to be confidential information.
6. Protective Covenant/Non-Competition. While employed by Employer and
for a period of eighteen (18) months after cessation of employment (the "Non-
compete Period"), whether termination is voluntary or involuntary, Employee
agrees not to accept employment, consult with or otherwise become associated or
affiliated with any person, firm, association or other entity that is directly
or indirectly in competition with the services, products, business or activities
of Employer.
It is specifically agreed that during the Non-compete Period,
Employee shall not in any manner contact, solicit or cause to be solicited any
of Employer's customers, suppliers or clients or former or prospective customers
or suppliers for any purpose whatsoever, without the written consent of
Employer. Employee further agrees that during his employment and for one (1)
year after termination of his employment, he will not directly or indirectly, in
any manner, request or induce any Employee of Employer to leave his employment
with Employer, unless expressly authorized or instructed to do so in writing by
Employer.
It is understood by both parties to this agreement that the
protective covenants meant for the reasonable protection of the business of
Employer and not to impair the ability of Employee to earn a living. Should any
portion of this covenant be construed by a court of law or equity as less than
reasonable, the parties agree to the establishment by such court of an
obligation for the protection of Employer's business that it deems reasonable.
3
<PAGE>
7. Return of Property. All documents, drawings, lists, records or other
tangible or intangible thing relating to the business of Employer that Employee
originates or comes into the Employee's possession in any way during the
employment period shall remain the sole property of Employer. Any copies,
abstracts or summaries of such items are likewise the sole property of Employer.
Employee shall not make copies or prepare abstracts or summaries of such items
except for the sole use and account of Employer and with the consent and
instruction of Employer's management. Upon termination of employment of
Employee, he or she shall immediately return to Employer all such items in his
or her possession, as well as all of Employer's property he or she has received
for assistance in performing work duties, including but not limited to those
items outlined above, as well as any of Employer's equipment or supplies.
Employee shall be liable for damages to Employer for any such property not so
returned.
8. Arbitration. If any dispute hereafter arises between the parties
hereto and/or their agents or employees relating to the terms and provisions of
this Agreement or otherwise, including but not limited to any claim for breach
of any contract or covenant (express or implied), tort claims, claims for
discrimination or harassment (including, but not limited to race, sex, religion,
national origin, age, handicap or disability), claims for compensation or
benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any
federal, state or other governmental law, statute, regulation or ordinance
(except for claims involving worker's compensation benefits), then either party
may initiate arbitration proceedings in accordance with the Employment Rules of
JAMS ENDispute, as the exclusive remedy for such dispute and in lieu of any
court action, which is hereby consent to such arbitration, and any arbitration
award shall be final and binding. Neither party shall disclose the existence of
any dispute or the terms of any arbitration decision to any third party, other
than legal counsel, accountants, and financial advisors or as required by law.
9. Attorneys' Fees. In the event of any arbitration arising out of the
subject matter hereof, the prevailing party shall be entitled to recover from
the non-prevailing party its costs and expenses (including reasonable attorney's
fees) incurred in such arbitration.
10. Remedy. Employee acknowledges and agrees that the confidential
information, trade secrets and special knowledge acquired by him during his
employment with Employer is valuable and unique, and that breach by him of the
provisions of this agreement will cause Employer irreparable injury and damage.
It cannot be reasonably or adequately compensated by money damages. Employee,
therefore, expressly agrees that Employer shall be entitled to injunctive or
other equitable relief in order to prevent a breach of this agreement or any
part thereof, in addition to such other remedies legally available to Employer.
Employee expressly waives the claim or defense that Employer has an adequate
remedy at law.
11. Applicable Law. This agreement shall be governed, interpreted and
construed in accordance with the laws of the State of California.
12. Severability. In the event that any portion of this agreement shall
be deemed unenforceable or void, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this agreement.
13. Entire Agreement. It is agreed that the provisions of the agreement
contain the entire agreement on the subject covered between the parties, and
cannot be modified orally, and can only be modified by written agreement signed
by Employee and Employer. This agreement shall be binding upon the parties and
their respective heirs, administrators and assigns.
4
<PAGE>
14. Voluntary Agreement. I understand I will have access to confidential
information and customer accounts while employed by Employer. I further
acknowledge that I have freely and voluntarily entered into this Agreement,
which contains restrictions on my ability to compete with Lantronix for any
reason. I recognize that Lantronix has provided me adequate consideration for my
agreement herein.
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
identified at the beginning of the agreement.
"EMPLOYEE"
/s/ Steven Cotton
_______________________________________
Steven Cotton
LANTRONIX
/s/ Fred Thiel
By: ___________________________________
Fred Thiel
Its: Chief Executive Officer
5
<PAGE>
EXHIBIT "1"
TITLE: Chief Financial Officer
RESPONSIBILITIES: The responsibilities of the Chief Financial Officer are as
follows:
. Manage the entire range of financial activity for
the Company, including both the treasury and
accounting functions;
. Formulate and recommend policies on banking, receipt
and disbursement of funds, and fiscal and accounting
matters;
. Develop procedures for standard accounting, analysis
and reporting, and overall financial controls.
AUTHORITY: The CFO is empowered, regarding the financial and accounting
activities, to make all decisions, create all policies, and
authorize all engagements that, upon the CEO's request, he
can demonstrate to be consistent with a reasonable
interpretation of the Company's objectives.
REPORTING: The Chief Financial Officer reports to the President and
Chief Executive Officer of the Company.
6
<PAGE>
EXHIBIT "2"
EXECUTIVE INCENTIVE COMPENSATION PROGRAM
----------------------------------------
The purpose of the Executive Incentive Compensation Plan is to enhance and
reinforce the goals of Lantronix (the "Company") for profitable growth and
continuance of a sound overall condition by providing selected employees with
additional financial rewards for attainment of such growth and stable financial
and operating condition. Final approval of the payment of any awards made under
the Plan is subject to the discretion of the Board of Directors.
The Plan will take into account two major categories in determining incentive
compensation:
. Corporate Financial Goals
-------------------------
. Individual Objectives
---------------------
The following is a matrix of the mix of annual incentive compensation elements
for selected management levels:
<TABLE>
<CAPTION>
LEVEL FINANCIAL MBO's % OF TOTAL COMP.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vice President 60% 40% 23.1%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The details of the MBO portion of the compensation plan are contained in the
LANTRONIX MBO INCENTIVE PROGRAM, revision 0.2x, attached as Exhibit 2A.
- -------------------------------
7
<PAGE>
EXHIBIT "2A"
LANTRONIX MBO INCENTIVE PROGRAM
- -------------------------------
Author: Fred Thiel
Date: October 1, 1999
Revision: 0.2x
_______________________________________________________________________________
Purpose
The purpose of the Lantronix MBO incentive program is to provide selected
employees with an incentive to focus their efforts on achieving designated
quarterly objectives which contribute to the achievement of overall departmental
and/or corporate goals.
Scope
The Lantronix MBO incentive program is applicable to any employee as a component
of their total compensation package upon recommendation by their supervising
manager. Employees must be approved by the President/CEO before they may
participate in the program.
Program Overview
The target incentive is paid quarterly as part of the employee's total target
compensation. It is targeted as a percentage of the employee's total target
compensation and consists of two components: the achievement of quarterly
corporate financial goals defined in the operating plan and individual
objectives determined by the employee and the supervising manager.
Prior to the start of each quarter, the employee and the supervising manager
agree on the individual objectives to be performed be the employee during the
quarter and submit an MBO worksheet to HR for approval by senior management.
Once approved, a copy of the worksheet is returned to the employee and
supervising manager.
After the close of the quarter, the MBO worksheet is updated with the employee's
results for the quarter and submitted to HR for approval by senior management
prior to being forwarded to Payroll for payment.
The incentive payment is considered supplemental income and is subject to
specific withholding requirements determined by state and federal tax law.
Senior management is defined as the Vice President responsible for the
functional area to whom both employee and supervisor report -- except in the
event that the Vice President is the supervisor of the employee, in which case
senior management will mean the President/CEO.
This program is subject to change, including revocation, at any time. This
program is offered at the sole discretion of the President/CEO.
LANTRONIX MBO INCENTIVE PROGRAM DETAILS
- ---------------------------------------
Target Incentive Amount
The target incentive amount is defined as a percentage of the employee's total
target compensation and is dependent on the employee's responsibilities and
impact on the Company's results.
8
<PAGE>
Employees with greater responsibilities and whose efforts have a greater impact
on corporate financial results should have a higher percentage of their
compensation dependent on the achievement of corporate goals.
Examples of suggested percentages for different positions:
Database Programmer 10% of total target compensation
Product Manager 10% of total target compensation
Director Marcom 15% of total target compensation
Vice President 25% of total target compensation
HR will recommend a percentage to the supervising manager at the time when the
employee is recommended for inclusion in this program.
Incentive Composition
The Lantronix MBO incentive program consists of two components: corporate
financial goals (CFG), and individual objectives (IO). The relative weighting
of these two components is determined by the employee's direct responsibilities
and their impact on the Company's results.
Employees whose individual efforts primarily impact one department's objectives
have a higher weighting on individual objectives. Employees with more senior and
general responsibilities whose efforts have a great impact on corporate
financial results or many departments of the Company have a higher weighting on
corporate financial goals.
Examples of relative weightings for different positions:
Database Programmer 90% individual objectives / 10% corporate financial goals
Product Manager 80% individual objectives / 20% corporate financial goals
Director Marcom 65% individual objectives / 35% corporate financial goals
Vice President 40% individual objectives / 60% corporate financial goals
HR will recommend the composition to the supervising manager at the time when
the employee is recommended for inclusion in this program.
Corporate Financial Goals
The corporate financial goals are based on the approved operating plan and any
periodic updates that may be made.
The corporate financial goals (CFG) component consists of three elements: gross
margin (50% of CFG), pre-tax profit (30% of CFG), and net revenue (20% of CFG).
Gross margin is weighted heavily because achievement of this objective has the
greatest impact on the Company's ability to fund operations and development
efforts. Gross margin is the fuel upon which the Company runs.
Pre-tax profit is an important factor in funding investments for long term
growth and increasing the value of the Company for the shareholders. Achieving
this objective is an indication of management's ability to operate within the
approved operating plan budgets and control spending relative to actual gross
margin contribution in order to achieve the pre-tax profit objective.
Net revenue is an indicator of business volume growth and market acceptance for
the Company's products.
Furthermore, each element has a step function factor with thresholds, which has
the effect of accelerating the incentive. This acts as an additional incentive
by focusing employees on striving to achieve the next higher threshold which
results in greatly increased incentive payment. The thresholds and step
functions are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Element Percent Achieved Factor
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Revenue (20%) less than 85% 0.0
85-95% 0.5
96-110% 1.0
greater than 110% 2.0
- -------------------------------------------------------------------------------------------------------
Gross Margin (50%) less than 80% 0.0
81-90% 0.5
91-115% 1.0
greater than 115% 2.0
- -------------------------------------------------------------------------------------------------------
Pre-tax Profit (30%) less than 60% 0.0
86-80% 0.5
81-120% 1.0
greater than 120% 2.0
- -------------------------------------------------------------------------------------------------------
</TABLE>
This step function factor with thresholds can result in an employee receiving an
incentive payment that is greater than the targeted amount when one or more of
the corporate financial goals are surpassed.
Individual Objectives
Individual objectives are negotiated and agreed upon between employee and
supervisor. They must be specifically defined, measurable and reasonably
achievable; can be subject to partial credit or not; and must support the
overall goals of the team and corporate operating plan.
Circumstances beyond the control of the employee, or not contemplated by the
parties when setting goals, should not negatively affect the incentive
compensation calculation. As such circumstances arise, expectations as to the
potential effect should be reviewed and negotiated by the employee and
supervisor. Any mid-quarter changes must be documented and forwarded to Human
Resources.
Any disputes are resolved solely at the discretion of the President/CEO.
MBO Worksheet
The MBO worksheet is an excel worksheet which is provided by HR. It is provided
with the corporate financial goals target numbers for the upcoming quarter.
The corporate financial goals are provided by Finance to HR 30 days prior to the
start of the quarter.
The actual corporate financial results are provided by Finance to HR 15 days
after the close of the quarter.
MBO Worksheets must be signed by both the employee and supervisor before
submittal to HR for executive approval.
Partial Quarters
If an employee is included in the program after the start of the quarter, the
total eligible incentive for the quarter will be prorated based on the
percentage of the quarter during which the employee was officially included. If
an employee is absent for an extended period of time during a quarter, the same
prorated calculation will be made.
Similarly, if a participating employee leaves the Company prior to the end of
the quarter, the employee will be eligible for a prorated bonus, based on the
percentage of the quarter during which the employee was officially included in
the Plan. An employee who leaves during the quarter will be entitled to a
prorated bonus based on individual objectives only. In order to receive a bonus
based on corporate financial goals, an employee must be an employee on the last
day of the applicable quarter.
Employees who work the entire quarter but leave prior to payment of the bonus
are entitled to receive the full bonus amount, subject to individual and Company
performance.
10
<PAGE>
Upon separation from the Company, employees will be paid all wages due,
including the appropriate bonus amount. However, in the event that results of
the Company financial goals are not yet known at the time of the employee's
separation, the employee will receive payment based only upon completion of
individual objectives. Once corporate financial results are known, HR will be
responsible for submitting a check request for the remainder of the employee's
bonus. The secondary bonus payment shall be made within 35 days after the end
of a quarter.
RECOMMENDING AN EMPLOYEE FOR INCLUSION
- --------------------------------------
The supervisor or hiring manager should discuss the appropriateness with HR
prior to submitting a recommendation for inclusion in this program.
A written recommendation for inclusion must be submitted to HR including the
following:
. employee name
. brief description of responsibilities and impact on department/corporate
goals
. supervisor's reasons for including the employee
HR will review the recommendation and resulting compensation package and submit
the recommendation to senior management for approval.
Upon senior management approval, HR will respond with recommendations for target
incentive amounts and composition.
Disputes regarding inclusion in this program are resolved solely at the
discretion of the President/CEO.
SUBMITTING MBO WORKSHEETS
- -------------------------
Submitting Objectives
The supervisor will receive MBO worksheets for the upcoming quarter from HR with
the respective employee's name, title, target incentive amount, and composition
data, as well as corporate financial goals already entered, no later than 15
days before the start of the quarter.
Individual objectives are negotiated and agreed upon between employee and
supervisor. They must be specifically defined, measurable and reasonably
achievable; can be subject to partial credit or not; and must support the
overall goals of the team and corporate operating plan.
The supervisor will complete the individual objectives sections, noting
specifically if partial credit is not applicable, and set each objective's
weighting.
Once it has been approved by both the employee and supervisor, the worksheet
must be submitted to senior management for approval no later than seven days
before the start of the quarter. Senior management may request that objectives
be modified or eliminated, and may also recommend additional objectives. Any
changes must be agreed to by both the employee and supervisor. Senior
management will then forward the worksheet to HR for review. Once all approvals
are received, HR will return the worksheet to the supervisor and employee for
later submittal with results after the end of the quarter.
Submitting Results
After the close of the quarter, the supervisor will complete the results portion
of the individual objectives sections with complete details and enter the
percentage completion. Acceptable percentages are 0, 25, 75 or 100 percent. In
the event that an objective was not 100% completed, the supervisor must provide
sufficient justification for the partial credit. Both the employee and
supervisor should agree on the results, and the completed form must be submitted
to HR within 10 business days after the end of the quarter. HR will review the
form and update the actual results of the corporate financial goals before
submitting the worksheets to senior management for approval.
Senior management may request further clarification of results or proof of
completion before approval for payment.
11
<PAGE>
Senior management may disapprove results and any disputes will be resolved
solely at the discretion of the President/CEO.
Approved worksheets are submitted to Payroll for payment and filed in the
employee's personnel file. A copy will be provided to the employee upon a
request to HR.
Incentives are targeted for payment within 30-45 days of the end of the quarter.
In the event that corporate financial results are not known within 30 days after
the end of the quarter, the Company may choose to pay the individual objective
portion of the bonus separately from the corporate financial results portion.
12
<PAGE>
EXHIBIT "3"
Lantronix Non-Statutory Stock Option Plan
[To Be Attached]
13
<PAGE>
EXHIBIT "4"
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") is made and entered into by LANTRONIX,
a California corporation ("Company"), and Steven Cotton ("Executive").
RECITALS
WHEREAS, Executive is employed as Chief Financial Officer of the Company; and
WHEREAS, the Company desires to provide certain benefits to Executive as
described herein as an incentive for Executive to continue to serve as an
officer of the Company.
AGREEMENT
NOW THEREFORE, in consideration of the promises and covenants set forth in
this Agreement and for other valuable consideration, the parties agree as
follows:
1. Termination or Resignation Following a Change in Control. If a "Change in
--------------------------------------------------------
Control" (as hereinafter defined) of the Company occurs after the date hereof,
and after such Change in Control either (i) the Company terminates Executive
without "Cause" (as hereinafter defined) on or before the two year anniversary
of the date of the Change in Control, or (ii) Executive resigns with "Good
Reason" (as hereinafter defined) on or before the two year anniversary of the
date of the Change in Control, then as a severance benefit and in lieu of all
other compensation or damages (except as set forth in Section 4 hereof) the
Company shall:
a. Continue to pay Executive his current base salary as in effect on the
date of such termination or resignation through the end of the month in which
the applicable termination or resignation occurred and continuing for a period
of eighteen months, payable either in monthly installments within five days
after the end of each month, or at the option of Executive (i) 50% in a lump sum
within 45 days after the date of termination or resignation and (ii) 50% in
eighteen equal monthly installments, commencing within fifteen days following
termination or resignation and continuing thereafter on the same day of each
month;
b. Pay Executive an amount equal to 100% of his MBO bonus for the quarter
in which the separation of employment takes place;
c. Continue to provide Executive, at Company expense, all medical,
disability and life insurance benefits provided to him immediately prior to the
date of such termination or resignation (or, at the option of Executive,
immediately prior to the date of the Change in Control) for a period of eighteen
14
<PAGE>
months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Executive for such eighteen month period under
the Company's policies as then in effect or under applicable law, then the
Company shall pay Executive an amount equal to the monthly premiums paid on
behalf of Executive for such benefits at the time of such termination or
resignation for a period beginning on the date the Executive's participation in
such benefits is prohibited and ending on the date that is eighteen
months following the date of such termination or resignation, payable in monthly
installments within five days after the end of each month;
d. Accelerate the vesting of 50% of all unvested stock options granted to
Executive under the Company's stock option or other benefit plan; and
e. Reimburse Executive for third party out placement services actually
incurred by Executive in an amount not to exceed $10,000.00, provided such
expenses are accounted for by Executive in accordance with the policies and
procedures by the Company.
2. Termination For Reasons Not Associated with a "Change in Control". If the
-----------------------------------------------------------------
Company terminates Executive without "Cause," for reasons not associated with a
"Change in Control," then as a severance benefit and in lieu of all other
compensation or damages (except as set forth in Section 4 hereof) the Company
shall:
a. Continue to pay Executive his current base salary as in effect on the
date of such termination or resignation through the end of the month in which
the applicable termination or resignation occurred and continuing for a period
of nine months, payable either in monthly installments within five days after
the end of each month, or at the option of Executive (i) 50% in a lump sum
within 45 days after the date of termination or resignation and (ii) 50% in nine
equal monthly installments, commencing within fifteen days following termination
or resignation and continuing thereafter on the same day of each month;
b. Pay Executive his MBO bonus for the quarter in which the separation of
employment takes place pursuant to the terms of the Lantronix MBO Incentive
Program;
c. Continue to provide Executive at Company expense all medical,
disability and life insurance benefits provided to him immediately prior to the
date of such termination or resignation (or, at the option of Executive,
immediately prior to the date of the Change in Control) for a period of nine
months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Executive for such nine month period under the
Company's policies as then in effect or under applicable law, then the Company
shall pay Executive an amount equal to the monthly premiums paid on behalf of
Executive for such benefits at the time of such termination or resignation for a
period beginning on the date the Executive's participation in such benefits is
prohibited and ending on the date that is nine months following the date of such
termination or resignation, payable in monthly installments within five days
after the end of each month; and
d. Extend the vesting period of all unvested stock options for a period
of three years beyond the date of termination. Extend the post-termination
exercise period for all vested stock options to coincide with this three-year
extension.
15
<PAGE>
e. Reimburse Executive for third party out placement services actually
incurred by Executive in an amount not to exceed $10000.00, provided such
expenses are accounted for by Executive in accordance with the policies and
procedures by the Company.
3. Definitions.
-----------
a. Change in Control. For purposes of this Agreement, the term "Change in
-----------------
Control" shall be deemed to have occurred if (i) any transaction (or series of
transactions) is consummated whereby all, or substantially all, of the assets of
the Company are sold, leased, exchanged or transferred, (ii) any person or
entity, or group or affiliated persons or entities (other than any person who on
the date of this Agreement is a director or officer of the Company, or their
heirs, family members or trusts), becomes, directly or indirectly, the owner of
securities of the Company which represent 50% or more of the combined voting
power or equity of the Company's then outstanding securities, (iii) any
transaction is consummated whereby the Company merges or consolidates with or
into another entity and the owners of the Company immediately prior to such
merger or consolidation do not own, directly or indirectly 50% or more of the
combined voting power and equity of the surviving entity, or (iv) the
shareholders of the Company approve the dissolution or liquidation of the
Company.
b. Termination without Cause. The Company in its sole discretion may
-------------------------
terminate Executive's employment at any time with or without Cause. For
purposes of this Agreement, the Company shall be deemed to have terminated
Executive's employment without "Cause" if Executive's employment is terminated
for any reason other then the following: (i) Executive commits a felony or
possesses, uses or sells illegal drugs; (ii) Executive significantly neglects,
or materially inadequately performs, his duties as an employee of the Company;
(iii) Executive breaches a fiduciary duty to the Company or its shareholders
involving personal profit to Executive; (iv) Executive is deceased; or (v)
Executive is disabled. Notwithstanding the foregoing, Executive shall be deemed
to have been terminated without Cause (except in the case of death) unless the
Company delivers to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less a majority of the entire membership of the
Company's Board of Directors finding that, in the opinion of the Board,
Executive engaged in the applicable conduct set forth in subsection (i), (ii) or
(iii) above or Executive is disabled. For purposes of this Agreement, Executive
shall be considered disabled if he has been physically or mentally incapable of
performing his essential job duties hereunder for (i) a continuous period of at
least one hundred twenty (120) days or (ii) a total of one hundred fifth (150)
days during any one hundred and eighty (180) day period, and Executive has not
recovered and returned to the full time performance of his duties within thirty
days after written notice is given to him by the Company following such 120 day
period or 180 day period, as the case may be.
c. Resignation with Good Reason. Executive may resign at any time with
----------------------------
or without Good Reason. For purposes of the Agreement, Executive shall be deemed
to have resigned with "Good Reason" following a Change in Control if he resigns
within ninety days after the Company has taken any of the following actions
without Executive's express written consent; (i) the Company "Substantially
Lessens Executive's Title" (as defined on Exhibit 4A attached hereto); (ii) the
Company assigns material duties to Executive's Senior Authority (as defined on
Exhibit 4A attached hereto); (ii) the Company
16
<PAGE>
assigns material duties to Executive which are materially inconsistent with
Executive's status as an officer of the Company; (iii) the Company reduces
Executive's base salary or benefits from that in effect at the time of the
Change in Control (unless such reduction is in connection with a salary or
benefit reduction program of general application to officers of the Company);
(iv) the Company requires Executive to be based more than fifty (50) miles from
his present office location, except for required travel consistent with
Executive's business travel obligations; or (v) the Company fails to obtain the
assumption of this Agreement by any successor or assign of the Company.
4. The Company's Obligations Under This Agreement. Executive shall not be
----------------------------------------------
entitled to any of the benefits of Sections 1 and 2 if the Company terminates
Executive's employment or if Executive resigns under circumstances other than as
specifically set forth in Sections 1 and 2. The Benefits set forth in Sections
1 and 2 constitute the sole obligations of the Company to Executive upon any
termination or resignation and are in lieu of any damages or other compensation
that Executive may claim under other Company policies or otherwise, except for
Executive's salary which has been earned up to the date of termination or
resignation, compensation for any accrued and unused vacation up to the date of
termination or resignation, reimbursement for business expenses incurred up to
the date of termination or resignation (in accordance with the customary
policies of the Company), and any benefits that the Company is required to
provide to Executive after the date of termination or resignation under COBRA or
pursuant to any ERISA plans of the Company. The benefits on termination or
resignation provided in this Agreement are in substitution for any severance or
termination benefits otherwise available under Company policies of general
application. The benefits on termination or resignation provided in this
Agreement shall not be reduced by any compensation or benefits received by
Executive from any subsequent employer or any other third party.
5. Withholding of Taxes; Tax Reporting. The Company may withhold from any
-----------------------------------
amounts payable under this Agreement all such Federal, state, city and other
taxes, and may file with appropriate governmental authorities all such
information, returns or other reports with respect to the tax consequences of
any amounts payable under this Agreement, as may, in its judgment, be required
by law.
6. Assignment. This Agreement may not be assigned by Executive. The Company
----------
shall be entitled to assign this Agreement to any successor in interest to its
business. The Company will obtain an assumption of this Agreement by any
successor or assign to all or substantially all of the business and/or assets of
the Company (whether direct or indirect, by acquisition, merger, consolidation
or otherwise), but the failure to obtain such assumption shall not prevent or
delay such acquisition, merger, consolidation or other transaction or relieve
the Company of its obligations under the Agreement. This Agreement shall bind
and inure to the benefit of the Company's successors and assigns, as well as
Executive heirs, executors, administrators, and legal representatives.
7. Notices. Any notice, request, demand or other communication required or
-------
permitted hereunder shall be deemed to be properly given when personally served
or three (3) days after deposit in the United States mail, registered or
certified, postage prepaid, return receipt requested, addressed to the Company
at its principal office or to Executive at his last known address.
17
<PAGE>
8. Entire Agreement. This Agreement, together with the documents referenced
----------------
herein, contains the entire agreement of the parties hereto with respect to the
subject matter hereof it supersedes any and all other agreements, either oral or
in writing, between the parties hereto with respect to the subject matter
hereof. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, written, oral or otherwise, have been made
by any party, or anyone acting on behalf of any party, which are not embodied
herein, and that no other agreement, statement or promise not contained in this
Agreement shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, but only by an agreement in writing signed by the
Company and Executive.
9. Attorneys' Fees. In the event of any arbitration arising out of the
---------------
subject matter hereof, the prevailing party shall be entitled to recover from
the non-prevailing party its costs and expenses (including reasonable attorney's
fees) incurred in such arbitration.
10. Arbitration. If any dispute hereafter arises between the parties hereto
-----------
and/or their agents or employees relating to the terms and provisions of this
Agreement or otherwise, including but not limited to any claim for breach of any
contract or covenant (express or implied), tort claims, claims for
discrimination or harassment (including, but not limited to race, sex, religion,
national origin, age, handicap or disability), claims for compensation or
benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any
federal, state or other governmental law, statute, regulation or ordinance
(except for claims involving worker's compensation benefits), then either party
may initiate arbitration proceedings in accordance with the Employment Rules of
JAMS ENDispute, as the exclusive remedy for such dispute and in lieu of any
court action, which is hereby consent to such arbitration, and any arbitration
award shall be final and binding. Neither party shall disclose the existence of
any dispute or the terms of any arbitration decision to any third party, other
than legal counsel, accountants, and financial advisors or as required by law.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
identified at the beginning of the Employment Agreement.
EXECUTIVE:
/s/ Steven Cotton
_______________________________________
Steven Cotton
COMPANY:
LANTRONIX,
A California corporation
/s/ Fred Theil
By: ___________________________________
Fred Thiel
Its: Chief Executive Officer
19
<PAGE>
EXHIBIT "4A"
(Steven Cotton)
"Substantially Lessens Executive's Title" shall mean that the Executive does
not have the title of Chief Financial Officer or some higher title.
The Company will be deemed to have Substantially Reduced Executive's Senior
Authority if Executive no longer has authority for the entire range of financial
activity of the Company on a day-to-day basis.
20
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made on September 28, 1998 is between Lantronix, a
California corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine,
California 92714, and Johannes Rietschel, a married individual, ("Employee"),
residing, at Wintersteinstrasse 2, 61440 Oberursel, Germany, by virtue of the
following facts, events, circumstances and desires:
RECITALS
A. WHEREAS, Employee desires to work for Employer and receive
compensation, and Employer desires to employ Employee;
B. WHEREAS, Employer is engaged in the business of developing and selling
terminal servers, print servers, switches and other peripheral devices used in
local area networking computer systems;
C. WHEREAS, Employee, in the course of employment, will obtain or develop,
confidential information and trade secrets;
D. WHEREAS, Employee recognizes and acknowledges that Employer must
maintain and preserve all such confidential information and trade secrets for
the protection of its business, competitive position and goodwill; and
E. WHEREAS, Employer desires assurance that Employee will not compete
while employed by Employer, and Employee is willing to refrain from such
competition.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this agreement, and in consideration of Employee's employment and
continued employment by Employer, it is agreed as follows:
AGREEMENT
1. Term. Subject to this Agreement's terms and conditions, Employer agrees
----
to employ Employee. The employment term shall commence January 1, 1999 and shall
terminate December 31, 2001. The Employee will be employed by the Employer until
such time as either or both parties choose to discontinue the employment. The
employment relationship shall be that of an Employee at will.
2. Duties. While employed by. Employer, Employee shall devote
------
substantially his entire working time, skill and attention exclusively to the
interests and business of Employer, shall perform such duties as may be assigned
to him from time to time by Employer. shall comply to the best of his ability
with all policies and directives issued by Employer's Board of Directors, and
shall in all respects do his
Page 1 of 9
<PAGE>
utmost to further enhance and develop the best interests and welfare of the
Employer. Employee's specific title, responsibility, authority and reporting
shall be as detailed on Exhibit "1" attached hereto and incorporated herein.
3. Compensation.
------------
3.1 Salary. The Employer shall pay to the Employee a cash
------
compensation of approximately Two Hundred Thousand Dollars (US$200,000.00) per
year, payable at those intervals as the Employer shall pay other Executives,
commencing January 1, 1999. Said compensation will consist of two components: 1)
a fixed salary of One Hundred and Fifty-five Thousand Dollars (US$155,000), and
2) a variable incentive compensation calculated in accordance with the standard
Executive Incentive Compensation Program attached hereto and incorporated
herewith as Exhibit "2". Said incentive compensation amount shall be paid
quarterly and its quarterly baseline calculated as 30% of the fixed salary paid
each quarter. Employee's compensation shall be subject to annual review by the
President & CEO.
3.2 Automobile Allowance. Employee shall receive an automobile
--------------------
allowance of US$800 per month.
3.3 Insurance Coverage. Employer shall make available to Employee and
------------------
his dependents whatever coverages Employee shall elect under Employer's standard
corporate medical, dental, life and disability insurance programs as each such
respective benefit is made available to any other Executive employee of Employer
at a comparable level within the organization.
3.4 Expenses. Employee shall be reimbursed by Employer for all
--------
reasonable entertainment, promotion, travel or other expenses advanced by him on
behalf of Employer.
3.5 Other Incentives. Employee shall be entitled to participate in
----------------
any other Employee incentive programs offered by Employer, including but not
limited to such programs as a IRC Section 401(k) plan.
3.6 Vacation. Employee will initially be entitled to twenty-five (25)
--------
days of vacation per year accrued ratably on a monthly basis. Vacation time that
has accrued but is unused at the end of the calendar year will be compensated at
the base salary rate.
3.7 Place of Service. The Employer and Employee shall mutually agree
----------------
where Employee will render his services to Employer. It is intended that the
working capacity of the Employee shall be split up between California, Germany
and other parts of the world in a reasonable and effective manner.
4. Termination. The Employer shall have the right to terminate employment
-----------
without cause, upon three weeks prior notice, or for cause, immediately after
notice. The term "cause" shall mean:
4.1 Conduct on the Employee's part intended to or likely to injure
the Employer's business or reputation;
Page 2 of 9
<PAGE>
4.2 The Employee's perpetration of a crime involving moral turpitude,
whether relating to employment or otherwise;
4.3 Significant failure by the Employee to perform duties and
obligations as set forth in this Agreement, resulting in substantial damage to
the Employer.
5. Confidential Information.
------------------------
5.1 Definition. "Confidential information" means information that is
----------
proprietary to the Employer or proprietary to others and entrusted to the
Employer, whether or not trade secrets. Confidential information includes, but
is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past, current or anticipated
products. Confidential information also includes, without limitation, Employer
information concerning (a) price lists, (b) costs of production, and (c) raw
material costs; (d) selling costs, (e) delivery costs, (f) information
concerning new or proposed new products, including the nature and design of such
products and the plans for marketing such products, (g) internal procedures and
policies, (h) customer lists, account .names, contacts, addresses and sales
activity, (i) names and addresses of suppliers and vendors, (j) tax and
financial information, (k) reserves, (l) intellectual property owned or leased
by the company, (m) banking relationships and, arrangements (n) Employees, (o)
management personnel and policies, (p) quotation names, addresses, contacts and
quote workups, (q) all mailing lists, (r) company product training materials and
courses, and (s) company computer programs and printouts.
5.2 Prohibitions Against Use. During or subsequent to the termination
------------------------
Of Employee's employment, whether termination is voluntary or involuntary,
Employee will not use or disclose, other than in connection with employment with
the company, any confidential information to any person not employed by the
company or not authorized by the company to receive such confidential
information without the prior written consent of the company. Employee will use
reasonable and. prudent care to safeguard and protect and prevent the
unauthorized use and disclosure of-confidential information. The obligations
contained in this paragraph will survive for as long as the company in its sole
judgment considers the information to be confidential information.
6. Protective Covenant/Non-Competition. While employed by Employer,
-----------------------------------
Employee agrees not to. accept employment, consult, with or otherwise become
associated or affiliated with any Person, firm, association or other entity that
is directly or indirectly in competition 'with the services, products, business
or activities of Employer.
It is specifically agreed that while employed and' for a period of,
one (1) year after termination of his employment, Employee shall not in any
manner contact, solicit or cause to be solicited any of Employer's customers,
suppliers or clients or former or prospective customers or suppliers for any
purpose whatsoever without the written consent of Employer. Employee further
agrees that during his employment and for one (1) year after termination of his
employment, he will not
Page 3 of 9
<PAGE>
directly or indirectly, in any manner, request or induce any Employee of
Employer to leave his employment with Employer, unless expressly authorized or
instructed to do so in writing by Employer.
It is understood by both parties to this agreement that the protective
covenants meant for the reasonable protection of the business of Employer and
not to impair the ability of Employee to earn a living. Should any portion of
this covenant be construed by a court of law or equity as less than reasonable,
the parties agree to the establishment by such court of an obligation for the
protection of Employer's business that it deems reasonable.
7. Return of Property. All documents, drawings, lists, records or other
------------------
tangible or intangible thing relating to the business of Employer that Employee
originates or comes into the Employee's possession in any way during the
employment period shall remain the sole property of Employer. Any copies,
abstracts or summaries of such items are likewise the sole property of Employer.
Employee shall not make copies or prepare abstracts or summaries of such items
except for the sole use and account of Employer and with the consent and
instruction of Employer's management. Upon termination of employment of
Employee, he or she shall immediately return to Employer all such items in his
or her possession, as well as any of Employer's property he or she has received
for assistance in performing work duties, including but not limited to those
items outlined above, as well as any of Employer's equipment or supplies.
Employee shall be liable for damages to Employer for any such property not so
returned.
8. Remedy. Employee acknowledges and agrees that' the confidential
------
information, trade secrets and special knowledge acquired by him or her during
his or her employment with Employer is valuable and unique, and that breach by
him or her of the provisions of this agreement will cause employer irreparable
injury and damage. It cannot be reasonably or adequately compensated by money
damages. Employee, therefore, expressly agrees that Employer shall be entitled
to injunctive or other equitable relief in order to prevent a breach of this
agreement or any part thereof. in addition to such other remedies legally
available to Employer. Employee expressly waives the claim or defense that
Employer has an adequate remedy at law.
9. Applicable Law. This agreement shall be governed, interpreted and
--------------
construed in accordance with the laws of the State of California.
10. Severability. In the event that any portion of this agreement shall be
------------
deemed unenforceable or void, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this agreement.
11. Entire Agreement. It is agreed that the provisions of the agreement
----------------
contain the entire agreement on the subject covered between the parties, and
cannot be modified orally, and can only be modified by written agreement signed
by Employee and Employer. This agreement shall be binding upon the parties and
their respective heirs, administrators .and assigns.
12. Voluntary Agreement. I understand I will have access to confidential,
-------------------
information and customer accounts while employed by Employer. I further
Page 4 of 9
<PAGE>
acknowledge that I have freely and voluntarily entered into this Agreement which
contains restrictions on my ability to complete with Lantronix for any reason. I
recognize that Lantronix has provided me adequate consideration for my agreement
herein.
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
identified at the beginning of the agreement.
"EMPLOYEE"
/s/ Johannes Rietschel
- ----------------------
Johannes Rietschel
LANTRONIX
By: /s/ Frederick G. Thiel
----------------------
Frederick G. Thiel
Its: Chief Executive Officer
Page 5 of 9
<PAGE>
EXHIBIT "1"
TITLE: Chief Technological Officer
RESPONSIBILITIES: The responsibility of the CTO is to:
AUTHORITY: The CTO is empowered to:
REPORTING: The CTO reports to the President and CEO
Page 6 of 9
<PAGE>
EXHIBIT "2"
EXECUTIVE INCENTIVE COMPENSATION PROGRAM
----------------------------------------
The purpose of the Executive Incentive Compensation Plan is to enhance and
reinforce the goals of Lantronix (the "Company") for profit, able growth and
continuance of a sound overall condition: by providing selected employees with
additional financial rewards for attainment of such growth and stable financial
and operating condition. Final approval of the payment of any awards made under
the Plan is subject to the discretion of the Board of Directors.
The Plan will take into account two major categories in determining incentive
compensation:
. Corporate Financial Goals
-------------------------
. Individual Management Objectives
--------------------------------
Following is a matrix of the mix of annual incentive compensation elements for
selected management levels:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
LEVEL Financial MBO's % of $base
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CEO/President 60% 40% 30%
- --------------------------------------------------------------------------------------------------------
CTO or Vice President 60% 40% 30%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Weighting and Factors:
- ---------------------
Financial goals consist of revenues, gross margin and bet operating income in
dollars and are weighed as follows:
Revenue 20%
Gross Margin 50%
Net 30%
Page 7 of 9
<PAGE>
Gross margin carried the greatest weight due to its importance in providing the
fuel that powers the company.
As a further incentive, each goal uses a step function with thresholds to
determine actual bonus amount as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Element Percentage of Goal Factor
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue Less than 85% 0.0x
85%-95% 0.5x
96-110% 1.0x
Greater than 110% 2.0x
- ------------------------------------------------------------------------------------------------------
Gross Margin Less than 80% 0.0x
81-90% 0.5x
91-115% 1.0x
Greater than 115% 2.0x
- ------------------------------------------------------------------------------------------------------
Net Less than 60% 0.0x
61-80% 0.5x
81-120% 1.0x
Greater than 120% 2.0x
- ------------------------------------------------------------------------------------------------------
</TABLE>
Example:
- -------
Period: Q3 1997
Annual Salary: $100,000 Incentive compensation baseline: 30%
MBO Baseline $/qtr: $7,500 Fin. %: 60% MBO %: 40%
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL TARGET ACTUAL RESULT/ FACTOR BASELINE (R/F)*
GOALS BASELINE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $10,000 $10,500 105% $ 900 $ 900.00
1.0 20%
- ----------------------------------------------------------------------------------------------------------------
GROSS MARGIN $ 4,600 $ 5,500 120% $2,250 $4,500.00
2.0 50%
- ----------------------------------------------------------------------------------------------------------------
PROFIT $ 1,100 $ 800 73% $1,350 $ 675.00
0.5 30%
- ----------------------------------------------------------------------------------------------------------------
SUBTOTAL FINANCIAL $4,500 $6,075.00
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 8 of 9
<PAGE>
Rules:
- -----
1. Incentive compensation is to be paid quarterly based on targeted
quarterly financial goals and MBO's.
2. Circumstance beyond the control of the executive, or not contemplated by
the parties when setting goals, should not negatively, affect the incentive
compensation calculation. As such circumstances arise, expectations as to the
potential effect should be negotiated between the executive and his
supervisor(s). Disputes should be resolved solely at the discretion of the Board
of Directors.
3. Financial goal targets should be based on the Board approved operating
plan and any periodic updates that may be made.
4. MBO's need to be specifically defined, measurable, subject to partial
credit or all or none, reasonably able to be accomplished, support the overall
goals of the Company and the Operating Plan, and negotiated and agreed to by
supervisor and executive.
Page 9 of 9
<PAGE>
Exhibit 21.1
Subsidiaries of Registrant
--------------------------
Lantronix International AG Switzerland
Lantronix Europe GmbH
Lantronix Deutschland GmbH
Lantronix UK Ltd.
Lantronix Singapore
Acola GmbH
Lantronix International, Inc.
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 15, 2000 (except for Note 9, as to which the
date is May , 2000), in the Registration Statement (Form S-1) and related
Prospectus of Lantronix, Inc.
Ernst & Young LLP
Orange County, California
May , 2000
The foregoing consent is in the form that will be signed upon the completion
of the re-incorporation described in Note 9 to the consolidated financial
statements.
/s/ Ernst & Young LLP
Orange County, California
May 18, 2000
<PAGE>
Exhibit 23.2
Consent of KPMG LLP, Independent Auditors
The Board of Directors
Lantronix, Inc.
The audit referred to in our report dated August 13, 1997, included the related
consolidated financial statement schedule for the year ended June 30, 1997,
included in the registration statement. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Orange County, California
May 19, 2000
<PAGE>
EXHIBIT 99.1
May 19, 2000
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Lantronix, Inc. and, under the
date of August 13, 1997, we reported on the consolidated financial statements
of Lantronix, Inc. for the year ended June 30, 1997. In 1998, our appointment
as principal accountants was terminated. We have read Lantronix, Inc.'s
statements included under "Change in Auditor" in its Form S-1, and we agree
with such statements, except that we are not in a position to agree or
disagree with Lantronix, Inc.'s statement that the change was approved by the
Board of Directors.
Very truly yours,
/s/ KPMG LLP
