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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission File Number 333-37508
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LANTRONIX, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0362767
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15353 Barranca Parkway, Irvine, California 92618
(Address of principal executive offices)
(949) 453-3990
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Name of each exchange
each class on which registered
---------- ---------------------
Common Stock Nasdaq National Market
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 20, 2000, there were 35,831,372 shares of the company's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Company (based on the closing sale price of such shares
on the NASDAQ National market on September 20, 2000) was approximately
$51,836,176. Shares of the Company's common stock held by each executive
officer, director and holder of five percent or more of the registrant's common
stock outstanding as of September 20, 2000 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
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LANTRONIX, INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART 1
ITEM 1. Business............................................................................... 1
ITEM 2. Properties............................................................................. 12
ITEM 3. Legal Proceedings...................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 13
ITEM 6. Selected Consolidated Financial Data................................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 31
ITEM 8. Financial Statements and Supplementary Data............................................ 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 31
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................... 32
ITEM 11. Executive Compensation................................................................. 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 34
ITEM 13. Certain Relationships and Related Transactions......................................... 35
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 37
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PART I
ITEM 1. 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 Heating,
Ventilation and Air Conditioning (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 Original Equipment
Manufacturers (OEMs), systems integrators, distributors and Value Added
Resellers (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
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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 theses devices determine if the
person requesting access should be admitted to the building. By implementing
device server technology at the point of entry, the 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, a security system which is monitored via the Internet emits a
constant pinging while connected. Therefore, an end-user would immediately be
informed of a problem if the pinging were to stop. In contrast, a security
system that relies on a telephone line does not emit a constant pinging, and
therefore might require a longer period of time to discover that a problem
exists. Moreover, using device server technology, 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. We believe that our customers deploy our device
server technology only in instances where the financial benefits outweigh the
cost of our products. As with the computer industry's move away from
centralized computing architectures, we believe that across a broad range of
applications, the access 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
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, 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 enable
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,
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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.
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
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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.
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.
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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.
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Net Revenues for
Year Ended
June 30, 2000 Primary Product
Product Family (millions) Function Products
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Device Servers $24.2 Enable almost any External and embedded
electronic device to CoBox, MSS and UDS
become network-enabled, products.
allowing the user to
control the device by
way of the Internet
using a wide range of
network protocols.
Multiport Device Servers $10.9 Enable multiple devices ETS and LRS products.
to become network-
enabled, allowing the
user to control the
devices by way of the
Internet using a wide
range of network
protocols.
Print Servers $ 6.5 Allow multiple users to EPS, MPS and LPS
share printers anywhere products.
on an Ethernet network
using a wide range of
network protocols.
Other $ 3.4 Support our product Switches, hubs and other
lines. connectivity
peripherals.
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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.
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The table below sets forth our Device Servers, their type of connection, the
product description and their initial introduction date:
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Connection
Product Name Type Description Introduction Date
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UDS 10 External RS-232, RS-485, RS-422 serial standards. June 2000
DB25 serial port. RJ45 connector. Flash
ROM. Managed via HTTP, DHCP, Telnet and
SNMP.
CoBox Micro Embedded TTL serial. Ethernet RJ45 connector. IP November 1999
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 standards March 1999
(switch selectable). 10BASE-T Ethernet
interface (RJ45). Master or slave
functionality.
CoBox Modbus External RS-232, RS-485, RS-422 serial standards. March 1999
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 and December 1998
Token Ring available. IP protocol stack.
Flash ROM. Managed via HTTP, Serial, Telnet
and SNMP.
MSS100 External DB25 with full modern controls and a 10/100 November 1998
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 standards. October 1998
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 Flash March 1998
ROM. Management via Telnet, SNMP, DHCP and
EZWebCon.
MSS1 External DB25 serial interface. Wide variety of port October 1995
and network configuration options. Flash
ROM Management via Telnet, SNMP, DHCP, and
EZWebCon.
LRS1 External RS-232 DB25 DTE asynchronous serial ports. September 1995
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.
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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:
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Product # of
Name Ports Description Introduction Date
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ETS32PR 32 10/100 RJ45 and AUI Ethernet ports. Full modem November 1998
controls on each port. Managed via HTTP, SNMP,
DHCP, Telnet and EZWebCon.
CoBox NTP 2 Connect GPS time source to an Ethernet or Token October 1998
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. TCP/IP, IPX, September 1998
AppleTalk, Windows NT, and LAT. NDS compliant.
Managed via Telnet, SNMP, DHCP and EZWebCon.
ETS8P 8 10BASE-T and AUI Ethernet interfaces. TCP/IP, IPX, May 1997
AppleTalk, Windows NT, and LAT. NDS compliant.
Managed via Telnet, SNMP, DHCP, and EZWebCon.
ETS16P 16 10BASE-T and AUI Ethernet interfaces. TCP/IP, IPX, May 1997
AppleTalk, Windows NT, and LAT. NDS compliant.
Managed via Telnet, SNMP, DHCP and EZWebCon.
LRS32F 32 RJ45 serial ports support RS-423 and RS-232C. May 1997
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-232C. March 1996
Secure Console Server connections to host systems.
In-band/out-of-band management. 10/100 and AUI
network interfaces.
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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
sales to OEMs as a percentage of total 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 enable 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 retailers 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 using 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, the United
Kingdom, Spain, France and the United States. As of August 1, 2000, our direct
sales force consisted of 48 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 August 1, 2000, we employed 22 people in our research and
development organization. Our research and development expenses were $3.2
million for the year ended June 30, 2000, $2.6 million for the year ended June
30, 1999 and $1.8 million for the year ended June 30, 1998.
9
<PAGE>
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 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 Echelon;
. 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 Technologies, Nortel Networks; 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. 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.
10
<PAGE>
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 June 30, 2000, we have had no patents issued in the
United States and one patent issued in Germany. We do not rely on 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.
Limitations on Our Rights to Intellectual Property
Pursuant to an agreement dated February 29, 1989 between the Company 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 years ended June 30, 2000 and 1999, we paid Gordian
approximately $2.2 and $2.0 million for royalties, respectively. Our agreement
with Gordian terminates at the end of the sales life of the product. The
agreement may also be terminated by either party upon 30 days notice or under
other specified conditions. 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
our MSS 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. is terminated, 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 seven 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. It is possible
that these, or other existing laws or regulations, may adversely affect us. In
addition, future regulation could adversely affect our business, operating
results and financial condition.
Employees
As of August 1, 2000, we had 149 full-time employees, of which 111 were
located in the United States and 38 were located internationally. As of that
date, we had 22 employees in research and development, 84 in sales and
marketing department, and 23 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.
11
<PAGE>
ITEM 2. PROPERTIES
In July 2000, we renewed and extended the lease for our corporate
headquarters facility in Irvine, California. Our products are manufactured by
third party contractors and distributed primarily from our Irvine facility. Our
renewed lease provides us with approximately 51,000 square feet of space, of
which 28,000 square feet had previously been subleased. We have now terminated
the sublease agreement which will be used as additional office space. We
believe our expanded facilities will be adequate to meet our needs for the next
several years. Our lease expires in July 2005.
Lantronix International AG Switzerland, a holding company which is our
wholly owned subsidiary, operates out of a leased office in Breda, Netherlands.
New sales offices, which we lease, have been established throughout Europe
during the past year, including Germany, the United Kingdom, Spain and France.
We also lease a research and development facility in Germany. We recently
leased office space in Singapore which is used to support our Asia Pacific
Region sales efforts.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. On June 19, 2000, Lantronix, a California corporation ("Lantronix
California"), solicited the consent of its stockholders to approve the
following:
(1) The reincorporation of Lantronix California into the State of Delaware,
including (i) the Agreement and Plan of Merger, (ii) the Certificate of
Incorporation of the Subsidiary, (iii) the Bylaws, and (iv) the form of
indemnification agreement for the directors and officers of the Company
<TABLE>
<CAPTION>
For Against or Withheld Abstain
--- ------------------- ---------
<S> <C> <C>
28,314,864 0 1,459,568
</TABLE>
2. On June 19, 2000, Lantronix Inc., a Delaware corporation ("Lantronix
Delaware"), solicited the consent of its stockholders to approve the
following:
(1) The reincorporation of Lantronix California into the State of Delaware,
including (i) the Agreement and Plan of Merger, (ii) the Delaware
Certificate of Incorporation of the Company authorizing 200,000,000
shares of common stock and 5,000,000 shares of "blank check" preferred
stock and (iii) the Delaware bylaws eliminating the right of
stockholders to act without written consent and eliminating the right
of cumulative voting.
<TABLE>
<CAPTION>
For Against or Withheld Abstain
--- ------------------- -------
<S> <C> <C>
Unanimous 0 0
</TABLE>
(2) The ratification and assumption by the Company of all employee benefits
plans of Lantronix California, including the 1993 Incentive Stock
Option Plan, the 1994 Nonstatutory Stock Option Plan, and the
ratification and assumption by the Company of the new 2000 Stock Plan
and 2000 Employee Stock Purchase Plan, and all outstanding and
unexercised options or warrants issued under all Plans.
<TABLE>
<CAPTION>
For Against or Withheld Abstain
--- ------------------- -------
<S> <C> <C>
Unanimous 0 0
</TABLE>
(3) The form of indemnification agreement for the directors and officers of
the Company.
<TABLE>
<CAPTION>
For Against or Withheld Abstain
--- ------------------- -------
<S> <C> <C>
Unanimous 0 0
</TABLE>
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Lantronix's common stock has been traded on the National Association of
Securities Dealers Automated Quote system ("NASDAQ") under the symbol "LTRX"
since August 4, 2000. The number of record holders of the Company's common
stock as of September 20, 2000 was approximately 34. The following table sets
forth, for the period indicated, the high and low sales prices for the
Company's common stock:
<TABLE>
<CAPTION>
Fiscal Year 2001 High Low
---------------- ------ -----
<S> <C> <C>
First Quarter through September 20, 2000................... $12.38 $6.56
</TABLE>
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.
Recent Sales of Unregistered Securities
Lantronix has issued and sold the following securities since June 1997:
(1) In June 1997, we issued and sold an aggregate of 169,600 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.
(2) In November 1997, we issued and sold an aggregate of 3,084 shares of
our common stock for an aggregate purchase price of $578.25 to an
employee.
(3) In August 1998, we issued and sold an aggregate of 3,500 shares of our
common stock for an aggregate purchase price of $720.00 to an
employee.
(4) In September 1998, we issued and sold an aggregate of 859,496 shares
of our common stock for an aggregate purchase price of $150,411.94 to
the spouse of an employee.
(5) In September 1998, we issued and sold an aggregate of 2,578,492 shares
of our common stock for an aggregate purchase price of $451,235.90 to
an employee.
(6) From April 1999 to July 1999, we issued and sold an aggregate of
215,840 shares of our common stock for an aggregate purchase price of
$36,371.00 to an employee. This employee also received a grant of
84,016 options.
(7) In June 1999, we issued and sold an aggregate of 10,980 shares of our
common stock for an aggregate purchase price of $2,227.36 to an
employee.
(8) In March 2000, we issued and sold an aggregate of 26,664 shares of our
common stock for an aggregate purchase price of $4,666.20 to an
employee.
(9) In April 2000, we issued and sold an aggregate of 5,804 shares of our
common stock for an aggregate purchase price of $1,268.96 to an
employee.
(10) In May 2000, we issued and sold an aggregate of 60,000 shares of our
common stock for an aggregate purchase price of $17,200.00 to a
director.
13
<PAGE>
(11) In May 2000, we issued and sold an aggregate of 100,000 shares of our
common stock for an aggregate purchase price of $28,100.00 to a
director.
(12) In May 2000, we issued and sold an aggregate of 459,354 shares of our
common stock for an aggregate purchase price of $82,683.72 to an
employee.
(13) In May 2000, we issued and sold an aggregate of 48,572 shares of our
common stock for an aggregate purchase price of $24,286.00 to an
employee.
(14) In June 2000, we issued and sold an aggregate of 42,236 shares of our
common stock for an aggregate purchase price of $8,105.12 to an
employee.
(15) In June 2000, we issued and sold an aggregate of 15,250 shares of our
common stock for an aggregate purchase price of $3,098.00 to an
employee.
(16) In June 2000, we issued and sold an aggregate of 21,853 shares of our
common stock for an aggregate purchase price of $4,001.97 to an
employee.
(17) In June 2000, we issued and sold an aggregate of 31,547 shares of our
common stock for an aggregate purchase price of $6,106.89 to an
employee.
(18) In June 2000, we issued and sold an aggregate of 1,800 shares of our
common stock for an aggregate purchase price of $324.00 to an
employee.
(19) In June 2000, we issued and sold an aggregate of 28,800 shares of our
common stock for an aggregate purchase price of $4,608.00 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.
All recipients either received adequate information about Lantronix or had
adequate access to, through their relationships with Lantronix, to such
information.
There were no underwritten offerings employed in connection with any of the
transactions set forth above.
Use of Proceeds
On August 4, 2000, we commenced our initial public offering ("IPO") of
6,000,000 shares, including an underwriter's over-allotment option to purchase
an additional 900,000 shares from two selling stockholders, at an offering
price of $10.00 per share. We made this offering pursuant to a Registration
Statement on Form S-1 filed with the Securities and Exchange Commission (file
no. 333-37508). One share consisted of one share of our Common Stock, $.0001
par value per share. Of the shares registered, 6,000,000 were sold. The over-
allotment option was not exercised by the underwriters.
Donaldson, Lufkin & Jenrette was the managing underwriter of the IPO. The
aggregate gross proceeds of the IPO (before deduction of underwriting
discounts and commissions and expenses of the offering) were $60,000,000. We
paid total expenses of $5,612,000 in connection with the IPO consisting of
underwriting discounts, commissions and expenses. Our net proceeds from the
offering were $54,388,000. As of September 25, 2000, we have not used any of
these net proceeds, other than for issuance expenses.
A summary of the issuance expenses in connection with the IPO is provided
in the table below:
<TABLE>
<S> <C>
Underwriters.................................................. $4,200,000
Legal......................................................... 684,000
Accounting.................................................... 450,000
Other......................................................... 278,000
----------
Total....................................................... $5,612,000
==========
</TABLE>
None of expenses listed above consisted of direct or indirect payments to
directors, officers 10% stockholders or affiliates.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL 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 below. The consolidated statements of operations data for
the years ended June 30, 2000, 1999 and 1998 and the balance sheet data as of
June 30, 2000 and 1999, are derived from the audited consolidated financial
statements included elsewhere in this report. The consolidated statements of
operations data for the years ended June 30, 1997 and 1996, and the balance
sheet data as of June 30, 1998, 1997 and 1996, are derived from the audited
consolidated financial statements not included elsewhere in this report. The
historical results are not necessarily indicative of results to be expected for
future periods.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues..................... $44,975 $32,980 $28,300 $30,680 $40,252
Cost of revenues................. 21,500 16,824 16,812 20,430 27,463
------- ------- ------- ------- -------
Gross profit..................... 23,475 16,156 11,488 10,250 12,789
------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative................ 17,557 9,768 7,857 7,455 9,674
Research and development....... 3,186 2,615 1,770 2,471 3,770
Amortization of deferred
compensation.................. 1,119 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses..... 21,862 12,383 9,627 9,926 13,444
------- ------- ------- ------- -------
Income (loss) from operations.... 1,613 3,773 1,861 324 (655)
Minority interest................ (49) (30) -- -- --
Interest income (expense), net... 187 151 (5) (168) 33
Other income (expense), net...... (47) (10) 1 9 (15)
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 1,704 3,884 1,857 165 (637)
Provision (benefit) for income
taxes........................... 649 1,098 554 (37) (191)
------- ------- ------- ------- -------
Net income (loss)................ $ 1,055 $ 2,786 $ 1,303 $ 202 $ (446)
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic........................ $ 0.04 $ 0.10 $ 0.05 $ 0.01 $ (0.02)
Diluted...................... 0.03 0.10 0.05 0.01 (0.02)
Weighted average shares:
Basic........................ 29,274 26,977 25,207 25,128 25,051
Diluted...................... 34,178 28,880 25,443 25,427 25,051
<CAPTION>
As of June 30,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $ 1,988 $ 5,833 $ 1,759 $ 173 $ 230
Working capital.................. 11,138 8,109 6,327 4,812 3,838
Total assets..................... 20,210 17,292 9,800 9,570 14,985
Capital lease obligations, net of
current portion................. 96 97 -- -- --
Minority interest................ -- 68 -- -- --
Retained earnings................ 8,427 7,372 4,586 3,284 3,081
Total stockholders' equity....... 12,547 10,312 6,928 5,624 5,407
</TABLE>
15
<PAGE>
ITEM 7. 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 our consolidated financial
statements and related notes included elsewhere in this report. In addition to
historical information, the discussion in this report contains forward-looking
statements that involve risks and uncertainties. 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 report.
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. We have two customers that accounted for more
than 10% of our net revenues. One of our distributors, Ingram Micro, accounted
for 12.8% of our net revenues during the year ended June 30, 2000, 15.5% for
the year ended June 30, 1999 and 22% for the year ended June 30, 1998. Another
distributor, Tech Data, accounted for 12.0% of our net revenues during the year
ended June 30, 2000, 11.5% for the year ended June 30, 1999 and 12.6% for the
year ended June 30, 1998. Transtec AG, an international OEM and related party
due to common ownership by our Chairman and major stockholder, accounted for
7.2% of our net revenues during the year ended June 30, 2000, 11.4% for the
year ended June 30, 1999 and 17.9% for the year ended June 30, 1998.
In October 1998, we acquired ProNet GmbH, a German company that is a
supplier of industrial application device server technology. In connection with
this acquisition, we acquired exclusive marketing rights to CoBox technology in
the United States and Canada from Dr. Peter Weisser, Sr. We also acquired non-
exclusive marketing rights to this technology world-wide, excluding Germany and
Switzerland. Under this agreement, we are required to make royalty payments to
Dr. Weisser. As a result, we will recognize approximately $376,000 of
amortization relating to a marketing rights agreement for the period from July
1, 2000 through December 31, 2000. In addition, we will incur sales commission
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 these transactions.
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. The
allowance for doubtful accounts is
16
<PAGE>
recorded based upon anticipated collection risk. This reserve has decreased
during the years ended June 30, 2000 and 1999 due primarily to a decline in bad
debt write-offs and continued reduction in the collection period.
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
$10.1 million, which is being amortized over the vesting period of the related
stock options, which is generally four years. At June 30, 2000, a balance of
$8.9 million remains and will be amortized as follows: $2.8 million in fiscal
2001, $2.8 million in fiscal 2002, $1.9 million in fiscal 2003, $1.2 million in
fiscal 2004 and $0.2 million in fiscal 2005. The amount of stock-based
compensation amortized 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.
In May 2000, the Company's Board of Directors authorized the re-
incorporation of the Company in the State of Delaware. Such re-incorporation
was completed on July 28, 2000. The par value and shares of common stock
authorized, issued and outstanding for each period presented in the
consolidated statement of stockholders' equity have been retroactively adjusted
to reflect the reincorporation.
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>
Year ended June
30,
-------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues............................................... 100.0% 100.0% 100.0%
Cost of revenues........................................... 47.8 51.0 59.4
----- ----- -----
Gross profit............................................... 52.2 49.0 40.6
Operating expenses:
Selling, general and administrative...................... 39.0 29.6 27.8
Research and development................................. 7.1 7.9 6.3
Amortization of deferred compensation.................... 2.5 -- --
----- ----- -----
Total operating expenses............................... 48.6 37.5 34.0
Income from operations..................................... 3.6 11.4 6.6
Minority interest.......................................... (0.1) (0.1) --
Interest income (expense), net............................. 0.4 0.5 --
Other income (expense), net................................ (0.1) -- --
----- ----- -----
Net income before income taxes............................. 3.8 11.8 6.6
Provision for income taxes................................. 1.5 3.3 2.0
----- ----- -----
Net income............................................. 2.3% 8.4% 4.6%
===== ===== =====
</TABLE>
Comparison of the Years Ended June 30, 2000 and 1999
Net Revenues
Net revenues increased $12.0 million, or 36.4%, from $33.0 million in the
year ended June 30, 1999 to $45.0 million in the year ended June 30, 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 $12.6 million, or 108.8%, from
$11.6 million or 35.2% of net revenues in the
17
<PAGE>
year ended June 30, 1999 to $24.2 million or 53.8% of net revenues in the year
ended June 30, 2000. A portion of this growth resulted from the acquisition of
ProNet GmbH. Multiport Device Server net revenues increased $1.8 million, or
19.3%, from $9.1 million or 27.7% of net revenues in the year ended June 30,
1999 to $10.9 million or 24.3% of net revenues in the year ended June 30, 2000.
Print Server and other revenues decreased $2.4 million, or 19.5%, from $12.2
million, or 37.1% of net revenues in the year ended June 30, 1999 to $9.9
million, or 21.9% of net revenues in the year ended June 30, 2000.
Net revenues generated from sales in the Americas increased $8.5 million, or
39.0%, from $21.8 million or 66.0% of net revenues in the year ended June 30,
1999 to $30.3 million or 67.3% of net revenues in the year ended June 30, 2000.
Our net revenues derived from customers located in Europe increased $3.1
million, or 32.9%, from $9.5 million or 28.9% of net revenues in the year ended
June 30, 1999 to $12.7 million or 28.2% of net revenues in the year ended June
30, 2000. Our net revenues derived from customers located in other geographic
areas increased $371,000, or 22.2%, from $1.7 million or 5.1% of net revenues
in the year ended June 30, 1999 to $2.0 million or 4.5% of net revenues in the
year ended June 30, 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 $7.3 million, or 45.3%, from
$16.2 million or 49.0% of net revenues in the year ended June 30, 1999 to
$23.5 million or 52.2% of net revenues in the year ended June 30, 2000. In the
year ended June 30, 2000, the Gordian royalties were $2.2 million as compared
to $2.0 million in the year ended June 30, 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 $7.8 million, or
79.7%, from $9.8 million or 29.6% of net revenues in the year ended June 30,
1999 to $17.6 million or 39.0% of net revenues in the year ended June 30, 2000.
This increase is due in part to a $1.1 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, including new offices in Europe
and Asia, an increase in our administrative infrastructure including key
executive positions, and an investment in our systems to support Year 2000
requirements. 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 $571,000, or 21.8%, from $2.6 million or 7.9% of net revenues for the
year ended June 30, 1999 to $3.2 million or 7.1% of net revenues for the year
ended June 30, 2000. This increase resulted primarily from increased headcount
and expenses related to new product development.
Interest and Other Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on 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
18
<PAGE>
assets. Net interest and other income (expense) was $140,000 and 141,000 for
the years ended June 30, 2000 and 1999, respectively.
Provision (Benefit) for Income Taxes
Our effective tax rate was 38.1% and 28.3% in the years ended June 30, 2000
and 1999, respectively. The federal statutory rate was 34% for both periods.
Our effective tax rate for the year ended June 30, 2000 was higher than the
federal statutory rate primarily due to the amortization of deferred
compensation for which a current tax benefit was not provided and due to an
unfavorable foreign tax rate variance. Our effective tax rate for the year
ended June 30, 1999 was lower than the federal statutory rate primarily due to
the reversal of the valuation allowance due to the expected recoverability of
deferred tax assets. The Company utilizes 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 for deferred tax assets since we
believe that it is more likely than not that these assets will be realized.
These assets are expected to be realized through the reversal of timing
differences and through future taxable income.
Comparison of Years Ended June 30, 1999 and 1998
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 growth
in our Device Server business.
Gross Profit
Gross profit increased $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 $1.6 million 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 $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 outside research and development
consultants in fiscal 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.
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<PAGE>
Interest and Other Income (Expense), Net
Net Interest and other income (expense) was $141,000 and $(4,000) for the
years ended June 30, 1999 and 1998, respectively.
Provision (Benefit) for Income Taxes
Our effective tax rate was 28.3% and 29.8% in the years ended June 30, 1999
and 1998, respectively. 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
expected recoverability of deferred tax assets. See note 6 of notes to
consolidated financial statements.
20
<PAGE>
Quarterly Results of Operations
The following table presents our consolidated operating results for each of
the eight quarters in the period from July 1, 1998 through June 30, 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 report. 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 document.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
2000 2000 1999 1999 1999 1999 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations:
Net revenues............ $12,344 $10,339 $11,417 $10,875 $9,823 $8,019 $8,010 $7,128
Cost of revenues........ 5,856 5,426 5,517 4,701 4,356 4,023 4,421 4,024
------- ------- ------- ------- ------ ------ ------ ------
Gross profit............ 6,488 4,913 5,900 6,174 5,467 3,996 3,589 3,104
Operating expenses:
Selling, general and
administrative........ 5,653 4,089 4,221 3,594 3,274 2,367 2,347 1,780
Research and
development........... 856 897 711 722 766 675 477 697
Amortization of
deferred
compensation.......... 532 587 -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Total operating
expenses............ 7,041 5,573 4,932 4,316 4,040 3,042 2,824 2,477
------- ------- ------- ------- ------ ------ ------ ------
Income (loss) from
operations............. (553) (660) 968 1,858 1,427 954 765 627
Minority interest ...... -- -- 19 (68) 27 (57) -- --
Interest and other
income (expense), net.. 41 (71) 108 62 126 (52) 29 38
------- ------- ------- ------- ------ ------ ------ ------
Net income (loss) before
income taxes........... (512) (731) 1,095 1,852 1,580 845 794 665
Provision (benefit) for
income taxes........... (432) (356) 534 903 416 251 235 196
------- ------- ------- ------- ------ ------ ------ ------
Net income (loss)....... $ (80) $ (375) $ 561 $ 949 $1,164 $ 594 $ 559 $ 469
======= ======= ======= ======= ====== ====== ====== ======
As a percentage of net
revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 47.4 52.5 48.3 43.2 44.3 50.2 55.2 56.5
------- ------- ------- ------- ------ ------ ------ ------
Gross profit............ 52.6 47.5 51.7 56.8 55.7 49.8 44.8 43.5
Operating expenses:
Selling, general and
administrative........ 45.8 39.5 37.0 33.0 33.3 29.5 29.3 25.0
Research and
development........... 6.9 8.7 6.2 6.6 7.8 8.4 6.0 9.8
Amortization of
deferred
compensation.......... 4.3 5.7 -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------
Total operating
expenses............ 57.0 53.9 43.2 39.7 41.1 37.9 35.3 34.8
------- ------- ------- ------- ------ ------ ------ ------
Income (loss) from
operations............. (4.5) (6.4) 8.5 17.1 14.5 11.9 9.6 8.8
Minority interest....... -- 0.2 (0.6) 0.3 (0.7) -- --
Interest and other
income (expense), net.. 0.3 (0.7) 0.9 0.6 1.3 (0.6) 0.4 0.5
------- ------- ------- ------- ------ ------ ------ ------
Net income (loss) before
income taxes........... (4.1) (7.1) 9.6 17.0 16.1 10.5 9.9 9.3
Provision (benefit) for
income taxes........... (3.5) (3.4) 4.7 8.3 4.2 3.1 2.9 2.7
------- ------- ------- ------- ------ ------ ------ ------
Net income (loss)....... (0.6)% (3.6)% 4.9% 8.7% 11.8% 7.4% 7.0% 6.6%
======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
Net revenues increased in each of the eight quarters ended June 30, 2000,
except for a decline in the quarter ended March 31, 2000, which we believe was
partially attributed to our customers' decisions to postpone purchases due to
Year 2000 concerns, as well as a reduction in the sale of Multiport Device
Servers during the quarter. We do not anticipate that Year 2000 concerns will
cause a future decline in sales. Also, sales of Multiport Device Servers were
very strong in the quarter ended June 30, 2000 and we expect that this will
continue strong in future periods. We believe most of our future net revenue
growth will be derived primarily from our Device Server products.
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<PAGE>
Cost of revenues show a general increasing trend over the eight quarters,
primarily due to the increase in net revenues. Gross profit as a percentage of
net revenues for the five quarters ended June 30, 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 ended
March 31, 2000, our gross margin declined due to a sequential decline in sales
of our Multiport Device Server products, which are our highest margin products.
Total operating expenses have increased during each of the eight quarters
ended June 30, 2000, due to our investment in infrastructure to support the
growth of our business, including expanding our sales force, adding key
executive positions and increasing expenditures on research and development. In
addition, we incurred charges of $532,000 and $587,000 in the quarters ended
June 30, 2000 and 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 June 30, 2000, we had cash and cash equivalents of $2.0
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 9.5% at June
30, 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 June 30, 2000.
During fiscal year 1999, we established a $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 $2.1 million during the year ended
June 30, 2000. Net income of $1.1 million, which includes amortization and
depreciation of $2.4 million, was reduced by increased inventory of $2.1
million, increased accounts receivable of $1.8 million, increased prepaid
expenses of $2.6 million, and increased deferred tax assets of $798,000. The
increase in accounts receivable was due to the $12.0 million increase in our
net revenues from the year ended June 30, 1999 to the year ended June 30, 2000.
We increased our inventory to support our increasing sales activity. We believe
this trend of increasing accounts receivable and inventory will continue for
the foreseeable future. The primary reason for the increased prepaid expenses
is a $1.6 million prepaid tax asset due to the tax benefit from the exercise of
NSO options late in the year, and prepaid issuance costs incurred in preparing
for an initial public stock offering. This is offset by an increase in deferred
taxes. Our operating activities provided cash of $5.6 million during fiscal
year 1999 and $2.5 million during fiscal year 1998.
Our investing activities used $1.1 million of cash during the year ended
June 30, 2000. The cash used in the period related mainly to the purchase of
property and equipment, primarily computer hardware, of $942,000 and the
acquisition of a minority interest of a subsidiary of ProNet GmbH. Our
investing activities used cash of $2.9 million during fiscal year 1999 and
$121,000 during fiscal year 1998. 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 $702,000 for the year ended June 30,
2000, related to the repayment of a line of credit used in the acquisition of
ProNet GmbH. Cash provided by financing activities was $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.
In May 2000, the Company's Board of Directors authorized the filing of a
Registration Statement with the Securities and Exchange Commission, which
permitted the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering. The Company filed a
Registration Statement on Form S-1 in May, and on August 4, 2000, the Company
successfully completed its initial public offering of 6,000,000 shares of
common stock, raising approximately $54.4 million in net proceeds. The company
intends to use proceeds from the offering for working capital and to make
strategic acquisitions.
22
<PAGE>
We spent $3.2 million on research and development expense for the year ended
June 30, 2000 related mainly to the development of products and technology.
Expenditures for research and development activities were $2.6 million and $1.8
million for the fiscal years ended June 30, 1999 and 1998, respectively. We
intend to use a portion of the proceeds from our recent public offering to
substantially increase our research and development activities. Over the next
two years, we expect our research and development expenses to increase to
approximately 10% of our net revenues. Specific amounts allocated to future
research and development and sales and marketing expenditures will be budgeted
based upon market conditions existing at that time.
We believe that the net proceeds from our public 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. 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. If we are unable
to secure additional financing, we may not be able to develop or enhance our
products, take advantage of future opportunities, respond to competition or
continue to operate our business.
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.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion No.
25 (FIN 44). This Interpretation clarifies the definition of employee for
purposes of applying APB Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. We believe that the impact of FIN 44 will not have a
material effect on the consolidated financial position or results of our
operations.
Factors Affecting Future Operating Results
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Our business operations may be impaired by
additional risks and uncertainties that we do not know of or that we currently
consider immaterial.
Our business, results of operations or cash flows may be adversely affected
if any of the following risks actually occur. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment.
This report also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this report.
23
<PAGE>
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. 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;
. 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.
Revenues from our Print Server line of products have decreased significantly
and we expect that revenues from our Print Server line of products will
continue to decline in the future as we focus our efforts on the development of
other product lines.
Since 1993, revenues from our Print Server line have accounted for a
significant portion of our net revenues but have declined significantly
recently. For example, revenues from our Print Server line accounted for
approximately 14.4% of our total net revenues for the year ended June 30, 2000
compared to approximately 25.7% for the year ended June 30, 1999. Revenues from
our Print Server line also decreased significantly in the year ended June 30,
2000 to approximately $6.5 million from approximately $8.5 million for the year
ended June 30, 1999. We anticipate that revenues from our Print Server line
will continue to decline in the future as we plan to turn our focus to the
development of our current Device Server product line which we introduced in
mid 1998. We do not know if this transition in product development will be
successful. We do not know whether our new product line will be accepted by our
current and future target markets to the extent we anticipate. If the expected
decline in net revenues attributable to our Print Server line of products is
not offset by increases in net revenues from our Device Server line of
products, our business could be harmed.
We intend to substantially increase our research and development efforts which,
if not successful, could cause a decline in our revenues and could harm our
business.
We intend to increase substantially our expenditures on research and
development in the next two years to enhance and develop additional products.
For the year ended June 30, 2000 research and development expenses comprised
7.1% of our net revenues. Over the next two years, we expect our research and
development expenses to increase to approximately 10% of our net revenues. 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.
24
<PAGE>
There is a risk that our OEM customers will develop their own internal
expertise in network-enabling products which could result in reduced sales of
our products.
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.
Selling products to OEMs involves unique risks, including the risk that the OEM
will develop internal expertise in network-enabling products or will otherwise
provide network functionality to their products without using our Device Server
technology. If this were to occur, our stock price 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 August 1, 1999, we had
102 employees. As of August 1, 2000, we had 150 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 pricing
strategies of our competitors. We face competition primarily from companies
that network-enable devices, companies in the automation industry, companies
with significant networking expertise and research and development resources,
and companies that produce semiconductors. Our 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. Similarly,
competitive pressure could force us to reduce the price of our products. In
each case, we could lose new and existing customers to our competition. If this
were to occur, our revenues could decline and our business could be harmed. See
"Competition".
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, RTG Elektronik and Express Manufacturing. 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;
. 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
25
<PAGE>
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.
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. We rely on a number of
different component suppliers. For example, during the quarter ended June 30,
2000 there were approximately 11 suppliers from which we purchased more than
$25,000 of components per month. 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 multiport 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.
If a major customer cancels, reduces, or delays purchases, our net revenues
might decline and our business could be adversely affected.
For the year ended June 30, 2000, our two largest customers, each of whom
are distributors, accounted for 25% of our net revenues. Ingram Micro, a
domestic distributor, accounted for 13% of our net revenues for the year ended
June 30, 2000 and Tech Data, a domestic distributor, accounted for 12% of our
net revenues for the year ended June 30, 2000. Our top five customers accounted
for 40% of our net revenues during this period and our top ten customers
accounted for 49% of our net revenues. Transtec AG, a major international
customer, accounted for 7% of our net revenues as well as a significant portion
of our accounts receivable for the year ended June 30, 2000. Bernhard Bruscha,
our Chairman of the Board, is the majority stockholder and Chief Executive
Officer of transtec AG. 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,
26
<PAGE>
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. For example, Print Server average
selling prices have decreased approximately 9.0% for the year ended June 30,
2000 over the year ended June 30, 1999 and approximately 11.2% for the year
ended June 30, 1999 over the year ended June 30, 1998. 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 33% of net revenues for
the year ended June 30, 2000 and 34% of net revenues for the year ended June
30, 1999. Net revenues from Europe represented 28% of our net revenues for the
year ended June 30, 2000 and 29% for the year ended June 30, 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;
. 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.
27
<PAGE>
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 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.
28
<PAGE>
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.
If our agreement with Gordian, Inc. is terminated, we could lose the rights to
valuable intellectual property.
Pursuant to an agreement dated February 29, 1989 between us and Gordian,
Inc. Gordian developed intellectual property used in our Micro Serial Server,
or MSS, Print Servers and ETS and LRS lines of Multiport Device Server
products. These products represent a substantial portion of our revenue. Our
total Print Server and Multiport Device Server products alone, without
including MSS products, represented approximately 38.7% and 53.4% of our net
revenues in the years ended June 30, 2000 and 1999, respectively. 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 with respect to sales of products covered by the
agreement. In the years ended June 30, 2000 and 1999, we paid Gordian
approximately $2.2 million and $2.0 million in royalties, respectively. 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 our MSS 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, there is no guarantee that we
will not lose customers and revenues which would harm our business.
29
<PAGE>
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.
The amortization of deferred stock compensation will negatively affect our
operating results.
We have recorded deferred stock compensation 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 $10.1 million during the year ended June
30, 2000, which is being amortized over the vesting period of the related stock
options, which is generally four years. A balance of $8.9 million remains at
June 30, 2000 and will be amortized as follows: $2.8 million in fiscal 2001,
$2.8 million in fiscal 2002, $1.9 million in fiscal 2003, $1.2 million in
fiscal 2004, and $0.2 million in fiscal 2005.
The amount of stock based compensation in future periods will increase if we
continue to grant stock options where the exercise price is less than the
estimated fair value of the underlying shares. The amount of stock based
compensation amortization in future periods could decrease if options for which
accrued, but unvested compensation has been recorded are forfeited.
The amortization of marketing rights and related payments of sales commissions
will negatively affect our operating results.
In September 1998, we purchased marketing rights from an individual, which
allow us to sell products in various geographical regions. Additionally, we pay
a sales commission to the same individual for sales of certain products made to
various customers through December 31, 2000. We entered into these transactions
to enhance the value of our October 1998 acquisition of ProNet GmbH, a German
company that is a supplier of industrial application device server technology.
We paid $1.7 million for the marketing rights, which are being amortized over
27 months. As a result, we will recognize approximately $376,000 of
amortization relating to the marketing rights agreement for the period from
July 1, 2000 through December 31, 2000. Commissions paid and amortization of
marketing rights during the years ended June 30, 2000 and 1999 were $2.7
million and $1.6 million, respectively. After December 31, 2000, we expect to
have no further charges relating to these transactions.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 30, 2000, we had cash and cash equivalents of $2.0
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 exchange rates or weak
economic conditions in foreign markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes appear on pages F-1 through
F-18 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning each of our
executive officers and directors and key employees as of September 20, 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...... 37 Chief Technology Officer
Mark Fondl.............. 45 Vice President, Automation
Richard Obermeyer....... 45 Vice President, Research and Development
Andrew Mitchell......... 45 Director of Pacific Rim Sales
Marcel van der Meijs.... 38 Director of Europe, Middle East, Africa Sales
Thomas W. Burton........ 54 Director
W. Brad Freeburg........ 45 Director
Howard T. Slayen........ 53 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 1988 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.
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 1987 to 1996, Mr. Fondl served as a Director of
Regional Sales for Siemens, an electrical engineering and electronics company.
Richard Obermeyer has served as our Vice President, Research and
Development, since March 2000. From 1995 to 2000, 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
Australia, 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.
32
<PAGE>
Marcel van der Meijs has served as our Director of Europe, Middle East,
Africa Sales since November 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.
Howard T. Slayen was elected to the board of directors effective August 17,
2000. Mr. Slayen is currently the Executive Vice President and Chief Financial
Officer of Quaartz Inc., a newly founded web-hosted communications business.
From 1971 to 1999, Mr. Slayen held various positions with
PricewaterhouseCoopers/Coopers & Lybrand including his most recent position as
Corporate Finance Partner.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the year
ended June 30, 2000, to our Chief Executive Officer and to our other executive
officers 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
Compensation
Awards
Annual ------------
Compensation Securities
----------------- Underlying
Name and Principal Position Salary Bonus Options
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
Frederick G. Thiel............................. $220,385 $123,250 348,000
Chief Executive Officer and President
Johannes Rietschel............................. 167,235 71,268 66,667
Chief Technology Officer
Steven V. Cotton (1)........................... 180,000 13,855 688,000
Chief Financial Officer and Chief Operating
Officer
</TABLE>
--------
(1) Steven V. Cotton began his employment with us in December 1999. The salary
compensation provided above is annualized, whereas the bonus and option
information above pertains to the period from December 1999 through June
30, 2000 only.
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, 2000.
<TABLE>
<CAPTION>
Potential
Realizable Value
Individual Grants at Assumed
--------------------------------------------- Annual Rates of
Number of Stock Price
Securities Percent of Appreciation for
Underlying Total Options Options Term(4)
Options Granted in Exercise Expiration -----------------
Name Granted(1) Fiscal 2000(2) Price(3) Date 5% 10%
---- ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel...... 348,000 11.8% $0.50 12/09/2009 $109,428 $277,311
Johannes Rietschel...... 66,667 2.3% $6.00 5/19/2010 251,559 637,500
Steven V. Cotton........ 688,000 23.4% $0.50 12/09/2009 216,340 548,247
</TABLE>
--------
33
<PAGE>
(1) Options were granted under our 1993 Incentive Stock Option Plan and 1994
Nonstatutory Stock Option Plan. The 348,000 options for Fred Thiel will
vest by August 1, 2002 and the 66,667 options for Johannes Rietschel will
vest by May 19, 2004. For Steve Cotton's options, 348,000 will vest by
August 9, 2002 and the remaining 340,000 will vest by December 9, 2005.
(2) Based on an aggregate of 2,941,644 options granted by us in the year ended
June 30, 2000 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 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 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.
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, 2000,
and exercisable and unexercisable options held at June 30, 2000.
The "Value of Unexercised In-the-Money Options at June 30, 2000" is based on
a value of $10.00 per share of our common stock, which is the 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 Incentive Stock Option Plan or our 1994 Nonstatutory Stock Option Plan.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options
Options at June 30, 2000 at June 30, 2000
------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel...... 459,354 $4,510,856 12,820 1,313,250 $125,892 $12,784,755
Johannes Rietschel...... -- -- -- 66,667 -- 266,668
Steven V. Cotton........ 48,572 461,434 -- 639,428 -- 6,074,566
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's common stock as of September 20, 2000 by: (i) each director;
(ii) each of the executive officers named in the "Summary Compensation Table;"
(iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its common stock.
<TABLE>
<CAPTION>
Beneficial
Beneficial Owner Ownership(1)
---------------- ---------------------
Number of Percent of
Name Shares Total
---- ---------- ----------
<S> <C> <C>
Bernhard Bruscha........................................ 22,506,720 61.6%
Johannes Rietschel(2)................................... 3,437,988 9.4%
W. Brad Freeburg(3)..................................... 2,408,600 6.5%
Frederick Thiel(4)...................................... 1,219,454 3.3%
Thomas Burton........................................... 100,000 0.3%
Steven V. Cotton........................................ 48,572 0.1%
Howard T. Slayen........................................ -- *
All directors and executive officers as a group (7
persons)(5)............................................ 29,721,334 80.2%
</TABLE>
--------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
34
<PAGE>
(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 within 60 days of this table.
(2) Includes 859,456 shares of common stock owned by his spouse.
(3) Includes 468,880 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of September 20, 2000.
(4) Includes 64,100 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of September 20, 2000.
(5) Includes 532,980 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of September 20, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Formation and Corporate Organization
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
Germany.
In March 2000, we established Lantronix International AG Switzerland, as our
wholly owned subsidiary. We subsequently transferred ownership of Lantronix
Europe GmbH and Lantronix Deutschland GmbH to Lantronix International AG
Switzerland. Since that time, we have also formed Lantronix UK Ltd. and
Lantronix Singapore which will operate as two additional sales offices under
Lantronix International AG. This structure was established to conduct
substantially all of the European and Asia Pacific sales.
Employment Agreements
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 $180,000 and provides for incentive compensation of up to
30% of his annual base salary. Pursuant to his employment agreement Mr. Cotton
was granted 340,000 stock options under our 1994 Nonstatutory Stock Option Plan
on December 9, 1999. 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 for a period of 18
months, 100% of his incentive bonus for the quarter in which his employment
ends and acceleration of 50% of his unvested options. Mr. Cotton is subject to
confidentiality and noncompete restrictions under his employment agreement. The
enforcement of these noncompete restrictions may be limited under California
Law.
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 AG is a major customer, accounting for $3.2 million, $3.8 million and
$5.1 million of net revenues for the years ended June 30, 2000, 1999 and 1998,
respectively.
In addition, we entered into a software maintenance contract with Transtec
AG in January 1999 under which $90,000 in maintenance fees are paid by the
Company per year through December 2003.
35
<PAGE>
Certain Transactions with Directors and Executive Officers
On August 17, 2000, Howard T. Slayen was granted 25,000 stock options
pursuant to our 2000 Stock Plan at an exercise price of $6.75.
On May 19, 2000, Frederick Thiel exercised options to acquire 459,354 shares
of common stock at a price of $0.18 per share. Mr. Thiel paid for such shares
with a full-recourse, three-year $82,683.72 promissory note secured by the
purchased shares. The note bears interest at a rate of 6.42% per annum. We have
agreed to loan Mr. Thiel sufficient funds to pay the tax liability associated
with these options on a non-recourse basis.
On May 19, 2000, Steven V. Cotton exercised options to acquire 48,572 shares
of common stock at a price of $0.50 per share. Mr. Cotton paid for such shares
with a full-recourse, three-year $24,286.00 promissory note secured by the
purchased shares. The note bears interest at a rate of 6.42% per annum. We have
agreed to loan Mr. Cotton sufficient funds to pay the tax liability associated
with these options on a non-recourse basis.
On May 19, 2000, Thomas W. Burton exercised options to acquire 100,000
shares of common stock at an average price of $0.28 per share. Mr. Burton paid
for such shares with a full-recourse, three-year $28,100 promissory note
secured by the purchased shares. The note bears interest at a rate of 6.42% per
annum. We have agreed to loan Mr. Burton sufficient funds to pay the tax
liability associated with these options on a non-recourse basis.
On May 19, 2000, W. Brad Freeburg exercised options to acquire 60,000 shares
of common stock at an average price of $0.29 per share. Mr. Freeburg paid for
such shares with a full-recourse, three-year $17,200 promissory note secured by
the purchased shares. The note bears interest at a rate of 6.42% per annum. We
have agreed to loan Mr. Freeburg sufficient funds to pay the tax liability
associated with these options on a non-recourse basis.
On May 19, 2000, Johannes Rietchsel was granted 66,667 stock options
pursuant to our 1993 Incentive Stock Option Plan at an exercise price of $6.00.
On December 9, 1999, Frederick Thiel was granted 348,000 stock options
pursuant to our 1994 Nonstatutory Stock Option Plan an exercise price of $0.50.
On December 9, 1999, Steven V. Cotton was granted 688,000 stock options
pursuant to our 1994 Nonstatutory Stock Option Plan at an exercise price of
$0.50. Of these options, 340,000 were granted pursuant to his employment
agreement.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements.
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets as of June 30, 2000 and 1999........... F-2
Consolidated Income Statements for the years ended June 30, 2000,
1999 and 1998..................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2000, 1999 and 1998...................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30,
2000, 1999 and 1998............................................... F-5
Notes to Consolidated Financial Statements......................... F-6 - F-18
</TABLE>
2. Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Form 10-K. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the consolidated
financial statements or notes thereto.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II--Consolidated Valuation and Qualifying Accounts................ S-1
</TABLE>
3. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby incorporated
by reference into, this Form 10-K.
(b) Reports on Form 8-K--not applicable
37
<PAGE>
REPORT OF 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, 2000 and 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended June 30, 2000. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
August 30, 2000
F-1
<PAGE>
LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
----------------
2000 1999
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 1,988 $ 5,833
Accounts receivable, (net of allowance for doubtful
accounts of $159 and $203 at June 30, 2000 and 1999,
respectively) ............................................ 5,861 4,156
Related party receivable................................... 211 158
Inventories................................................ 5,385 3,306
Deferred income taxes...................................... 1,425 1,220
Prepaid income taxes....................................... 1,639 --
Prepaid expenses and other current assets.................. 1,193 251
------- -------
Total current assets..................................... 17,702 14,924
Property and equipment, net.................................. 1,348 876
Intangible assets, net....................................... 586 1,399
Other assets................................................. 574 93
------- -------
Total assets............................................. $20,210 $17,292
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable........................................... $ 3,197 $ 2,547
Accrued payroll and related expenses....................... 764 629
Accrued commissions payable................................ 865 672
Accrued warranty costs..................................... 545 619
Income taxes payable....................................... -- 583
Other current liabilities.................................. 1,193 999
Bank line of credit........................................ -- 766
------- -------
Total current liabilities................................ 6,564 6,815
Deferred income taxes........................................ 1,003 --
Capital lease obligations, net of current portion............ 96 97
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; 29,803,232 and 28,745,512 shares issued and
outstanding at June 30, 2000 and 1999, respectively....... 3 3
Additional paid-in capital................................. 13,221 2,944
Employee notes receivable.................................. (152) --
Deferred compensation...................................... (8,942) --
Retained earnings.......................................... 8,427 7,372
Accumulated other comprehensive loss....................... (10) (7)
------- -------
Total stockholders' equity............................... 12,547 10,312
------- -------
Total liabilities and stockholders' equity............... $20,210 $17,292
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE>
LANTRONIX, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net revenues(A)...................................... $44,975 $32,980 $28,300
Cost of revenues(B).................................. 21,500 16,824 16,812
------- ------- -------
Gross profit......................................... 23,475 16,156 11,488
------- ------- -------
Operating expenses:
Selling, general and administrative(B)............. 17,557 9,768 7,857
Research and development(B)........................ 3,186 2,615 1,770
Amortization of deferred compensation(B)........... 1,119 -- --
------- ------- -------
Total operating expenses............................. 21,862 12,383 9,627
------- ------- -------
Income from operations............................... 1,613 3,773 1,861
Minority interest.................................... (49) (30) --
Interest income (expense), net....................... 187 151 (5)
Other income (expense), net.......................... (47) (10) 1
------- ------- -------
Income before income taxes........................... 1,704 3,884 1,857
Provision for income taxes........................... 649 1,098 554
------- ------- -------
Net income........................................... $ 1,055 $ 2,786 $ 1,303
======= ======= =======
Earnings per share:
Basic.............................................. $ 0.04 $ 0.10 $ 0.05
======= ======= =======
Diluted............................................ $ 0.03 $ 0.10 $ 0.05
======= ======= =======
Weighted average shares:
Basic.............................................. 29,274 26,977 25,207
======= ======= =======
Diluted............................................ 34,178 28,880 25,443
======= ======= =======
(A) Revenues from related parties.................... $ 3,226 $ 3,753 $ 5,065
======= ======= =======
(B) Amortization of deferred compensation:
Cost of revenues................................... $ 26 $ -- $ --
Selling, general and administrative expense........ 1,025 -- --
Research and development expense................... 68 -- --
------- ------- -------
$ 1,119 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Employee Other Total
----------------- Paid-In Notes Deferred Retained Comprehensive Stockholders'
Shares Amount Capital Receivable Compensation Earnings Loss Equity
---------- ------ ---------- ---------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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............. 1,057,720 -- 64 -- -- -- -- 64
Deferred compensation
related to grant of
stock options ........ -- -- 10,061 -- (10,061) -- -- --
Amortization of
deferred compensation
...................... -- -- -- -- 1,119 -- -- 1,119
Notes receivable issued
to employees for stock
purchase.............. -- -- 152 (152) -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (3) (3)
Net income............. -- -- -- -- -- 1,055 -- 1,055
-------
Comprehensive income... 1,052
---------- ---- ------- ----- -------- ------ ----- -------
Balance at June 30,
2000................... 29,803,232 $ 3 $13,221 $(152) $ (8,942) $8,427 $ (10) $12,547
========== ==== ======= ===== ======== ====== ===== =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 1,055 $ 2,786 $1,303
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation...................................... 502 378 441
Amortization of intangible assets................. 813 595 --
Amortization of deferred compensation............. 1,119 -- --
Loss on disposal of assets........................ -- 3 8
Provision for doubtful accounts................... 1 (136) 396
Deferred (Benefit) income taxes................... 798 (158) (173)
Changes in operating assets and liabilities, net
of acquisitions in 1999:
Accounts receivable.............................. (1,759) 93 (190)
Inventories...................................... (2,079) (592) 840
Prepaid income taxes............................. (1,639) -- --
Prepaid expenses and other current assets........ (942) 111 38
Other assets..................................... (481) (76) --
Accounts payable................................. 650 1,002 (677)
Income taxes payable............................. (583) 46 --
Other current liabilities........................ 415 1,513 520
Minority interest................................ 48 30 --
------- ------- ------
Net cash provided by (used in) operating
activities.................................... (2,082) 5,595 2,506
Cash flows from investing activities:
Purchases of property and equipment, net........... (942) (543) (121)
Acquisitions, net of cash acquired................. (116) (655) --
Acquisition of marketing rights.................... -- (1,694) --
------- ------- ------
Net cash used in investing activities.......... (1,058) (2,892) (121)
Cash flows from financing activities:
Net (repayment of) proceeds from bank lines of
credit............................................ (766) 766 (800)
Sale of common stock............................... -- 602 --
Stock options exercised............................ 64 3 1
------- ------- ------
Net cash provided by (used in) financing
activities.................................... (702) 1,371 (799)
------- ------- ------
Effect of exchange rates on cash..................... (3) -- --
------- ------- ------
Net (decrease) increase in cash...................... (3,845) 4,074 1,586
Cash and cash equivalents at beginning of year....... 5,833 1,759 173
------- ------- ------
Cash and cash equivalents at end of year............. $ 1,988 $ 5,833 $1,759
======= ======= ======
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 5 $ 23 $ 5
Income taxes paid.................................. $ 1,828 $ 781 $ 671
</TABLE>
See accompanying notes.
F-5
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. Summary of Significant Accounting Policies
The Company
Lantronix, Inc. (the Company) incorporated in California in June 1989 and
re-incorporated in the State of Delaware in July 2000, 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.
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
F-6
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
end-of-period exchange rates. Revenues and expenses are translated at average
exchange rates in effect during 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, 2000, 1999 and 1998, 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 include
contributions of approximately $149,000, $93,000 and $80,000 for the years
ended June 30, 2000, 1999 and 1998, respectively.
F-7
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
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 $1,130,000, $929,000 and $934,000 for the years ended June 30,
2000, 1999 and 1998, 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-8
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
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>
Years ended June 30,
-----------------------
2000 1999 1998
------- ------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Numerator: Net income............................... $ 1,055 $ 2,786 $ 1,303
======= ======= =======
Denominator for basic earnings per share:
Weighted average shares outstanding............... 29,274 26,977 25,207
Effect of dilutive securities:
Stock options..................................... 4,904 1,903 236
------- ------- -------
Denominator for diluted earnings per common share... 34,178 28,880 25,443
======= ======= =======
Basic earnings per share............................ $ 0.04 $ 0.10 $ 0.05
======= ======= =======
Diluted earnings per share.......................... $ 0.03 $ 0.10 $ 0.05
======= ======= =======
</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 will be required to implement SFAS No. 133 beginning in fiscal year
2001. Management does not anticipate that the adoption of the new statement
will have a significant impact on the consolidated results of operations or
financial position of the Company.
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.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion No.
25 (FIN 44). This Interpretation clarifies the definition of employee for
purposes of applying APB Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company believes that the impact of FIN 44 will not
have a material effect on its consolidated financial position or results of
operations.
F-9
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
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,
--------------
2000 1999
------ ------
(In
thousands)
<S> <C> <C>
Raw materials................................................ $4,766 $2,527
Finished goods............................................... 1,488 1,546
------ ------
6,254 4,073
Reserve for excess and obsolete inventory.................... (869) (767)
------ ------
$5,385 $3,306
====== ======
</TABLE>
Property and Equipment
A summary of property and equipment, at cost, follows:
<TABLE>
<CAPTION>
June 30,
----------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Computer and office equipment.............................. $ 2,561 $ 1,858
Furniture and fixtures..................................... 727 657
Production and warehouse equipment......................... 603 513
Transportation equipment................................... 175 108
------- -------
4,066 3,136
Accumulated depreciation................................... (2,718) (2,260)
------- -------
$ 1,348 $ 876
======= =======
</TABLE>
Intangible Assets
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
June 30,
---------------
2000 1999
------- ------
(In thousands)
<S> <C> <C>
Marketing rights............................................ $ 1,694 $1,694
Patents..................................................... 300 300
------- ------
1,994 1,994
Accumulated amortization.................................... (1,408) (595)
------- ------
$ 586 $1,399
======= ======
</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
F-10
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
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 years ended June 30, 2000 and 1999 were $2,727,055 and
$1,580,184, respectively.
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,
---------------
1999 1998
------- -------
(In thousands,
except per
share data)
(Unaudited)
<S> <C> <C>
Net revenues............................................. $35,473 $31,354
Net income............................................... $ 3,311 $ 1,743
Basic earnings per share................................. $ 0.12 $ 0.07
Diluted earnings per share............................... $ 0.11 $ 0.07
</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 stockholders of ProNet for an amount representing the deemed
fair market value of the common stock on the date of purchase.
During the year ended June 30, 2000, the Company acquired the remaining 35%
interest of Acola GmbH. The Company paid $115,920 to the minority stockholder,
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.
F-11
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
4. Bank Lines of Credit
As of June 30, 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 (9.5% at June 30, 2000) plus 2% per annum.
Borrowings are collateralized by a continuing security interest in all of the
assets of the Company. As of June 30, 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 June 30, 2000, the Company was in compliance with these
covenants and conditions.
During fiscal year 1999, the Company established a $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. Borrowings bear interest at a
fixed rate which is renegotiated every six months (3.45% as of June 30, 1999).
5. Stockholders' Equity
Common Stock
In May 2000, the Board of Directors approved an increase in the number of
authorized shares of common stock from 25,000,000 to 200,000,000 shares. This
increase was approved by the stockholders on May 18, 2000.
Stock Split
The Company effected a 4-for-1 split of its common stock in the form of a
100% stock dividend, to be effective upon the filing of a re-incorporation in
Delaware. In May 2000, the Company's Board of Directors authorized the re-
incorporation of the Company in the state of Delaware. Such re-incorporation
was completed July 28, 2000. All share numbers and per share amounts contained
in these notes and in the accompanying consolidated financial statements have
been retroactively restated to reflect these changes in the Company's capital
structure.
Initial Public Offering
On August 4, 2000, the Company completed its initial public offering (the
"Offering") of common stock. The Company sold 6,000,000 shares, at a price of
$10.00 per share. The Company received aggregate net proceeds from the Offering
of $54,388,000.
Employee Stock Purchase Plan
In May 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan) effective upon the completion of the
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 Purchase 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-12
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
Stock Option Plans
The Company has in effect several stock-based plans under which non-
qualified and incentive stock options have been granted to employees, non-
employees, board members and other non-employees.
At the discretion of the Board of Directors, the Company may make secured
loans to option holders in amounts up to the exercise price of their options
plus related taxes or permit the option holder to pay the exercise price in
installments over a determined period. In May 2000, the Company loaned $152,000
to employees for the exercise of options. These notes are full-recourse, are
secured by the shares of stock issued upon exercise, are interest bearing at a
rate of 6.42%, and are due three years from the exercise date.
The Board of Directors determines eligibility, vesting schedules and
exercise prices for options granted under the plans. Options generally have a
term of 10 years and vest and become exercisable, generally over a four-year
period.
Under the Company's 1993 Incentive Stock Option Plan (the 1993 Plan), the
Company has reserved 4,000,000 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 common 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 June 30, 2000,
249,232 options were available for grant under the 1993 Plan.
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 June 30, 2000, 6,890,184 options were available for
grant under the 1994 Plan.
Under the Company's 2000 Stock Plan (the 2000 Plan), the Company has
reserved 1,000,000 shares of common stock for issuance pursuant to option
grants. 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 Offering. Each outside director will
automatically be granted an option to purchase 10,000 shares of common stock
annually, subject to certain eligibility requirements. As of June 30, 2000,
1,000,000 options were available for grant under the 2000 Plan.
F-13
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
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, 1997............................ 1,341,320 $0.17
Granted............................................... 1,294,224 0.18
Canceled.............................................. 82,052 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............................................... 2,941,644 2.32
Canceled.............................................. 58,732 0.18
Exercised............................................. 1,057,720 0.20
--------- -----
Outstanding at June 30, 2000............................ 5,738,748 $1.35
========= =====
Exercisable at June 30, 1998............................ 2,242,624
=========
Exercisable at June 30, 1999............................ 2,442,624
=========
Exercisable at June 30, 2000............................ 1,543,234
=========
</TABLE>
The weighted average exercise price of options outstanding and of options
exercisable as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------- --------------------
Weighted average Weighted Weighted
Number of remaining average average
options contractual life exercise Options exercise
Range of Exercise Prices outstanding (years) price exercisable price
------------------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0 to $0.14............. 500,880 3.15 $0.11 500,880 $0.10
$0.18 to $0.29.......... 1,548,784 7.43 0.18 518,346 0.20
$0.50................... 1,919,428 9.34 0.50 20,000 0.50
$0.79 to $2.50.......... 816,012 8.39 0.92 504,008 0.79
$6.00................... 953,644 9.88 6.00 -- --
</TABLE>
At June 30, 2000, 13,878,164 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
year ended June 30, 2000, the Company has recorded deferred compensation in the
aggregate amount of approximately $10,061,000, 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 year ended June 30, 2000, amortization expense was
approximately $1,119,000. 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, 1998, 1999 and 2000 was $0.05, $0.14
and $4.67, respectively.
F-14
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
Pro Forma Disclosures of the Effect of Stock-based Compensation Plans
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 June 30,
--------------------
2000 1999 1998
------ ------ ------
(In thousands,
except
per share data)
<S> <C> <C> <C>
Net income
As reported.......................................... $1,055 $2,786 $1,303
Pro forma............................................ 2,174 2,786 1,303
Basic earnings per share
As reported.......................................... $ .04 $ .10 $ .05
Pro forma............................................ .07 .10 .05
Diluted earnings per share
As reported.......................................... $ .03 $ .10 $ .05
Pro forma............................................ .06 .10 .05
</TABLE>
6. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------
2000 1999 1998
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Current:
Federal ............................................ $ (310) $ 817 $ 524
State............................................... (11) 329 203
Foreign............................................. 172 110 --
------ ------ -----
Total current..................................... (149) 1,256 727
Deferred:
Federal ............................................ 735 (161) (122)
State............................................... 63 3 (51)
------ ------ -----
Total deferred.................................... 798 (158) (173)
------ ------ -----
Total........................................... $ 649 $1,098 $554
====== ====== =====
</TABLE>
F-15
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
---------------
2000 1999
------ -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible......................... $1,046 $ 962
State taxes............................................... 12 29
Inventory capitalization.................................. 55 111
Depreciation.............................................. 109 118
Federal tax loss carryforwards and tax credits............ 123 --
------ -------
Total deferred tax assets................................... 1,345 1,220
Deferred tax liablities:
Deferred compensation .................................... (923) --
------ -------
Total deferred tax liabilities.............................. (923) --
------ -------
Net deferred tax assets..................................... $ 422 $ 1,220
====== =======
</TABLE>
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
30,
--------------------
2000 1999 1998
----- ------ -----
(In thousands)
<S> <C> <C> <C>
Federal income tax statutory rate...................... $ 579 $1,321 $ 631
State taxes (net of federal tax benefit)............... 89 219 100
Reduction of valuation allowance....................... -- (456) --
Permanent differences.................................. 67 -- --
Research and development credit........................ (96) -- (19)
Foreign sales corporation benefit...................... (130) (53) (166)
Foreign tax rate variances............................. 56 109 --
Deferred compensation.................................. 132 -- --
Other.................................................. (48) (42) 8
----- ------ -----
$ 649 $1,098 $ 554
===== ====== =====
</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.
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. In July 2000, the Company
renewed its office and warehouse facility lease commencing in August 2000 and
expiring in July 2005. The agreements to sublease a portion of the facility
will not be renewed when they expire in 2001 to provide additional space to
accommodate staffing increases.
F-16
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
As of June 30, 2000, the Company has recorded $150,500 of property held
under capital leases, less $27,900 in accumulated amortization. These balances
are included as property and equipment in the accompanying consolidated balance
sheet.
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 June 30,
2000.
<TABLE>
<CAPTION>
Sublease Operating Capital
-------- --------- -------
(In thousands)
<S> <C> <C> <C>
Fiscal year ending June 30:
2001.......................................... $(77) $ 831 $ 38
2002.......................................... (8) 730 38
2003.......................................... -- 741 38
2004.......................................... -- 735 31
2005.......................................... -- 754 --
---- ------ ----
Total minimum lease payments (receipts)..... $(85) $3,791 145
==== ======
Less imputed interest (at approximately
7.75%)..................................... (11)
----
Present value of minimum lease payments..... 134
Less current portion........................ (38)
----
Total long-term capital lease
obligations.............................. $ 96
====
</TABLE>
Rent expense, including month-to-month rentals, totaled approximately
$591,000, $643,000 and $474,000 for the years ended June 30, 2000, 1999 and
1998, respectively. Sublease income totaled approximately $281,000, $276,000
and $148,000 for the years ended June 30, 2000, 1999 and 1998, 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 $2,168,000, $2,011,000 and $1,539,000 is
included in cost of sales in the accompanying consolidated income statements
for the years ended June 30, 2000, 1999 and 1998, respectively, relating to
royalties paid on applicable product sales. As of June 30, 2000 and 1999,
accrued royalties were approximately $467,000 and $293,000, 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.
F-17
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
Net revenue by product family is provided below for the years ended June 30,
2000 and 1999. Revenues by product family prior to the year ended June 30, 1999
are not readily determinable.
<TABLE>
<CAPTION>
Years ended
June 30,
---------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Device servers............................................ $24,208 $11,595
Multiport device servers.................................. 10,911 9,146
Print servers............................................. 6,485 8,466
Other..................................................... 3,371 3,773
------- -------
Total net revenues...................................... $44,975 $32,980
======= =======
</TABLE>
Revenue by Geographic Area
Net revenue by geographic area is provided below for the years ended June
30, 2000 and 1999. Revenue by geographic area is based on where products are
shipped.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------
2000 1999
----------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Americas........................................ $30,269 67% $21,780 66%
Europe.......................................... 12,665 28% 9,530 29%
Other........................................... 2,041 5% 1,670 5%
------- --- ------- ---
$44,975 100% $32,980 100%
======= === ======= ===
</TABLE>
Revenues to customers outside of the United States approximated 38% for the
year ended June 30, 1998, principally from sales to European value-added
resellers.
Accounts receivable attributable to international sales represented
approximately 24% and 22% of total accounts receivable at June 30, 2000 and
1999, 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 25%, 27% and 35% of the
Company's net revenues for the years ended June 30, 2000, 1999 and 1998,
respectively. Accounts receivable attributable to these two domestic customers
accounted for approximately 34% and 32% of total accounts receivable at June
30, 2000 and 1999, respectively.
One international customer, a related party due to common ownership by the
Company's major stockholder, accounted for approximately 7%, 11% and 18% of the
Company's net revenues the years ended June 30, 2000, 1999 and 1998,
respectively. Included in related party receivable in the accompanying
consolidated balance sheets are approximately $211,000 and $158,000 due from
this related party at June 30, 2000 and 1999, 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 $90,000, $75,000 and $60,000 during the years ended
June 30, 2000, 1999 and 1998, respectively.
F-18
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1* Certificate of Incorporation of registrant and amendment.
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.
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.
10.10 Lease Agreement between registrant and The Irvine Company.
10.11** Loan and Security Agreement between registrant and Silicon Valley
Bank.
10.12+** Research and Development Agreement between registrant and Gordian.
10.13+** Distributor Contract between registrant and Tech Data Corporation.
10.14+** Distributor Contract between registrant and Ingram Micro Inc.
21.1* Subsidiaries of registrant.
23.2 Consent of Independent Auditors.
24.1 Power of Attorney (see page II-2).
27.1 Financial Data Schedule.
</TABLE>
--------
* Incorporated by reference to the same numbered exhibit previously filed with
Lantronix's Registration Statement on Form S-1 (SEC file no. 333-37508)
originally filed May 19, 2000.
** Incorporated by reference to the same numbered exhibit previously filed with
Lantronix's Registration Statement on Form S-1, Amendment No. 1, (SEC file
no. 333-37508) originally filed June 13, 2000.
+ Confidential treatment granted as to portions of this exhibit.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Lantronix has duly caused this Registration Statement on Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irvine, State of California, on the 28th day of September, 2000.
LANTRONIX, INC.
/s/ Steven V. Cotton
By: _________________________________
Steven V. Cotton
Chief Financial Officer and Chief
Operating Officer
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 to this Form 10-K 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
report on Form 10-K 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 September 28, 2000
____________________________________
Bernhard Bruscha
/s/ Frederick G. Thiel Chief Executive Officer, September 28, 2000
____________________________________ President (Principal
Frederick G. Thiel Executive Officer)
/s/ Steven V. Cotton Chief Financial Officer and September 28, 2000
____________________________________ Chief Operating Officer
Steven V. Cotton (Principal Financial and
Accounting Officer)
Director September 28, 2000
____________________________________
Thomas W. Burton
Director September 28, 2000
____________________________________
W. Brad Freeburg
/s/ Howard T. Slayen Director September 28, 2000
____________________________________
Howard T. Slayen
</TABLE>
II-2
<PAGE>
SCHEDULE II
LANTRONIX, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance Charged
At (recovered) Charged Balance
Beginning to Costs and To Other End of
Description Of Period Expenses Accounts Deductions Period
----------- --------- ------------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
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
====== ====== ===== ====== ======
Year ended June 30, 2000:
Allowance for doubtful
accounts................. $ 203 $ 1 $ -- $ 45 $ 159
Reserve for excess and
obsolete inventory....... 767 570 -- 468 869
Accrued warranties........ 619 260 -- 334 545
------ ------ ----- ------ ------
Total................... $1,589 $ 831 $ -- $ 847 $1,573
====== ====== ===== ====== ======
</TABLE>
S-1
