<PAGE>
As filed with the Securities and Exchange Commission on August 2, 2000
Registration No. 333-37508
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
to
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
---------------
LANTRONIX, INC.
(Exact name of Registrant as specified in its charter)
California 3576 33-0362767
(prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
15353 Barranca Parkway
Delaware Irvine, California 92618
(after reincorporation) (949) 453-3990
(State or other jurisdiction
of incorporation or organization)
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Frederick G. Thiel
President and Chief Executive Officer
Lantronix, Inc.
15353 Barranca Parkway
Irvine, California 92618
(949) 453-3990
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
John T. Sheridan, Esq. Shane M. Byrne, Esq.
John B. Turner, Esq. Krista Peck, Esq.
Michelle D. Gregory, Esq. Angela C. Hilt, Esq.
WILSON SONSINI GOODRICH & ROSATI Mark Hornor, Esq.
Professional Corporation BROBECK, PHLEGER & HARRISON LLP
650 Page Mill Road One Market
Palo Alto, CA 94304 Spear Tower
(650) 493-9300 San Francisco, California 94105
(415) 442-0900
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================
Proposed
Title of Each Class of Maximum Proposed
Securities to be Amount to Offering Price Maximum Aggregate Amount of
Registered be Registered Per Share Offering Price(1) Registration Fee(2)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $0.0001
par value ............. 10,350,000 $16.00 $165,600,000 $43,718
============================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities law to offer these securities using +
+this prospectus we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- August 2, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO OF LANTRONIX, INC.]
9,000,000 Shares of Common Stock
--------------------------------------------------------------------------------
Lantronix, Inc.: The Offering:
. We design, develop . We are offering
and market products 9,000,000 shares of
that enable almost our common stock.
any electronic
device to be
controlled, . The underwriters
configured or have an option to
reprogrammed over purchase an
the Internet and/or additional 375,000
intranets. shares from us and
975,000 from the
. Lantronix, Inc. selling stockholders
15353 Barranca to cover over-
Parkway allotments.
Irvine, California
92618 . This is our
(949) 453-3990 initial public
offering, and no
Symbol & Market: public market
currently exists for
. Our common stock our shares.
has been authorized
for listing on the . We anticipate that
Nasdaq National the initial public
Market under the offering price for
symbol "LTRX." our shares will be
between $14.00 and
$16.00 per share.
. Closing: , 2000
----------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
----------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Lantronix, Inc.:
----------------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on Page 5.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette Lehman Brothers
--------------
DLJdirect Inc.
<PAGE>
INSIDE FRONT COVER
The words "what does DEVICE SERVER technology mean to you?" are centered on the
page both horizontally and vertically. Above the text are two small pictures:
(1) two engineers working at a mainframe computer; and (2) five telephone poles
in a row. Beneath the text are three pictures: (1) a reflection of a building;
(2) a man using a security card to access a door; and (3) a person ringing up a
receipt on a cash register.
INSIDE GATEFOLD
The words "With Device Server technology you can Internet-enable almost any
electronic device." Below the text is a circle split into three segments. In
each segment there is a picture. In the upper left segment is a photo of an ATM
machine, directly left of the segment is the word "Past." In the upper right
segment there is a photo of an automobile, directly right of the segment is the
word "future". In the lower segment is a photo of a handheld barcode reader,
directly below is the word "Present".
INSIDE GATEFOLD (2)
At the top left of the page is the word "Internet", inside of a yellow bubble.
Directly to the right of the word "Internet" are the words, "Device Server
Technology brings the Internet to virtually every industry from factory
automation to healthcare to retail." Below the yellow bubble and the text is a
red text box with the words "Device Server applications." There are three
arrows down from the red text box, one on the left, one in the center and one
on the right. Below the arrows are six photos in two rows of three. The first
photo at the top left is of a patient being monitored by medical equipment
while a nurse looks on, above the photo are the words "Hospital Information
Access." The top center photo is of a man using a security panel to access a
door, above the photo are the words, "Internet Enabled Security Systems." At
the top right is a photo of a building, with the words "Remote building HVAC
Control." At the bottom left is a photo of a person ringing up a receipt on a
cash register, above the photo are the words, "Cost-effective Retail POS
connectivity." At the bottom contains a photo of two engineers working at a
mainframe, above the photo are the words "Enterprise IT management." On the
bottom left is a photo of five telephone lines with the words "Industrial
control and remote management."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Note Regarding Forward-Looking Statements................................ 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Change in Auditors....................................................... 27
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 28
Management................................................................. 39
Certain Transactions....................................................... 46
Principal and Selling Stockholders......................................... 48
Description of Capital Stock............................................... 49
Shares Eligible for Future Sale............................................ 52
Underwriting............................................................... 54
Legal Matters.............................................................. 57
Experts.................................................................... 57
Where You Can Find Additional Information.................................. 57
Index to Consolidated Financial Statements................................. F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, references
to "Lantronix," "we," "our" and "us" refer to Lantronix, Inc.
----------------
Our logo, "Lantronix," "EZWebCon" and "Comm Port Redirector" are trademarks
or service marks of Lantronix, Inc. We have filed for trademark protection for
"Device Server." This prospectus also contains trademarks and tradenames of
other companies.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in this offering. You
should read the following summary together with the more detailed information
in this prospectus, including risk factors, regarding our company and the
common stock being sold in this offering.
Our Company
Our Business
Lantronix designs, develops and markets products that enable almost any
electronic device to be controlled, configured or reprogrammed over the
Internet and/or intranets. Our products connect these electronic devices to the
Internet and/or intranets by using the infrastructure already in place to
connect businesses and homes to the Internet, including fiber optic, Ethernet
and wireless connections. Our primary products that connect electronic devices
are our Device Servers and Multiport Device Servers. Our Device Servers are
used to network enable single devices while our Multiport Device Servers are
used to network enable multiple devices simultaneously. These products are
fully integrated systems that contain memory, processors, operating systems,
software applications and communication ports. By utilizing our products, users
can gain instant access to critical information, manage and control devices
with no time lag over the Internet or other networks. Our Device Servers and
Multiport Device Servers are currently being used to network enable a variety
of electronic devices including bar code scanners, building heating,
ventilation and air conditioning, or HVAC systems, elevators, manufacturing
equipment, process control equipment, vending machines, thermostats, security
cameras, medical instruments, temperature sensors, card readers and point of
sale terminals. In addition to our Device Server and Multiport Device Server
product lines we also design, develop and market Print Servers, which enable
multiple users to share printers anywhere on an Ethernet network, and other
products which support our product lines. We sell our products through multiple
channels using original equipment manufacturers, or OEMs, systems integrators,
distributors and value added resellers, or VARs, to a wide variety of end-
markets including industrial automation, healthcare, security, retail,
information technology and telecommunications.
Our Market
The emergence of the Internet has increased users' access to information and
the speed at which users are able to respond to new information. As Internet
technology applications have become more advanced, users have become able to
conduct business instantaneously over the Internet. The increasing productivity
that instantaneous, or real-time, communication creates has escalated demand
for real-time access to devices over the Internet for a broad range of
applications at all levels of technological sophistication. Moreover, by
enabling devices to make intelligent decisions and communicate using the
Internet without human intervention, significant cost savings and efficiencies
can be realized. The majority of electronic devices in existence today are not
connected to the Internet. Instead, these devices, if networked, primarily
communicate through proprietary, closed control systems requiring a personal
computer, or PC, extensive wiring and custom designed software. Examples of
such isolated systems include point of sale devices, bar code scanners,
security systems, elevators, manufacturing equipment and medical instruments.
Moreover, any intelligent action that must be taken as a result of information
provided by these devices, such as ordering additional inventory when a bar
code scanner provides information that a store is out of a certain product,
requires action by a human being. Today, manufacturers and systems integrators
are increasingly using device server technology which provides a cost-effective
solution to enable electronic devices to be connected and controlled over the
Internet as well as to replace human intervention by enabling the devices to
respond automatically to certain data inputs.
1
<PAGE>
Demand for device server technology is being driven by the need for cost
effective networking solutions for the base of installed devices as well as
devices currently being developed by OEMs and systems integrators. In terms of
the installed base, device server technology can benefit virtually any
electronic device that has a serial port. In terms of devices currently being
developed, device server technology can benefit virtually any electronic device
that contains, or otherwise could contain, a microprocessor. Cahners In-stat
Group, an independent research company, estimates that the number of
microprocessors embedded in electronic devices is expected to increase from
over 4.9 billion units as of December 31, 1999 to 7.3 billion units by December
31, 2002.
As competition to be the first-to-market with Internet-enabled products
becomes more intense, OEMs, VARs and systems integrators, whose core
competencies typically do not include networking expertise, are increasingly
seeking out third-party providers of networking capabilities that can meet end-
user demand. End-users desire solutions that provide higher levels of
automation and functionality with advanced features and services including the
ability:
. to enable devices to take intelligent action without the need for human
intervention or a more expensive and sophisticated PC or similar
instrument;
. to reprogram the functions of electronic devices via the Internet
without the need to replace them;
. to integrate devices from multiple manufacturers;
. to access and communicate with devices instantaneously and continuously;
and
. to provide flexible applications.
Our Solution
We believe our products provide a solution for our end users requirements
for intelligent, real-time, flexible remote access and control of electronic
devices. In addition, we believe our products enable our customers to compete
more effectively by allowing them to improve their business models by
automating tasks previously performed by human resources and streamlining
redundant technology. We believe our products offer end-users and manufacturers
the following key advantages:
. a fully integrated solution;
. a remote real-time solution;
. an open, standards-based architecture;
. no requirement to use a PC or server to network devices; and
. improved reliability.
Our Address
Our headquarters are located at 15353 Barranca Parkway, Irvine, California
92618, and our telephone number at that location is (949) 453-3990. Our web
addresses are www.lantronix.com and www.deviceserver.com. Information on our
websites should not be considered to be part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Lantronix................... 9,000,000 shares
Common stock to be outstanding after this offering.. 38,774,432 shares
Use of proceeds..................................... We plan to use the
proceeds of this
offering for working
capital, general
corporate purposes,
other operating
expenses, including
research and development
and strategic
acquisitions. See "Use
of Proceeds."
Nasdaq National Market symbol....................... LTRX
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
Except as otherwise indicated, the total number of shares of common stock
outstanding after the offering excludes:
. 5,737,987 shares of common stock issuable upon the exercise of stock
options outstanding at June 22, 2000, at a weighted average exercise
price of $1.35 per share;
. 8,139,416 shares of common stock in the aggregate reserved for future
issuance as of June 22, 2000, under our 1993 Stock Option Plan and 1994
Nonstatutory Stock Option Plan; and
. 1,750,000 shares in the aggregate reserved for future issuance as of June
22, 2000, under our 2000 Stock Plan and 2000 Employee Stock Purchase
Plan.
3
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The summary consolidated financial information set forth below is derived
from our consolidated financial statements. You should read the following data
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus. The as adjusted
balance sheet data summarized below reflects the application of the net
proceeds from the sale of the shares of common stock offered by us in this
offering at an assumed initial public offering price of $15.00 per share after
deducting the underwriting discounts and commissions and our estimated offering
expenses. See "Capitalization."
<TABLE>
<CAPTION>
Nine months
Year Ended June 30, ended March 31,
----------------------- ---------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues........................... $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues....................... 20,430 16,812 16,824 12,468 15,644
Gross profit........................... 10,250 11,488 16,156 10,689 16,987
Total operating expenses............... 9,926 9,627 12,383 8,343 14,821
Income from operations................. 324 1,861 3,773 2,346 2,166
Net income............................. 202 1,303 2,786 1,622 1,135
Earnings per share:
Basic................................ $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.04
Diluted.............................. 0.01 0.05 0.10 0.06 0.03
Weighted average shares:...............
Basic................................ 25,128 25,207 26,977 26,964 28,870
Diluted.............................. 25,427 25,443 28,880 28,967 33,293
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
2000
-------------------
Actual As Adjusted
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 4,118 $127,925
Working capital............................................. 10,185 133,992
Total assets................................................ 17,527 141,334
Capital lease obligations, net of current portion........... 110 110
Retained earnings........................................... 8,507 8,507
Total stockholders' equity.................................. 12,075 135,882
</TABLE>
4
<PAGE>
RISK FACTORS
Any investment in our shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained in this prospectus, before
you decide to buy our common stock. If any of the following risks actually
occur, our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Business
Variations in quarterly operating results, due to factors including changes in
demand for our products and changes in our mix of net revenues, could cause our
stock price to decline.
Our quarterly net revenues, expenses and operating results have varied in
the past and might vary significantly from quarter to quarter in the future. We
therefore believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance, and you should not rely on
them to predict our future performance or the future performance of our stock
price. Our short-term expense levels are relatively fixed and are based on our
expectations of future net revenues. If we were to experience a reduction in
net revenues in a quarter, we would likely be unable to adjust our short-term
expenditures. If this were to occur, our operating results for that quarter
would be harmed. 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 15.8% of our total net revenues for the nine months ended March
31, 2000 compared to approximately 29.4% for the nine months ended March 31,
1999. Revenues from our Print Server line also decreased significantly in the
nine months ended March 31, 2000 to approximately $5.2 million from
approximately $6.8 million for the nine months ended March 31, 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.
5
<PAGE>
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 nine months ended March 31, 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.
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 March 31, 1999, we had
77 employees. As of March 31, 2000, we had 128 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;
6
<PAGE>
. lack of guaranteed production capacity or product supply; and
. reliance on third-party manufacturers to maintain competitive
manufacturing technologies.
We do not have supply agreements with our manufacturers, and instead obtain
manufacturing services on a purchase-order basis. Our manufacturers have no
obligation to supply products to us for any specific product, in any specific
quantity or at any specific price. If our manufacturers were to become unable
or unwilling to continue to manufacture our products in required volumes, at
acceptable quality, quantity, yields and costs, or in a timely manner, our
business would be seriously harmed. As a result, we would have to attempt to
identify and qualify substitute manufacturers for our current manufacturers,
which could be time consuming and difficult, and might result in unforeseen
manufacturing and operations problems. In addition, a natural disaster could
disrupt our manufacturers' facilities and could inhibit our manufacturers'
ability to provide us with manufacturing capacity on a timely basis, or at all.
If this were to occur, we likely would be unable to fill customers' existing
orders or accept new orders for our products. The resulting decline in revenue
would harm our business.
The current manufacturing capacity of our two third-party manufacturers is
not sufficient to meet our expected future growth. Therefore, we are in the
process of locating additional manufacturing capacity. Available capacity to
manufacture products like ours is limited. If we are unable to secure
additional manufacturing capacity on a timely basis and on favorable terms, we
will be unable to grow at the rate we anticipate. This could cause the price of
our stock to decline.
Inability or delays in deliveries from our component suppliers could damage our
reputation and could cause our net revenues to decline and harm our results of
operations.
Although we outsource our manufacturing, we are responsible for procuring
raw materials for our products. Our products incorporate components or
technologies that are only available from single or limited sources of supply.
In particular, some of our integrated circuits are available from a single
source. In the past, from time to time, integrated circuits we use in our
products have been phased out of production. When this happens, we attempt to
purchase sufficient inventory to meet our needs until a substitute component
can be incorporated into our products. Nonetheless, we might be unable to
purchase sufficient components to meet our demands, or we might incorrectly
forecast our demands, and purchase too many or too few components. In addition,
our products use components that have in the past been subject to market
shortages and substantial price fluctuations. For example, the price of flash
memory, a component used in our products, has fluctuated significantly. From
time to time, we have been unable to meet our orders because we were unable to
purchase necessary components for our products. We rely on a number of
different component suppliers. For example, during the month of April 2000
there were approximately 10 suppliers from which we purchased more than $25,000
of components. Because we do not have long-term supply arrangements with any
vendor to obtain necessary components or technology for our products, if we are
unable to purchase components from these suppliers, product shipments could be
prevented or delayed, which could result in a loss of sales. For example,
recently our supplier of gate array chips ended production of that component,
which caused an interruption in our ability to supply one of our multi port
products. If we are unable to meet existing orders or to enter into new orders
because of a shortage in components, we will likely lose net revenues and risk
losing customers and harming our reputation in the marketplace.
If the Internet does not continue to expand as a widespread communications
medium, demand for our products could decline significantly.
Our future success depends on the continued growth of the Internet as a
widely used medium for commerce and communication. If the Internet does not
continue to expand as a widespread communications medium and commercial
marketplace, the growth of the market for Internet connectivity products might
not continue, and the demand for our products could decline significantly. The
resulting decline in our revenues could cause the price of our stock to fall.
7
<PAGE>
If a major customer cancels, reduces, or delays purchases, our net revenues
might decline and our business could be adversely affected.
For the nine months ended March 31, 2000, our two largest customers, each of
whom are distributors, accounted for 23% of our net revenues. Ingram Micro, a
domestic distributor, accounted for 12% of our net revenues for the nine months
ended March 31, 2000 and Tech Data, a domestic distributor, accounted for 11%
of our net revenues for the nine months ended March 31, 2000. Our top five
customers accounted for 38% of our net revenues during this period and our top
ten customers accounted for 46% of our net revenues. Transtec AG, a major
international customer, accounted for 8% of our net revenues as well as a
significant portion of our accounts receivable for the nine months ended March
31, 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, 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 6.8% for the nine months ended
March 31, 2000 over the nine months ended March 31, 1999, approximately 11.2%
for the year ended June 30, 1999 over the year ended June 30, 1998 and
approximately 16.5% for the year ended June 30, 1998 over the year ended June
30, 1997. In the future, we expect competition to increase, and we anticipate
this could result in additional pressure on our pricing. In addition, our
average selling prices for our products might decline as a result of other
reasons, including promotional programs and customers who negotiate price
reductions in exchange for longer-term purchase commitments. Average selling
prices and gross margins for our products also might decline as the products
mature in their life cycles. In addition, we might not be able to increase the
price of our products in the event that the price of components or our overhead
costs increase. If this were to occur, our gross margins would decline.
Because we are dependent on international sales for a substantial amount of our
net revenues, we face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results.
Net revenues from international sales represented 34% of net revenues for
the nine months ended March 31, 2000 and 33% of net revenues for the nine
months ended March 31, 1999. Net revenues from Europe represented 29% of our
net revenues for the nine months ended March 31, 2000 and 28% for the nine
months ended March 31, 1999. We expect that international revenues will
continue to represent a significant portion of our net revenues in the
foreseeable future. Doing business internationally involves greater expense and
many additional risks. For example, because the products we sell abroad and the
products and services we buy abroad are priced in foreign currencies, we are
affected by fluctuating exchange rates. In the past, we have from time to time
lost money because of these fluctuations. We might not successfully protect
ourselves against
8
<PAGE>
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.
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-
9
<PAGE>
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.
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
Print Server and Multiport Device Server products together (excluding our MSS
products) represented approximately 53.4% of our net revenues in the year ended
June 30, 1999 and approximately 38.9% of our net revenues in the nine months
ended March 31, 2000. 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
10
<PAGE>
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 year ended June 30, 1999, we paid Gordian approximately
$2.0 million in royalties and for the nine months ended March 31, 2000 we paid
Gordian approximately $1.5 million in royalties. In the event that the Gordian
agreement is terminated, we could lose our rights to the intellectual property
developed under the Gordian agreement and this might prevent us from marketing
some or all of 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.
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 $6.4 million during the nine months ended
March 31, 2000, which is being amortized over the vesting period of the related
stock options, which is generally four years. A balance of $5.8 million remains
at March 31, 2000 and will be amortized as follows: $0.5 million during the
remainder of fiscal 2000, $1.8 million in fiscal 2001, $1.8 million in fiscal
2002, $0.9 million in fiscal 2003, $0.6 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. On May 19, 2000, the Board of
Directors granted options under the 1993 Stock Plan to employees to purchase an
aggregate of 920,894 shares of our common stock at an exercise price of $6.00
per share. In connection with this option grant, we will record deferred
compensation aggregating $8.3 million that will be amortized over the vesting
period of the options as follows: $0.2 million during the remainder of fiscal
2000, $2.1 million in fiscal 2001, $2.1 million in fiscal 2002, $2.1 million in
fiscal 2003, and $1.8 million in fiscal 2004.
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.
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<PAGE>
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 is being amortized over 27
months. As a result, we will recognize approximately $565,000 of amortization
relating to the marketing rights agreement for the period from April 1, 2000
through December 31, 2000. Commissions paid and amortization of marketing
rights during the year ended June 30, 1999 and the nine months ended March 31,
2000 were $1.6 million and $2.2 million, respectively. After December 31, 2000,
we expect to have no further charges relating to these transactions.
Risks Related to this Offering
Our stock price might be volatile and you might not be able to resell your
shares at or above the initial public offering price.
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. This initial public
offering price might vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you might not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock might fluctuate significantly in response to factors,
some of which are beyond our control, including the following:
. actual or anticipated fluctuations in our annual and quarterly operating
results;
. changes in market valuations of other technology companies;
. changes in financial estimates by securities analysts;
. variations in our operating results which could cause us to fail to meet
analysts' or investors' expectations;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
. additions or departures of key personnel;
. future sale of equity or debt securities; and
. general economic, industry and market conditions.
In addition, the stock market, and the stock of Internet companies in
particular, has experienced extreme volatility that often has been unrelated to
the performance of these companies. These market fluctuations might cause our
stock price to fall regardless of our performance. In the past, companies that
have experienced volatility in the market price of their stock have been the
object of securities class action litigation. If we were involved in securities
class action litigation, it could result in substantial costs and a diversion
of management's attention and resources. You should read the "Underwriting"
section for a more complete discussion of the factors that were considered in
determining the initial public offering price of our common stock.
Because some existing stockholders will together own a majority of our stock,
the voting power of other stockholders, including purchasers in this offering,
might be limited.
After this offering, it is anticipated that our officers, directors, and
five percent or greater stockholders will beneficially own or control, directly
or indirectly, 73.9% of our shares of common stock. One individual,
12
<PAGE>
Bernhard Bruscha will own 58.0% of our common stock after this offering. As a
result, if some of these existing stockholders choose to act together, they
will have the ability to control matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any business combinations. This might delay or prevent an acquisition or cause
the market price of our stock to decline. Some of these persons or entities
might have interests different from yours. For example, they might be more
interested than other investors in selling our company or pursuing different
business strategies. For additional information on this calculation, see
"Principal and Selling Stockholders."
We might be unable to meet our future capital requirements, and if we issue
additional equity securities to raise capital our stockholders could experience
additional dilution.
We might be required to seek additional funding to meet our capital
requirements, particularly if we elect to acquire complementary businesses,
products or technologies. If we are required to raise additional funds, we
might not be able to do so on favorable terms, if at all. In addition, if we
issue new equity securities, stockholders might experience dilution or the
holders of new equity securities might have rights, preferences or privileges
senior to those of existing holders of common stock. If we are unable to raise
additional capital on acceptable terms, we might not be able to develop or
enhance our products, take advantage of future opportunities, or respond to
clients and competition.
Substantial future sales of our common stock in the public market could depress
our stock price.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that might be sold in the public market in the future.
You will experience immediate and substantial dilution in the book value of
your shares.
The price for each share in the initial public offering is substantially
higher than the book value per share of our outstanding common stock
immediately after the offering. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $11.44 in the
book value of our common stock from the price you pay for our common stock. For
additional information on this calculation, see "Dilution."
The provisions of our charter documents might inhibit potential acquisition
bids that a stockholder might believe are desirable, and the market price of
our common stock could be lower as a result.
Upon completion of this offering, our Board of Directors will have the
authority to issue up to five million shares of preferred stock. Our Board of
Directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock might delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders might be adversely affected. The
issuance of preferred stock might result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our charter documents also contain other provisions which might discourage,
delay or prevent a merger or acquisition, including:
. only one of the three classes of directors is elected each year;
. our stockholders have limited rights to remove directors without cause;
. our stockholders have no right to act by written consent;
. our stockholders have limited rights to call a special meeting of
stockholders; and
. stockholders must comply with advance notice requirements to nominate
directors or submit proposals for consideration at stockholder meetings.
13
<PAGE>
These provisions could also have the effect of discouraging others from
making tender offers for our common stock. As a result, these provisions might
prevent the market price of our common stock from increasing substantially in
response to actual or rumored takeover attempts. These provisions might also
prevent changes in our management.
We have broad discretion in how we use the proceeds of this offering, and we
might not use these proceeds effectively.
Our management has broad discretion in the use of the net proceeds of this
offering and could spend the net proceeds in ways that do not yield a favorable
return or to which stockholders object. For example, we might use the proceeds
to acquire complementary businesses or technologies, although no such
acquisitions are currently planned. These acquisitions could prove to be
unprofitable and harm our business. Until we need to use the proceeds of this
offering, we plan to invest the net proceeds in short-term, interest-bearing
securities.
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<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, including, without limitation, statements concerning conditions
in our industry and our business, financial condition and operating results,
including in particular statements relating to our business and growth
strategies and our product development efforts. We use words like "believe,"
"expect," "anticipate," "intend," "future" and other similar expressions to
identify forward-looking statements. Purchasers of our common stock should not
place undue reliance on these forward-looking statements, which speak only as
of their dates. These forward-looking statements are based on our current
expectations, and are subject to a number of risks and uncertainties,
including, without limitation, those identified under "Risk Factors" and
elsewhere in this prospectus. Our actual operating results could differ
materially from those predicted in these forward-looking statements, and any
other events anticipated in the forward-looking statements might not actually
occur.
USE OF PROCEEDS
We expect to receive proceeds of approximately $123.8 million from the sale
of the shares of common stock at an assumed initial public offering price of
$15.00 per share, after deducting the underwriting discount and our estimated
offering expenses, or approximately $129.0 million if the underwriters exercise
in full their option to purchase additional shares. The principal reasons for
the offering are to provide liquidity for our securities, to provide working
capital for future operations and to provide capital to make strategic
acquisitions. We also intend to use the proceeds for other general corporate
purposes, including research and development and expansion of our sales and
marketing organizations. We intend to use at least 50% of the net proceeds to
make strategic acquisitions of other companies, technology or products that
complement our business. We are not currently in negotiations for any of these
transactions. Pending these uses, the net proceeds of this offering will be
invested in short-term, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We do not
currently anticipate paying any cash dividends on our common stock in the
foreseeable future, and we intend to retain any future earnings for use in the
expansion of our business and for general corporate purposes. Additionally, our
current debt instruments limit the payment of dividends.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis; and
. as adjusted to reflect our sale of 9,000,000 shares of common stock
offered hereby at an assumed offering price of $15.00 per share and our
application of the estimated net proceeds therefrom, after deducting
underwriting discounts and commissions and estimated offering expenses.
Except as otherwise indicated, all information to this prospectus assumes:
. a four-for-one stock split of our common stock, which will occur prior to
the completion of this offering; and
. our reincorporation in the State of Delaware, which will occur prior to
the completion of this offering.
See "Use of Proceeds." The capitalization information set forth in the table
below is qualified by the more detailed Consolidated Financial Statements and
Notes thereto included elsewhere in this prospectus and should be read in
conjunction with such consolidated financial statements and notes.
<TABLE>
<CAPTION>
As of March 31,
2000
-----------------
As
Actual Adjusted
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,118 $127,925
======= ========
Capital lease obligations, net of current portion .......... $ 110 $ 110
Stockholder's equity:
Preferred stock, $0.0001 par value; 5 million shares
authorized; no shares issued and outstanding..............
Common stock, $0.0001 par value; 200 million shares
authorized; 28,993,820 shares issued and outstanding,
actual; 37,993,820 shares issued and outstanding, as
adjusted.................................................. 3 4
Additional paid-in capital.................................. 9,396 133,202
Deferred compensation....................................... (5,823) (5,823)
Retained earnings .......................................... 8,507 8,507
Accumulated other comprehensive loss........................ (8) (8)
------- --------
Total stockholders' equity................................ 12,075 135,882
------- --------
Total capitalization.................................... $12,185 $135,992
======= ========
</TABLE>
This table does not include:
. 5,737,987 shares of common stock issuable upon the exercise of
outstanding stock options as of June 22, 2000 at a weighted average
exercise price of $1.35 per share, of which options for 1,638,935 shares
were exercisable;
. 8,139,416 shares of common stock reserved for future issuance as of
June 22, 2000, under our 1993 Stock Option Plan and 1994 Nonstatutory
Stock Option Plan; and
. 1,750,000 shares in the aggregate reserved for future issuance as of
June 22, 2000, under our 2000 Stock Plan and 2000 Employee Stock Purchase
Plan.
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DILUTION
Our net tangible book value as of March 31, 2000 was $11.3 million, or $0.39
per share of common stock. Net tangible book value per share is calculated by
subtracting our total liabilities from our total tangible assets, which equals
total assets less intangible assets, and dividing this amount by the number of
shares of common stock outstanding as of March 31, 2000. Assuming the sale by
us of 9,000,000 shares of common stock offered in this offering at an initial
public offering price of $15.00 per share and the application of the estimated
net proceeds from this offering, our net tangible book value as of March 31,
2000 would have been $135.1 million, or $3.56 per share of common stock.
Assuming the completion of this offering, there will be an immediate increase
in the net tangible book value of $3.17 per share to our existing stockholders
and an immediate dilution in the net tangible book value of $11.44 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $15.00
Net tangible book value per share as of March 31, 2000.......... $0.39
Increase attributable to new investors.......................... 3.17
-----
Net tangible book value per share after offering.................. 3.56
------
Dilution per share to new investors............................... $11.44
======
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid by existing stockholders and by new investors, in each case based
upon the number of shares of common stock outstanding as of March 31, 2000.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ -------------------- Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 28,993,820 76.3% $ 2,986,000 2.2% $ 0.10
New investors................ 9,000,000 23.7 135,000,000 97.8 $15.00
---------- ----- ------------ -----
Total...................... 37,993,820 100.0% $137,986,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing stockholders will be reduced to
73.0% of the total number of share of common stock to be outstanding after this
offering, and will increase the number of shares of common stock held by the
new investors to 10,350,000 shares, or 27.0% of the total number of shares of
common stock to be outstanding immediately after this offering. See "Principal
and Selling Stockholders."
The tables and calculations above assume no exercise of outstanding options.
At March 31, 2000, there were 5,502,956 shares of common stock reserved for
issuance upon exercise of outstanding options with a weighted average exercise
price of $0.37 per share, of which options for 2,420,584 were exercisable. To
the extent that these options are exercised, there will be further dilution to
new investors. In addition, the tables and calculations above do not include
the 7,251,496 shares of common stock reserved for future issuance under our
1993 Incentive Stock Option Plan and 1994 Nonstatutory Stock Option Plan as of
March 31, 2000.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations data for the years ended June 30, 1997, 1998 and 1999 and the
nine months ended March 31, 2000, and the balance sheet data as of June 30,
1998 and 1999 and March 31, 2000, are derived from the audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended June 30, 1995 and 1996, and
the balance sheet data as of June 30, 1995, 1996 and 1997, are derived from the
audited consolidated financial statements not included elsewhere in this
prospectus. The consolidated statement of operations data for the nine months
ended March 31, 1999, are derived from unaudited consolidated financial
statements included elsewhere in this prospectus. We prepared the unaudited
consolidated financial statements on substantially the same basis as the
audited consolidated financial statements and, in our opinion, they include all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for this period. The historical
results are not necessarily indicative of results to be expected for future
periods.
<TABLE>
<CAPTION>
Nine months ended
Year ended June 30, March 31,
------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ $33,977 $40,252 $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues........ 21,633 27,463 20,430 16,812 16,824 12,468 15,644
------- ------- ------- ------- ------- ------- -------
Gross profit............ 12,344 12,789 10,250 11,488 16,156 10,689 16,987
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 9,484 9,674 7,455 7,857 9,768 6,494 11,904
Research and
development........... 2,078 3,770 2,471 1,770 2,615 1,849 2,330
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 587
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 11,562 13,444 9,926 9,627 12,383 8,343 14,821
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 782 (655) 324 1,861 3,773 2,346 2,166
Minority interest....... -- -- -- -- (30) (57) (49)
Interest income
(expense), net......... (1) 33 (168) (5) 151 121 154
Other income (expense),
net.................... 134 (15) 9 1 (10) (106) (55)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes......... 915 (637) 165 1,857 3,884 2,304 2,216
Provision (benefit) for
income taxes........... 197 (191) (37) 554 1,098 682 1,081
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 718 $ (446) $ 202 $ 1,303 $ 2,786 $ 1,622 $ 1,135
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share:
Basic................. $ 0.03 $ (0.02) $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.04
Diluted .............. 0.03 (0.02) 0.01 0.05 0.10 0.06 0.03
Weighted average shares:
Basic................. 25,167 25,051 25,128 25,207 26,977 26,964 28,870
Diluted............... 25,307 25,051 25,427 25,443 28,880 28,967 33,293
<CAPTION>
As of June 30, As of
------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 197 $ 230 $ 173 $ 1,759 $ 5,833 $ 4,118
Working capital......... 4,916 3,838 4,812 6,327 8,109 10,185
Total assets............ 10,695 14,985 9,570 9,800 17,292 17,527
Capital lease
obligations, net of
current portion........ -- -- -- -- 97 110
Minority interest....... -- -- -- -- 68 --
Retained earnings....... 3,528 3,081 3,284 4,586 7,372 8,507
Total stockholders'
equity................. 5,853 5,407 5,624 6,928 10,312 12,075
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors
including, but not limited to, those factors set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Since our inception in 1989, we have developed an array of network-
enabling products including Device Servers, Multiport Device Servers, Print
Servers and other products. Beginning in fiscal year 1999, we began to
experience an increase in sales of our Device Servers reflecting our focus on
this higher margin product line. At the same time, we began to experience a
decline in sales of Print Server and other products as we shifted resources to
our Device Server business, which we believe represents a greater opportunity
for long-term growth. We believe sales of our Device Server products will
continue to represent an increasing percentage of our net revenues in the
future. Our strategy for continuing to increase sales of our Device Server
product line involves a two-fold approach. First, we intend to substantially
increase our research and development expenditures over the next two years to
enhance our Device Server product line and develop new products. Second, we
intend to grow our Device Server business through strategic acquisitions,
investments and partnerships, which we believe will support our product lines
and allow us to secure additional intellectual property, increase our customer
base and provide access to new markets.
Our products are sold to OEMs, VARs, systems integrators and distributors,
as well as directly to end-users. We have two customers that accounted for more
than 10% of our net revenues. One of our distributors, Ingram Micro, accounted
for 11.5% of our net revenues during the nine months ended March 31, 2000,
15.5% for the year ended June 30, 1999, 22% for the year ended June 30, 1998,
and 15.3% for the year ended June 30, 1997. Another distributor, Tech Data,
accounted for 11.2% of our net revenues during the nine months ended March 31,
2000, 11.5% for the year ended June 30, 1999, 12.6% for the year ended June 30,
1998 and 15.1% for the year ended June 30, 1997. Transtec AG, an international
OEM and related party due to common ownership by our major stockholder,
accounted for 7.6% of our net revenues during the nine months ended March 31,
2000, 11.4% for the year ended June 30, 1999, 17.9% for the year ended June 30,
1998 and 16.4% for the year ended June 30, 1997.
In October 1998, we acquired ProNet GmbH, a German company that is a
supplier of industrial application device server technology. 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 $565,000 of
amortization relating to a marketing rights agreement for the period from April
1, 2000 through December 31, 2000. In addition, we will incur sale commissions
payments relating to the acquisition through December 31, 2000. After that
date, we expect to have no further charges relating to these acquisitions. See
notes 2 and 3 of the consolidated financial statements for additional
information relating to 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,
19
<PAGE>
based on our five-year warranty policy from the date of shipment. The allowance
for doubtful accounts is recorded based upon anticipated collection risk. This
reserve has decreased during the year ended June 30, 1999 and the nine months
ended March 31, 2000 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
$6.4 million, which is being amortized over the vesting period of the related
stock options, which is generally four years. A balance of $5.8 million remains
at March 31, 2000 and will be amortized as follows: $0.5 million during the
remainder of fiscal 2000, $1.8 million in fiscal 2001, $1.8 million in fiscal
2002, $0.9 million in fiscal 2003, $0.6 million in fiscal 2004 and $0.2 million
in fiscal 2005. The amount of stock-based compensation amortization actually
recognized in future periods could decrease if options for which accrued, but
unvested compensation has been recorded, are forfeited. See note 5 to the
consolidated financial statements.
On May 19, 2000, the Board of Directors granted options under the 1993 Stock
Plan to employees to purchase an aggregate of 920,894 shares of our common
stock at an exercise price of $6.00 per share. In connection with this option
grant, we will record deferred compensation aggregating $8.3 million that will
be amortized over the vesting period of the options as follows: $0.2 million
during the remainder of fiscal 2000, $2.1 million in fiscal 2001, $2.1 million
in fiscal 2002, $2.1 million in fiscal 2003, and $1.8 million in fiscal 2004.
See note 9 to the consolidated financial statements.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net revenues represented by each item in our consolidated income statements:
<TABLE>
<CAPTION>
Nine months
Year ended June 30, ended March 31,
---------------------- ----------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 66.6 59.4 51.0 53.8 47.9
------ ------ ------ ------- -------
Gross profit......................... 33.4 40.6 49.0 46.2 52.1
Operating expenses:
Selling, general and
administrative.................... 24.3 27.8 29.6 28.0 36.5
Research and development........... 8.1 6.3 7.9 8.0 7.1
Amortization of deferred
compensation...................... -- -- -- -- 1.8
------ ------ ------ ------- -------
Total operating expenses............. 32.4 34.0 37.5 36.0 45.4
------ ------ ------ ------- -------
Income from operations............... 1.1 6.6 11.4 10.1 6.6
Minority interest.................... -- -- (0.1) (0.2) (0.2)
Interest income (expense), net....... (0.5) -- 0.5 0.5 0.5
Other income (expense), net.......... -- -- -- (0.5) (0.2)
------ ------ ------ ------- -------
Net income before income taxes....... 0.5 6.6 11.8 9.9 6.8
Provision (benefit) for income
taxes............................... (0.1) 2.0 3.3 2.9 3.3
------ ------ ------ ------- -------
Net income........................... 0.7% 4.6% 8.4% 7.0% 3.5%
====== ====== ====== ======= =======
</TABLE>
Comparison of the Nine Months Ended March 31, 1999 and 2000
Net Revenues
Net revenues increased $9.5 million, or 40.9%, from $23.2 million in the
nine months ended March 31, 1999 to $32.6 million in the nine months ended
March 31, 2000. The increase was primarily attributable to an increase in net
revenues of our Device Server products, offset by a decline in our Print Server
and other
20
<PAGE>
products. Device Server net revenues increased $10.3 million, or 151.8%, from
$6.8 million or 29.2% of net revenues in the nine months ended March 31, 1999
to $17.0 million or 52.2% of net revenues in the nine months ended March 31,
2000. A portion of this growth resulted from the acquisition of ProNet GmbH.
Multiport Device Server net revenues increased $1.0 million, or 15.7%, from
$6.5 million or 28.1% of net revenues in the nine months ended March 31, 1999
to $7.5 million or 23.0% of net revenues in the nine months ended March 31,
2000. Print Server and other revenues decreased $1.8 million, or 18.4%, from
$9.9 million, or 42.7% of net revenues in the nine months ended March 31, 1999
to $8.1 million, or 24.7% of net revenues in the nine months ended March 31,
2000.
Net revenues generated from sales in the United States increased $5.8
million, or 37.6%, from $15.6 million or 67.2% of net revenues in the nine
months ended March 31, 1999 to $21.4 million or 65.6% of net revenues in the
nine months ended March 31, 2000. Our net revenues derived from customers
located in Europe increased $3.2 million, or 49.3%, from $6.4 million or 27.7%
of net revenues in the nine months ended March 31, 1999 to $9.6 million or
29.4% of net revenues in the nine months ended March 31, 2000. Our net revenues
derived from customers located in other geographic areas increased $458,000, or
39.0%, from $1.2 million or 5.1% of net revenues in the nine months ended March
31, 1999 to $1.6 million or 5.0% of net revenues in the nine months ended March
31, 2000.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues
consists primarily of the cost of raw material components, subcontract labor
assembly from outside manufacturers and associated overhead costs. As part of
our agreement with Gordian, Inc., an outside research and development firm, a
royalty charge is included in cost of revenues and is calculated based on the
related products sold. Gross profit increased by $6.3 million, or 58.9%, from
$10.7 million or 46.2% of net revenues in the nine months ended March 31, 1999
to $17.0 million or 52.1% of net revenues in the nine months ended March 31,
2000. In the nine months ended March 31, 2000, the Gordian royalties were $1.5
million as compared to $1.2 million in the nine months ended March 31, 1999.
The increase in gross profit resulted primarily from a change in product mix
with more emphasis on our higher margin Device Server products and a decrease
in royalties as a percentage of net revenues.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel-
related expenses including salaries and commissions, facilities expenses,
information technology, trade show expenses, advertising, and professional
fees. Selling, general and administrative expenses increased $5.4 million, or
83.3%, from $6.5 million or 28.0% of net revenues in the nine months ended
March 31, 1999 to $11.9 million or 36.5% of net revenues in the nine months
ended March 31, 2000. This increase is due in part to a $1.5 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 $481,000, or 26.0%, from $1.8 million or 8.0% of net revenues for the
nine months ended March 31, 1999 to $2.3 million or 7.1% of net revenues for
the nine months ended March 31, 2000. This increase resulted primarily from
increased headcount and expenses related to new product development.
21
<PAGE>
Interest and Other Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on
average cash and cash equivalents, less interest on our bank lines of credit
and capital lease obligations. Other income (expense), net consists primarily
of exchange gains and losses from foreign currency transactions and gains and
losses from disposals of fixed assets. Interest and other income (expense), net
was $15,000 in the nine months ended March 31, 1999 and $99,000 in the nine
months ended March 31, 2000.
Provision (Benefit) for Income Taxes
Our effective tax rate was 29.6% in the nine months ended March 31, 1999 and
48.8% in the nine months ended March 31, 2000. The federal statutory rate was
34% for both periods. Our effective tax rate for the nine months ended March
31, 1999 was lower than the federal statutory rate primarily due to the
reversal of the valuation allowance due to the recoverability of deferred tax
assets. Our effective tax rate for the nine months ended March 31, 2000 was
higher than the federal statutory rate primarily due to start-up losses in
foreign subsidiaries which could not be deducted, the amortization of deferred
compensation for which a current tax benefit was not provided and a research
and development tax credit which could not be used. We believe the effective
tax rate during this period was higher than normal. We expect that our
effective tax rate will likely be lower than the effective tax rate experienced
in the nine months ended March 31, 2000 in the future. We utilize the liability
method of accounting for income taxes as set forth in Financial Accounting
Standards Board ("FASB") Statement No. 109, Accounting for Income Taxes. See
note 6 of notes to consolidated financial statements.
There is no valuation allowance provided on our deferred tax assets since we
believe that it is more likely than not that these assets will be realized.
These assets will be realized through the reversal of timing differences and
through future taxable income.
Comparison of Years Ended June 30, 1998 and 1999
Net Revenues
Net revenues increased $4.7 million, or 16.5%, from $28.3 million in the
year ended June 30, 1998 to $33.0 million in the year ended June 30, 1999. This
increase was due to our acquisition of ProNet GmbH in October 1998 and
sequential growth in our Device Server business.
Gross Profit
Gross profit increased $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,
22
<PAGE>
1999. The increase was primarily due to resource constraints at our 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.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was a $4,000 net expense in the
year ended June 30, 1998 and a $141,000 net income in the year ended June 30,
1999.
Provision (Benefit) for Income Taxes
Our effective tax rate was 29.8% in the year ended June 30, 1998 and 28.3%
the year ended June 30, 1999. The federal statutory rate was 34% for both
periods. Our effective tax rate in the year ended 1998 was lower than the
federal statutory rate due to a tax benefit provided by our foreign operations.
Our effective tax rate in the year ended June 30, 1999 was lower than the
federal statutory rate due to the reversal of the valuation allowance due to
the recoverability of deferred tax assets. See note 6 of notes to consolidated
financial statements.
Comparison of Years Ended June 30, 1997 and 1998
Net Revenues
Net revenues decreased $2.4 million, or 7.8%, from $30.7 million in the year
ended June 30, 1997 to $28.3 million during the year ended June 30, 1998. The
decrease was primarily due to the loss of a major customer of our Print Server
products.
Gross Profit
Gross profit increased $1.2 million, or 12.1% as a percentage of net
revenues from $10.3 million, or 33.4% of net revenues for the year ended June
30, 1997 to $11.5 million, or 40.6% of net revenues for the year ended June 30,
1998 due to a shift in product mix to our higher margin Device Servers and
Multiport Device Servers. For the year ended June 30, 1997, the royalties paid
to Gordian, Inc. were $1.4 million as compared to $1.5 million for the year
ended June 30, 1998.
Selling, General and Administrative
Selling, general and administrative expenses increased $402,000, or 5.4%,
from $7.5 million or 24.3% of net revenues in the year ended June 30, 1997 to
$7.9 million or 27.8% of net revenues in the year ended June 30, 1998.
Research and Development
Research and development expenses decreased $701,000 or 28.4%, from $2.5
million or 8.1% of net revenues in the year ended June 30, 1997 to $1.8 million
or 6.3% of net revenues in the year ended June 30, 1998. The decrease resulted
from resource constraints at our outside research and development consultants.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was a $159,000 net expense in the
year ended June 30, 1997 and a $4,000 net expense in the year ended June 30,
1998.
Provision (Benefit) for Income Taxes
Our effective tax benefit was 22.4% in the year ended June 30, 1997 and our
effective tax rate was 29.8% in the year ended June 30, 1998. The federal
statutory rate was 34% for both periods. The effective tax benefit in 1997 was
due to a tax benefit provided by our foreign sales corporation and was offset
by the provision for the valuation allowance in that period. The effective tax
rate in 1998 was lower than the federal statutory rate due to a tax benefit
provided by our foreign sales corporation. See note 6 of notes to consolidated
financial statements.
23
<PAGE>
Quarterly Results of Operations
The following table presents our consolidated operating results for each of
the seven quarters in the period from July 1, 1998 through March 31, 2000, as
well as such data expressed as a percentage of our net revenues. The
information for each of these quarters is unaudited and has been prepared on
the same basis as our audited consolidated financial statements appearing
elsewhere in this prospectus. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1999 1999 1999 1999 2000
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations:
Net revenues............ $7,128 $8,010 $8,019 $9,823 $10,875 $11,417 $10,339
Cost of revenues........ 4,024 4,421 4,023 4,356 4,701 5,517 5,426
------ ------ ------ ------ ------- ------- -------
Gross profit............ 3,104 3,589 3,996 5,467 6,174 5,900 4,913
Operating expenses:
Selling, general and
administrative....... 1,780 2,347 2,367 3,274 3,594 4,221 4,089
Research and
development.......... 697 477 675 766 722 711 897
Amortization of
deferred
compensation......... -- -- -- -- -- -- 587
------ ------ ------ ------ ------- ------- -------
Total operating
expenses........... 2,477 2,824 3,042 4,040 4,316 4,932 5,573
------ ------ ------ ------ ------- ------- -------
Income (loss) from
operations............. 627 765 954 1,427 1,858 968 (660)
Minority interest
(expense), net......... -- -- (57) 27 (68) 19 --
Interest and other
income (expense), net.. 38 29 (52) 126 62 108 (71)
------ ------ ------ ------ ------- ------- -------
Net income (loss) before
income taxes........... 665 794 845 1,580 1,852 1,095 (731)
Provision (benefit) for
income taxes........... 196 235 251 416 903 534 (356)
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $ 469 $ 559 $ 594 $1,164 $ 949 $ 561 $ (375)
====== ====== ====== ====== ======= ======= =======
As a percentage of net
revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 56.5 55.2 50.2 44.3 43.2 48.3 52.5
------ ------ ------ ------ ------- ------- -------
Gross profit............ 43.5 44.8 49.8 55.7 56.8 51.7 47.5
Operating expenses:
Selling, general and
administrative....... 25.0 29.3 29.5 33.3 33.0 37.0 39.5
Research and
development.......... 9.8 6.0 8.4 7.8 6.6 6.2 8.7
Amortization of
deferred
compensation......... -- -- -- -- -- -- 5.7
------ ------ ------ ------ ------- ------- -------
Total operating
expenses........... 34.8 35.3 37.9 41.1 39.7 43.2 53.9
------ ------ ------ ------ ------- ------- -------
Income (loss) from
operations............. 8.8 9.6 11.9 14.5 17.1 8.5 (6.4)
Minority interest....... -- -- (0.7) 0.3 (0.6) 0.2 --
Interest and other
income (expense), net.. 0.5 0.4 (0.6) 1.3 0.6 0.9 (0.7)
------ ------ ------ ------ ------- ------- -------
Net income (loss) before
income taxes........... 9.3 9.9 10.5 16.1 17.0 9.6 (7.1)
Provision (benefit) for
income taxes........... 2.7 2.9 3.1 4.2 8.3 4.7 (3.4)
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... 6.6% 7.0% 7.4% 11.8% 8.7% 4.9% (3.6)%
====== ====== ====== ====== ======= ======= =======
</TABLE>
Net revenues increased in each of the six quarters ended December 31, 1999.
We did experience a decline in our most recent quarter, which we believe was
partially attributed to reduced purchases due to Year 2000 concerns
24
<PAGE>
as well as a reduction in the sale of Multiport Device Servers during the
quarter. We believe sales of Multiport Servers will remain relatively flat in
future periods. We believe most of our future net revenues growth will be
derived primarily from our Device Server products.
Cost of revenues show a general increasing trend over the seven quarters,
primarily due to the increase in net revenues. Gross profit as a percentage of
net revenues for the four quarters ended March 31, 2000 was higher as compared
to the three quarters ended March 31, 1999 due to a shift in our net revenues
toward higher margin Device Server products. During the three months ending
March 31, 2000, our gross margin declined due to a sequential decline in sales
of our terminal server products, which are our highest margin products. We
believe this decline in sales was due to our customers' decisions to postpone
purchases due to Year 2000 concerns. We do not anticipate that Year 2000
concerns will cause future declines in sales.
Total operating expenses have increased during each of the seven quarters
ended March 31, 2000, due to our investment in infrastructure to support the
growth of our business, including expanding our sales force, adding key
executive positions and increasing expenditures on research and development. In
addition, we incurred charges of $587,000 in the quarter ended March 31, 2000
to adjust the valuation for stock grants and options under the guidelines of
APB No. 25.
Liquidity and Capital Resources
Since inception, we have financed our operations through the issuance of
common stock and through net cash generated from operations. Our cash
equivalents consist of short term investments with original maturities of 90
days or less. As of March 31, 2000, we had cash and cash equivalents of $4.1
million. We have a secured bank line of credit which provides for borrowings of
up to $5.0 million, at the bank's prime interest rate, which was 9.0% at March
31, 2000, plus 2% per annum. The line of credit expires on December 2, 2000 and
requires us to maintain compliance with customary covenants and conditions. We
had no outstanding balance under our bank line of credit as of December 31,
2000. During fiscal year 1999, we established 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 $394,000 during the nine months ended
March 31, 2000. Net income of $1.1 million, which includes amortization and
depreciation of $1.5 million, was reduced by increased inventory of $817,000,
increased accounts receivable of $897,000, and decreased accounts payable and
other current liabilities of $744,000. The increase in accounts receivable was
due to the $9.5 million increase in our net revenues from the nine months ended
March 31, 1999 to the nine months ended March 31, 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 decrease in other current liabilities is due
to $1.7 million of commission payments made relating to our acquisition of
ProNet GmbH. Our operating activities provided cash of $3.9 million during the
nine months ended March 31, 1999, provided cash of $5.6 million during fiscal
year 1999, provided cash of $2.5 million during fiscal year 1998 and provided
cash of $1.8 million during fiscal year 1997.
Our investing activities used $596,000 of cash during the nine months ended
March 31, 2000. The cash used in the period related mainly to the purchase of
property and equipment, primarily computer hardware, of $480,000 and the
acquisition of a minority interest of a subsidiary of ProNet GmbH. Our
investing activities used cash of $2.6 million during the nine months ended
March 31, 1999, $2.9 million during fiscal year 1999, $121,000 during fiscal
year 1998 and $95,000 during fiscal year 1997. During the year ended June 30,
1999, we used $2.3 million for the acquisition of ProNet GmbH and related
marketing rights.
Cash used for financing activities was $724,000 for the nine months ended
March 31, 2000, related to the repayment of a line of credit used in the
acquisition of ProNet GmbH. Cash provided by financing activities was $1.5
million during the nine months ended March 31, 1999 and $1.4 million during
fiscal year 1999, primarily related to borrowings on our bank line of credit
related to our acquisition. Cash used by financing activities was $799,000
during fiscal year 1998 and $1.8 million during fiscal year 1997.
25
<PAGE>
We spent $2.3 million on research and development expenses for the nine
months ended March 31, 2000. This expense related mainly to the development of
products and technology. Expenditures for research and development activities
were $1.8 million for the nine months ended March 31, 1999, $2.5 million for
the fiscal year ended June 30, 1997, $1.8 million for the fiscal year ended
June 30, 1998, and $2.6 million for the fiscal year ended June 30, 1999. We
intend to use a portion of the proceeds of this 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 not be budgeted until
after completion of the offering and will be based upon market conditions
prevailing at that time.
We believe that the net proceeds from this offering, our existing cash and
cash generated from operations will be adequate to meet our anticipated cash
needs through at least the next 12 months. Our future capital requirements will
depend on many factors, including the timing and amount of our net revenues and
research and development and infrastructure investments which will affect our
ability to generate additional cash. 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 Financial Accounting Standards Board 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
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), 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 financial position or results of our operations.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to interest rate risk is limited to the exposure related to our
cash and cash equivalents and our credit facilities, which is tied to market
interest rates. As of March 31, 2000, we had cash and cash equivalents of $4.1
million, which consisted of cash and short-term investments with original
maturities of 90 days or less, both domestically and internationally. We
believe our short-term investments will decline in value by an insignificant
amount if interest rates increase, and therefore would not have a material
effect on our financial condition or results of operations.
26
<PAGE>
Foreign Currency Risk
We sell products internationally. As a result, our financial results could
be harmed by factors such as changes in foreign currency exchanges rates or
weak economic conditions in foreign markets. Because our international sales
are denominated in foreign currencies and are generally translated on a monthly
basis to U.S. dollars, we could be adversely affected by fluctuations in
foreign exchanges rates.
CHANGE IN AUDITORS
KPMG LLP was previously the principal accountants for Lantronix, Inc. In
1998, the Company terminated KPMG's appointment as principal accountants and
engaged Ernst & Young LLP as principal accountants. The board of directors
approved the decision to change accountants.
In connection with the audit of the fiscal year ended June 30, 1997, the
Company had no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statements disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would
have caused KPMG LLP to make reference in connection with their opinion to the
subject matter of the disagreement.
The audit report of KPMG LLP on the consolidated financial statements of
Lantronix, Inc. for the year ended June 30, 1997, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
27
<PAGE>
BUSINESS
Overview
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks using
standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Our Device Servers and Multiport Device Servers are fully integrated
systems that contain memory, processors, operating systems, software
applications and communication ports. As a result, users can gain instant
access to critical information, manage devices in real-time and manage and
control devices over the Internet or other networks. We have developed
networking solutions for devices such as bar code scanners, building HVAC
systems, elevators, manufacturing equipment, process control equipment, vending
machines, thermostats, security cameras, medical instruments, temperature
sensors, card readers and point of sale terminals. We sell our products, which
also include print servers and other devices through multiple channels
including OEMs, systems integrators, distributors and VARs to a wide variety of
end-markets, including industrial automation, healthcare, security/access
control, retail/point of sale, commercial/information technology and
telecommunications.
Industry Background and Trends
The emergence of the Internet has increased users' access to information and
the speed at which users are able to interact with new information. As Internet
technology applications have become more advanced, users have become able to
conduct business in real-time over the Internet and other networks. This trend
has escalated demand for real-time access to devices over the Internet for a
broad range of applications at all levels of technological sophistication.
The majority of electronic devices in existence today are not connected to
the Internet or other networks. Instead, these devices, if networked, primarily
communicate through proprietary closed control systems. These systems collect
data from the physical world and convert that data into electrical signals.
These signals can be used to effect responses based on preprogrammed rules and
logic. These systems have traditionally required a PC gateway solution, where
the intelligence is based in the central controller and complex wiring and
customization are required for communication. Examples of these systems include
point of sale devices, bar code scanners, security systems, elevators,
manufacturing equipment and medical instruments. Moreover, any intelligent
action that must be taken as a result of information provided by these devices,
such as ordering additional inventory, requires action by a human being. Today,
manufacturers, VARs, systems integrators and end-users are increasingly
demanding cost-efficient solutions to enable electronic devices to be connected
and controlled and to be able to respond automatically and intelligently to
data inputs over the Internet or other networks.
Device server technology can enhance the full spectrum of electronic
devices, from ordinary devices such as vending machines to highly sophisticated
devices such as security systems, by reducing hardware and software costs,
reducing labor costs, increasing access to information and increasing the
overall speed and efficiency of completing tasks. For example, a traditional
vending machine requires a human being to routinely drive out to the vending
machine site, perform routine maintenance, collect cash and to check, stock and
order new inventory. By connecting the vending machine to the Internet using
device server technology, the vending machine could automatically monitor its
inventory and operational status, send purchase orders to suppliers, and
request maintenance visits as needed. The vending machine could also adjust
prices automatically and even process credit card payments instead of requiring
cash. Moreover, the vending machine could accurately monitor consumer
preferences for use by snack food companies to measure demand or set pricing.
Device server technology can also benefit more complex applications such as
security systems. Traditionally, security systems have had security panels
located at entrances where permitted entrants input a code or swipe a badge for
access to the building. Typically, these security panels are connected to
central, on-site control panels through extensive wiring which in turn is
connected to a local server, which in turn is
28
<PAGE>
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 control industry is moving away from customized, wiring-
intensive and closed interconnection schemes among various system components,
towards open, interoperable, distribution architectures in which the control
intelligence resides among the sensors and actuators in an intelligent network.
In terms of the installed base of devices, device server technology can enable
Internet access to almost any electronic device that has a serial port. In
terms of devices currently being developed, device server technology can be
embedded in many electronic devices, including devices that contains a
microprocessor. Cahners In-stat Group, an independent research company,
estimates that the number of microprocessors embedded in electronic devices is
expected to increase from over 4.9 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, including industrial automation, healthcare, security access/control,
retail/point of sale, commercial/information
29
<PAGE>
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 technology companies. In
addition, in 1998 we acquired ProNet GmbH, a German supplier of
30
<PAGE>
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.
31
<PAGE>
Products
We develop, market and support a variety of powerful, turnkey hardware and
software products that enable electronic devices to be connected over the
Internet or other networks. Our connectivity solutions are currently deployed
in industrial automation, healthcare, security access/control, retail/point of
sale, commercial/information technology, and telecommunication markets. Our
products are based on our integrated, open architecture Device Server
technology.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Net Revenues for
Nine Months Ended
March 31, 2000 Primary Product
Product Family (millions) Function Products
--------------------------------------------------------------------------------------
<C> <S> <C> <C>
Device Servers $17.0 Enable almost any External and
electronic device embedded
to become network- CoBox, MSS
enabled, allowing and UDS products.
the user to control
the device by way
of the Internet
using a wide range
of network
protocols.
--------------------------------------------------------------------------------------
Multiport Device Servers $7.5 Enable multiple ETS and LRS
devices to become products.
network-enabled,
allowing the user
to control the
devices by way of
the Internet using
a wide range of
network protocols.
--------------------------------------------------------------------------------------
Print Servers $5.2 Allow multiple EPS, MPS and
users to share LPS products.
printers anywhere
on an Ethernet
network using a
wide range of
network protocols.
--------------------------------------------------------------------------------------
Other $2.9 Support our product Switches, hubs and
lines. other connectivity
peripherals.
--------------------------------------------------------------------------------------
</TABLE>
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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<PAGE>
The table below sets forth our Device Servers, their type of connection, the
product description and their initial introduction date:
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Connection Introduction
Product Name Type Description Date
-------------------------------------------------------------------------------
<C> <C> <S> <C>
UDS 10 External RS-232, RS-485, RS-422 serial June 2000
standards. DB25 serial port. RJ45
connector. Flash ROM. Managed via
HTTP, DHCP, Telnet and SNMP.
-------------------------------------------------------------------------------
CoBox Micro Embedded TTL serial. Ethernet RJ45 November 1999
connector. IP protocol stack. Flash
ROM. Managed via HTTP, Telnet and
SNMP.
-------------------------------------------------------------------------------
MSS-VIA External Combines RS-232, RS-422 and RS-485 October 1999
interface with a 10/100 Ethernet
and integrated PC Card interface
for Wireless Connectivity. Flash
ROM for software upgrades.
Management via Telnet, SNMP, DHCP,
HTTP, DB9 Serial Console Port and
EZWebCon.
-------------------------------------------------------------------------------
CoBox DinRail External RS-232, RS-485, & RS-422 serial March 1999
standards (switch selectable).
10BASE-T Ethernet interface (RJ45).
Master or slave functionality.
-------------------------------------------------------------------------------
CoBox Modbus External RS-232, RS-485, RS-422 serial March 1999
standards. DB25 and DB9 serial
interfaces. RJ45 and AUI Ethernet
interfaces, STP/UTP Token Ring
interfaces. IP, Modbus RTU, Modbus
ASCII and Modbus TCP. Flash ROM.
Managed via Serial, Telnet, and
SNMP.
-------------------------------------------------------------------------------
CoBox Mini Embedded Two TTL serial interfaces. Ethernet December 1998
and Token Ring available. IP
protocol stack. Flash ROM. Managed
via HTTP, Serial, Telnet and SNMP.
-------------------------------------------------------------------------------
MSS100 External DB25 with full modern controls and November 1998
a 10/100 RJ45 network interface.
Flash ROM for software upgrades.
Management via HTTP, SNMP, DHCP,
Telnet and EZWebCon GUI.
-------------------------------------------------------------------------------
CoBox External RS-232, RS-485, RS-422 serial October 1998
standards. DB25 and DB9 serial
interfaces. RJ45 and AUI Ethernet
interfaces, STP/UTP Token Ring
interfaces. Flash ROM. IP protocol
implementation. Managed via HTTP,
Telnet, Serial and SNMP.
-------------------------------------------------------------------------------
MSS485 External RJ45/screw block serial interface March 1998
Flash ROM. Management via Telnet,
SNMP, DHCP and EZWebCon.
-------------------------------------------------------------------------------
MSS1 External DB25 serial interface. Wide variety October 1995
of port and network configuration
options. Flash ROM Management via
Telnet, SNMP, DHCP, and EZWebCon.
-------------------------------------------------------------------------------
LRS1 External RS-232 DB25 DTE asynchronous serial September 1995
ports. TCP/IP, IPX/SPX and
AppleTalk protocols. RIP and Static
routing. PPP, SLIP/CSLIP, and NAT
support. Supports V.90 and ISDN
modems. Provides secure access for
Dial-in, Dial-out, LAN-to-LAN,
Console Server and ISP.
</TABLE>
--------------------------------------------------------------------------------
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.
33
<PAGE>
The table below sets forth our line of Multiport Servers, their number of
serial ports, the product description and their initial introduction date:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Product # of Introduction
Name Ports Description Date
--------------------------------------------------------------------------------
<C> <C> <S> <C>
ETS32PR 32 10/100 RJ45 and AUI Ethernet ports. Full November 1998
modem controls on each port. Managed via
HTTP, SNMP, DHCP, Telnet and EZWebCon.
-------------------------------------------------------------------------------
CoBox NTP 2 Connect GPS time source to an Ethernet or October 1998
Token Ring network. Supports NTP and
time/udp protocols. RS-232 and RS-422 serial
standards. Flash ROM. Managed via Serial and
Telnet.
-------------------------------------------------------------------------------
ETS4P 4 10BASE-T and AUI Ethernet interfaces. September 1998
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP and EZWebCon.
-------------------------------------------------------------------------------
ETS8P 8 10BASE-T and AUI Ethernet interfaces. May 1997
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP, and EZWebCon.
-------------------------------------------------------------------------------
ETS16P 16 10BASE-T and AUI Ethernet interfaces. May 1997
TCP/IP, IPX, AppleTalk, Windows NT, and LAT.
NDS compliant. Managed via Telnet, SNMP,
DHCP and EZWebCon.
-------------------------------------------------------------------------------
LRS32F 32 RJ45 serial ports support RS-423 and RS- May 1997
232C. Secure Console Server connections to
host systems. In-band/out-of-band
management. 10/100 and AUI network
interfaces.
-------------------------------------------------------------------------------
LRS16F 16 RJ45 serial ports support RS-423 and RS- March 1996
232C. Secure Console Server connections to
host systems. In-band/out-of-band
management. 10/100 and AUI network
interfaces.
--------------------------------------------------------------------------------
</TABLE>
Software Developers Kit. Many of our Device Servers can be easily customized
by an OEM or systems integrator to meet unique application requirements by
using our Software Developers Kit. Using the commonly used "C" programming
language, our customers can quickly customize the core operating system on a
variety of our Device Servers.
Comm Port Redirector. We provide customers with our Comm Port Redirector
software utility at no charge. When used in conjunction with Device Servers,
our Comm Port Redirector allows existing Windows-based software applications to
continue operating over a network without any modification, as if devices were
still locally attached.
Other Products. We also sell switches, hubs and other connectivity
peripherals that our customers may request in conjunction with our Device
Servers, Multiport Device Servers and Print Server products.
Print Servers. We offer our MPS, LPS and EPS lines of print servers, which
enable multiple users to share printers anywhere on an Ethernet network using a
wide range of network protocols. Our EPS product line supports TCP/IP, IPX,
AppleTalk, and LAT protocols. Within the individual EPS products, additional
protocols are supported. Our MPS and LPS product lines support TCP/IP, IPX,
NetBIOS/NetBEUI and LAT. In addition, our MPS product line supports AppleTalk.
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.
34
<PAGE>
Original Equipment Manufacturers. Our OEM customers manufacture products
that traditionally have not been networked, but for which consumers are
increasingly demanding networking capabilities. Typically, OEMs use our
external solutions to network-enable their installed base of products and our
embedded solutions to network-enable their current and future products. These
OEMs typically lack a core competency in networking but require solutions that
enable them to quickly introduce network solutions to their end-users. We allow
OEMs to outsource the development function of these networking solutions, and
as a result, reduce the OEMs' research and development costs, avoid integration
problems and bring newly networked products to market faster. We expect that
our sales to OEMs as a percentage of our sales will increase in the future.
Value Added Resellers/Systems Integrators. Our VAR and systems integrator
customers are typically seeking an easily integrated, open standards-based way
to connect a variety of devices to networks to address the needs of their
customers. Our products enable VARs and systems integrators to create value
added networking solutions for their customers.
Distributors. Our distributor customers resell our products to a variety of
customers including manufacturers, VARs, systems integrators and end-users. We
primarily use the distribution channel to service smaller VAR, systems
integrator and end-user customers that would not be cost effective for us to
service directly.
End-Users. Our end-users require solutions that will enable them to network
company-specific equipment or processes.
Case Studies
We believe our market includes applications such as semiconductor
manufacturing equipment, medical devices, security systems, retail kiosks, HVAC
systems and telephone switches, among others. Below are case studies depicting
the use of our products.
Industrial Automation. A semiconductor manufacturing facility uses our
device server technology to accurately manage capital equipment used for the
production of semiconductor wafers. Our Device Server Technology allows for the
remote measurement and control of etch and deposition, lithography and
metrology tools and for the precision management of industrial robotics. With
the use of our Device Server Technology, this highly technical machinery can be
connected, monitored and controlled by any PC over the LAN.
Retail/POS. One of our customers uses our Device Servers to deliver content
over the Internet to a network of kiosks located in numerous major retail
locations nationwide. Instead of spending the high capital costs associated
with networking each kiosk separately, our Device Servers enables our customer
to utilize the Ethernet infrastructure already in place within the retailer to
deliver content. In addition, our technology provides a secure connection to
our customer, completely encrypting our customer's data and separating it from
the retailer's within the same network.
Healthcare. A leading provider of handheld point-of-care blood analyzer
equipment uses our technology to enable doctors to get fast, accurate results
at the patient bedside instead of sending blood samples to an expensive
laboratory. Prior to being networked by our Device Server technology,
information from the blood analyzers had to be downloaded at local PCs located
throughout the hospital in order to transmit the data to the central data
station for analysis. With the use of our Device Servers, this data can be
transmitted directly from the blood analyzer to the central data station and
sent back to the blood analyzer without the need for local PCs.
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
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control their building access systems. In addition, our technology enabled the
customer to send data from the readers and keypads upstream to multiple IP
addresses for online monitoring by multiple security personnel, automatic
database logging and backup system coverage.
Commercial/Information Technology. A company that designs and manufactures
cost effective electronic and software products to meet the on-site and remote-
location control needs for the heating, ventilation and air conditioning
market, uses our Device Servers to control interior environments in multi-unit
apartment complexes, schools and hotels from a central location. As a result,
our client's customers are able to eliminate expensive wiring and gain the
benefits of controlling their HVAC systems over the Internet.
Telecommunications. A large telecommunications equipment manufacturer uses
our embedded device server technology in their telephone switches to enable
remote management of the equipment. Our Device Servers enable remote monitoring
of call logging data, automatic uploading of software upgrades and system
maintenance. Previously these actions were performed through on-site visits or
by people using slow modem connections.
Sales and Marketing
We maintain regional sales offices in Irvine, California, the Netherlands
and Singapore. Additionally, we have local sales offices in Germany,
Switzerland, the United Kingdom and the United States. As of March 31, 2000,
our direct sales force consisted of 36 sales professionals located worldwide.
We supplement our sales effort with marketing activities designed to build our
brand name and promote product awareness. These activities include magazine and
online advertising, public relations efforts and targeted mailings. We also
participate in trade shows and industry gatherings.
Manufacturing
Our manufacturing objective is to produce reliable, high quality products at
competitive prices and to achieve on-time delivery to our customers. We
outsource the manufacturing of our products, which enables us to concentrate
our resources on the design, engineering and marketing of our products where we
believe we have greater competitive advantages, and to eliminate the high cost
of owning and operating a manufacturing facility.
We currently outsource all of our product manufacturing to two third party
manufacturers. Our manufacturing is performed on a purchase order basis and the
manufacturers are not contractually obligated to accept our manufacturing
requests or deliver our requests within our desired schedules. We supply our
own raw materials and testing is performed by the manufacturers using test
equipment we supply to them. We buy some of our integrated circuits from sole
sources of supplies. We also employ quality control personnel who visit our
contract manufacturers' sites at regular intervals and independently test our
products. Please see "Risk Factors" for a discussion of the risks associated
with manufacturing.
Research and Development
Our research and development efforts are focused on the development of
technology and products that will enhance our position in our markets. We
intend to significantly expand our research and development team in the near
future. As of March 31, 2000, we employed 19 people in our research and
development organization. Our research and development expenses were $2.5
million for the year ended June 30, 1997, $1.8 million for the year ended June
30, 1998, and $2.6 million for the year ended June 30, 1999. These expenses
were $1.8 million for the nine months ended March 31, 1999 and $2.3 million for
the nine months ended March 31, 2000.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain a
leadership position. We intend to substantially increase our research and
development expenditures over the next two years including planned increases in
personnel, material costs and depreciation resulting from higher capital
expenditures.
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<PAGE>
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 and Nortel; and
. companies that produce semiconductors such as Cirrus Logic and National
Semiconductor.
Many of our current and potential competitors, alone or together with their
trade associations and partners, have significantly greater financial,
technical, marketing, service and other resources, greater name recognition,
broader product offerings, and longer operating histories.
We also compete with companies' in-house capabilities to network-enable
their products. Moreover, our current customers may, in the future, elect to
use their internal resources to create network capabilities for their products.
Our industry involves rapidly changing technology, frequent new product
introductions and evolving standards and protocols. To maintain or improve our
competitive position, we must continue to develop and introduce, on a timely
and cost-effective basis, new products and services. We must also maintain and
strengthen our relationships with OEMs, VARs and systems integrators.
The principal competitive factors that affect the market for our products
are:
. product quality, technological innovation, compatibility with standards
and protocols, reliability, functionality, ease of use, and
compatibility;
. price of our products; and
. potential customers' awareness and perception of our products as well as
device servers generally.
We offer an open architecture, meaning that much of our technology can be
licensed without royalties or licenses fees. As a result, our customers could
develop products that compete with our offerings. In addition, there is a risk
that our customers could develop and market their own applications based on our
technology without paying a fee to us.
If we are unable to compete successfully with new or existing competitors or
otherwise meet the competitive challenges we face, we could receive fewer
orders than we anticipate, lose existing customers, have reduced operating
margins and lose market share. This could harm our business and cause the price
of our stock to decline.
Intellectual Property Rights
We have developed proprietary methodologies, tools, processes and software
in connection with delivering our services. We rely on a combination of
copyright, trademark, trade secret laws, and contractual restrictions, such as
confidentiality agreements and licenses to establish and protect our
proprietary rights. As of March 31, 2000, we have had no patents issued in the
United States and one patent issued in Germany. We do not rely on 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.
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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 us and Gordian,
Inc., Gordian developed certain intellectual property used in our Micro Serial
Server line of products. These products represented and continue to represent a
significant portion of our revenues. Under the terms of this agreement Gordian
owns the rights to the intellectual property developed by it but has agreed
that for the term of the agreement it will not develop products for any other
party which will directly compete with a product Gordian developed for us. The
agreement with Gordian currently provides that we are required to pay royalties
in respect of sales of products covered by the agreement. In the fiscal year
ended June 30, 1999, we paid Gordian approximately $2.0 million in royalties
and for the nine months ended March 31, 2000 we paid Gordian approximately $1.5
million in royalties. 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 our six wholly-owned subsidiaries are incorporated
outside of the United States. Therefore, we are subject to the regulation of
foreign governments. For example, wireless communication is highly regulated in
both the United States and elsewhere. Our products currently employ encryption
technology. The export of encryption software is restricted. We can not assure
you that these or other existing law or regulation will not adversely affect
us. In addition, future regulation could adversely affect our business,
operating results and financial condition.
Employees
As of March 31, 2000, we had 128 full-time employees, of which 109 were
located in the United States and 19 were located internationally. As of that
date, we had 19 employees in research and development, 31 in sales and
marketing department, and 26 in general and administrative employees. We have
not experienced any work stoppages and we believe that our relationship with
our employees is good. None of our employees are currently represented by a
labor union.
Facilities
Our headquarters are located in a leased facility in Irvine, California
consisting of approximately 28,872 square feet, a portion of which we sublease.
The lease for this facility expires on July 31, 2000.
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.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth certain information concerning each of our
executive officers and directors and key employees as of May 15, 2000:
<TABLE>
<CAPTION>
Name Age Position(s)
------------------------ --- ---------------------------------------------------
<S> <C> <C>
Bernhard Bruscha........ 47 Chairman of the Board
Frederick G. Thiel...... 39 President and Chief Executive Officer
Steven V. Cotton........ 37 Chief Financial Officer and Chief Operating Officer
Johannes Rietschel...... 36 Chief Technology Officer
Richard A. Franzi....... 42 Vice President, Americas Sales
Mark Fondl.............. 45 Vice President, Automation
Richard Obermeyer....... 45 Vice President, Research and Development
Andrew Mitchell......... 44 Director of Pacific Rim Sales
Marcel van der Meijs.... 38 Director of Europe, Middle East, Africa Sales
Thomas W. Burton........ 53 Director
W. Brad Freeburg........ 45 Director
</TABLE>
Bernhard Bruscha has been the Chairman of the Board since he founded our
company in June 1989. Since 1991, Mr. Bruscha has served as Chief Executive
Officer of transtec AG, a computer systems manufacturer. Transtec is a leading
European direct computer reseller.
Frederick G. Thiel has served as our President and Chief Executive Officer
since April 1998. From 1996 to 1998, Mr. Thiel served as a Corporate Vice
President and General Manager, Storage Division for CMD Technology, a developer
of RAID storage controllers. From 1994 to 1996, Mr. Thiel served as the
Director of Worldwide Marketing for Standard Microsystem Corporation, a
manufacturer of networking technology. Mr. Thiel also serves as a director for
Patriot Scientific Corporation.
Steven V. Cotton has served as our Chief Financial Officer and Chief
Operating Officer since December 1999. From 1996 to 1999, Mr. Cotton served as
the Chief Financial Officer and Chief Operating Officer at M2 Automotive, an
automotive repair business. From 1991 to 1996, Mr. Cotton was a Senior Vice
President and Chief Financial Officer at Panda Management Company, a restaurant
management business.
Johannes Rietschel has served as our Chief Technology Officer since January
1999. From 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.
Richard A. Franzi has served as our Vice President, Americas Sales since
November 1999. In 1999, prior to joining Lantronix, Mr. Franzi served as Vice
President, Americas Sales for Network Computing Device, a software and hardware
manufacturer. From 1984 to 1998, Mr. Franzi worked for Tektronix, Inc., a
manufacturer of electronics products which has since been acquired by Network
Computing Devices, Inc. During his tenure at Tektronix, Mr. Franzi served in
the positions of Major Accounts Manager, Regional Sales Manager, Director
Western Sales Area and, most recently, Director of Sales Operations.
Mark Fondl has served as our Vice President, Automation since November 1999.
From 1996 to 1999, Mr. Fondl served as Vice President of Marketing for
Schneider Automation, a business specializing in industrial automation
applications and products. From 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.
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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.
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.
Committees of the Board of Directors
Our audit committee is currently comprised of our present board members. The
audit committee makes recommendations to the board of directors regarding the
selection of our independent public accountants, reviews the results and scope
of the audit and other services provided by our independent public accountants
and reviews and evaluates our control functions.
Our compensation committee is currently comprised of our current board
members. The compensation committee makes recommendations regarding our various
incentive compensation and benefit plans and determines salaries for our
executive officers and incentive compensation for our employees and
consultants.
Board Composition
Our Board of Directors currently consists of three directors. Our
certificate of incorporation and bylaws that become effective upon the
completion of this offering provide that our board of directors will be divided
into three classes, Class I, Class II and Class III, with each class serving
staggered three-year terms. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This staggered classification of the board of directors might have
the effect of delaying or preventing changes in control or management. There
are no family relationships among any of our directors, officers or key
employees.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee was, at any time since our
formation, an officer or employee of ours. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Director Compensation
Each of our directors is paid $5,000 per year and $750 for each meeting
attended. We do not provide compensation for committee participation or special
assignments of the board of directors. Each of our
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non-employee directors who joins the board of directors after the completion of
this offering, will be granted an option to purchase 25,000 shares of common
stock upon their election to our board of directors. In addition, each of these
directors will be granted options to purchase 10,000 shares of common stock for
each year of service thereafter. Fifty percent of the shares of each option
granted vest on the first anniversary of the date of the grant of the option,
and the remainder of the shares vest in equal monthly installments over the
next succeeding year. All outstanding options granted to an outside director
fully vest upon a change of control.
Executive Compensation
The following table sets forth the compensation paid by us during the year
ended June 30, 1999, to our Chief Executive Officer and to our other executive
officer whose total annual salary and bonus exceeded $100,000. This prospectus
refers to these executives as the Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Name and Principal Position Underlying
--------------------------- Salary Bonus Options
<S> <C> <C> <C>
Frederick G. Thiel............................... $160,000 $53,760 696,000
Chief Executive Officer and President
Johannes Rietschel (1)........................... 155,000 -- --
Chief Technology Officer
</TABLE>
--------
(1) Mr. Rietschel began his employment with us in January 1999. His annual
salary is $155,000 and he is eligible to receive incentive compensation of
up to 30% of his annual salary. In March 2000, Mr. Rietschel was granted an
option to purchase 66,667 shares of our common stock.
In addition, one person who served as an executive officer during the year
ended June 30, 1999, and who received compensation in excess of $100,000 during
that year, has since terminated her employment with us.
Steven V. Cotton, our Chief Financial Officer and Chief Operating Officer,
began his employment with us in December 1999. His annual salary is $180,000
and he is eligible to earn incentive compensation of up to 30% of his annual
salary. As part of his employment contract, Mr. Cotton was granted an option to
purchase 340,000 shares of our common stock.
Option Grants in Last Fiscal Year
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential
Realizable Value
Individual Grants at Assumed
-------------------------------------------- Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted in Options Term(4)
Name Options Fiscal Exercise Expiration ----------------
---- Granted(1) 1999(2) Price(3) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel...... 696,000 45.4% $0.175 04/09/2005 $45,354 $104,242
Johannes Rietschel...... -- -- -- -- -- --
</TABLE>
--------
(1) Options were granted under our 1994 Nonstatutory Stock Option Plan and
vest on September 30, 2000.
(2) Based on an aggregate of 1,532,012 options granted by us in the year ended
June 30, 1999 to our employees, directors and consultants, including the
Named Executive Officers.
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<PAGE>
(3) Options were granted at an exercise price equal to the fair market value
per share of common stock on the grant date, as determined by our board of
directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant, or ten years. In accordance with the rules of
the Securities and Exchange Commission, the following table also sets
forth the potential realizable value over the term of the options, the
period from the grant date to the expiration date, based on assumed rates
of stock appreciation of 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, 1999,
and exercisable and unexercisable options held at June 30, 1999.
The "Value of Unexercised In-the-Money Options at June 30, 1999" is based on
a value of $14.82 per share of our common stock, which is the assumed initial
public offering price, less the per share exercise price, multiplied by the
number of shares issued upon exercise of the option. All options were granted
under our 1993 Stock Option Plan or our 1994 Nonstatutory Stock Option Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at in-the-Money Options at
Acquired June 30, 1999 June 30, 1999
Name on Value ------------------------- -------------------------
---- Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Frederick G. Thiel...... -- -- 305,514 1,131,910 $4,527,717 $16,774,906
Johannes Rietschel...... -- -- -- -- -- --
</TABLE>
Employee Benefit Plans
1993 Incentive Stock Option Plan. Our 1993 Incentive Stock Option Plan
provides for the grant of incentive stock options to key employees and
affiliates. Our board of directors administers the 1993 Plan and determines the
terms and conditions of all grants, including the exercise price, the duration
of the option and the form of payment upon exercise of the option. No option
granted under the 1993 Plan is transferable or assignable other than by will.
Upon completion of this offering, the 1993 Plan will terminate except with
respect to outstanding options granted under the plan. No further option grants
will be made under this plan. In the event we are acquired in a merger or asset
purchase, each outstanding option granted under the 1993 Plan may be assumed or
substituted for by the successor corporation. In the event that the successor
corporation refuses to assume or issue an equivalent option for each
outstanding option, the options shall become fully vested and exercisable
provided, however, the options are not subject to other limitations imposed by
the board of directors at the time of the grant.
No optionee may, at the time any option is granted under the 1993 Plan, own
stock possessing more than ten percent of the total combined voting power of
all classes of stock of the corporation or of its parent or subsidiary
corporations unless, if at the time such option is granted, the option price is
at least 110% of the fair market value of the stock and the option expires five
years from the date of the grant.
The aggregate number of shares of common stock which may be issued upon the
exercise of incentive stock options granted under this 1993 Plan shall not
exceed 4,000,000 shares. As of June 22, 2000, 2,996,420 shares have been issued
under the 1993 Plan.
1994 Nonstatutory Stock Option Plan. Our 1994 Nonstatutory Stock Option Plan
provides for the grant of nonstatutory stock options to employees, officers,
directors and affiliates. Our board of directors administers
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<PAGE>
the 1994 Plan and has sole authority to determine the conditions of option
grants including the exercise price, the duration of the option and the form of
payment upon exercise. No options granted under the 1994 Plan are transferable
or assignable other than by will.
Upon completion of this offering, the 1994 Plan will terminate except with
respect to outstanding options granted under the plan. No further option grants
will be made under this plan.
In the event we are acquired in a merger or asset purchase, each outstanding
option granted under the 1994 Nonstatutory Stock Option Plan may be assumed or
substituted for by the successor corporation. In the event that the successor
corporation refuses to assume or issue an equivalent option for each
outstanding option, the options shall become fully vested and exercisable
provided, however, the options are not subject to other limitations imposed by
the board of directors at the time of the grant.
The aggregate number of shares of common stock which may be issued upon the
exercise of nonstatutory stock options granted under the 1994 Plan shall not
exceed 10,000,000 shares. As of June 22, 2000, 3,109,736 shares have been
issued under the 1994 Plan.
2000 Stock Plan
Our board of directors adopted our 2000 Stock Plan in May 2000. A total of
1,000,000 shares of common stock were reserved for issuance under the 2000
Stock Plan. The number of shares available for issuance increases annually on
the first day of each new year beginning with the year 2001. The increase is
equal to the lesser of 5% of the outstanding shares of common stock on the
first day of the year, 1,000,000 shares or an amount as the board of directors
may determine. Employees may be granted incentive stock options. Employees,
directors and consultants may be granted nonstatutory stock options and stock
purchase rights, or SPRs.
Plan. Our board of directors, or a committee of the board, will administer
the 2000 Stock Plan. The stock plan administrator has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability of the
options and the form of consideration payable upon exercise.
Options. The exercise price of all options granted under the 2000 Stock Plan
is set by a committee, and the exercise price of all incentive stock options
granted under the 2000 Stock Plan must be at least equal to the fair market
value of the common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
our outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 2000 Stock Plan may not exceed ten years.
The administrator of the 2000 Stock Plan fixes the period within which an
option may be exercised and the conditions to exercise at the time an option is
granted. If the optionee ceases to be an employee, director or consultant of
the company, the optionee generally must exercise an option granted under the
2000 Stock Plan at the time set forth in the optionee's option agreement. If
the option terminates because of death or disability, the optionee must
exercise an option within 12 months of such termination. In no event may an
optionee exercise an option after the expiration of the option's term.
SPRs. The administrator determines the exercise price of SPRs granted under
the 2000 Stock Plan. Unless the administrator determines otherwise, the
restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant us a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's service with us for any
reason, including death or disability. The purchase price for shares we
repurchase is the original price paid by the purchaser. The price may be paid
by cancellation of any indebtedness of the purchaser to us. The repurchase
option lapses at a rate that the administrator determines.
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Outside Director Options. The 2000 Stock Plan provides for an initial
automatic grant of an option to purchase 25,000 shares of common stock to a
director who first becomes an outside director on or after our initial public
offering. The 2000 Stock Plan defines an outside director as a director who is
not an employee. Each outside director will also be automatically granted an
option to purchase 10,000 shares of common stock following each annual meeting
of the stockholders beginning after the end of our fiscal year 2001, if
immediately after such meeting, he or she shall continue to serve on the board
and has served on the board of directors for at least the preceding six months.
Fifty percent of the shares of each option granted will vest on the first
anniversary of the date of the grant of the option, and the remainder of the
shares vest in equal monthly installments over the next succeeding year. All
outstanding options granted to outside directors fully vest upon a change of
control.
The exercise price of options granted to outside directors is a 100% of the
fair market value of our common stock on the date of grant.
2000 Employee Stock Purchase Plan. The board of directors adopted our
Purchase Plan in May 2000. A total of 750,000 shares of common stock has been
reserved for issuance under the Purchase Plan. In addition, the Purchase Plan
provides for annual increases in the number of shares available for issuance
under the Purchase Plan on the first day of each fiscal year, beginning in
2001, equal to the lesser of 2% of the outstanding shares of common stock on
the first day of the fiscal year, 150,000 shares or an amount as the board of
directors may determine.
The board of directors, or a committee appointed by the board, administers
the Purchase Plan. The board or its committee has full and exclusive authority
to interpret the terms of the Purchase Plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by
us, or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Purchase Plan if such an employee:
. immediately after the grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive 24 month offering periods. The
offering periods generally start on the first trading day on or after August 1
and February 1, except for the first offering period which will start on the
first trading day on or after the effective date of this offering and will end
on the last trading day on or before July 30, 2002.
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's compensation. Compensation
is defined as the participant's base straight time gross earnings, bonuses and
commissions but excludes shift premium payments, incentive compensation,
incentive payments and other compensation.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period or end of the
offering period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with us. The
maximum number of shares a participant may purchase during a single offering
period is 25,000 shares.
The Purchase Plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the Purchase Plan at any time, except
that, subject to certain exceptions described in the Purchase Plan, no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.
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<PAGE>
Limitations of Liability and Indemnification Matters
Our certificate of incorporation that will be in effect at the time of the
completion of this offering limits the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us arising out of such person's services as our
director or executive officer, any of our subsidiaries or any other company or
enterprise to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
45
<PAGE>
CERTAIN TRANSACTIONS
Our Formation
We were initially formed as "Lantronix," a California corporation, in June
1989 and have been primarily engaged in the design and distribution of
networking products. In January 1992, we formed Lantronix International Inc., a
U.S. Virgin Islands corporation to conduct our international sales.
In October 1998 we acquired ProNet GmbH, a supplier of industrial
application device servers. We have changed this entity's name to Lantronix
Deutschland GmbH. At the time of this acquisition, ProNet GmbH owned 65% of
Acola GmbH, a sales organization. We subsequently purchased the remaining
capital stock of Acola GmbH and transferred ownership of Acola GmbH to
Lantronix Europe GmbH, a wholly owned subsidiary formed to sell our products in
Europe. We now conduct substantially all of our European sales activities
through Acola GmbH and Lantronix Europe GmbH.
Recently we have formed Lantronix UK Ltd. and Lantronix Singapore to conduct
international sales.
In March 2000, we established Lantronix International AG Switzerland, as our
wholly owned subsidiary. We subsequently transferred ownership of Lantronix
Europe GmbH, Lantronix Deutschland GmbH, Lantronix UK Ltd. and Lantronix
Singapore to Lantronix International AG Switzerland.
Stock Transactions
As part of our acquisition of ProNet GmbH in October 1998, Johannes
Rietchsel, a ProNet GmbH stockholder, and his wife purchased 3,437,988 shares
of our common stock for cash of $602,000, the deemed fair market value of our
common stock on the date of purchase. Mr. Rietchsel serves as our Chief
Technology Officer.
Indemnification and Employment Agreements
We have entered into indemnification agreements with each of our directors
and officers, see "Management--Limitations of Liability and Indemnification
Matters."
Employment Agreements
We entered into an employment agreement in April 1998 with Frederick G.
Thiel, who serves as our Chief Executive Officer. The agreement provides that
Mr. Thiel's employment is at-will and sets forth an annual base salary of
$160,000 and incentive compensation of up to 30% of his annual base salary. Mr.
Thiel's agreement also provides that he be granted stock options representing
3.5% of our then outstanding shares at the time the employment agreement was
executed. Pursuant to this agreement, Mr. Thiel was granted 696,000 stock
options on October 15, 1998. The options were granted under our 1993 Incentive
Stock Option Plan and 1994 Nonstatutory Stock Option Plan. If we terminate Mr.
Thiel without cause, or if Mr. Thiel resigns with "good reason" after a change
in control of Lantronix, Mr. Thiel will receive his current base salary and
certain benefits for a period of 15 months and a payment equal to 125% of his
two highest bonuses received over the previous 3 year period. Mr. Thiel's
severance provisions terminate upon the closing of a public offering of our
stock pursuant to an effective registration statement filed with the SEC. Mr.
Thiel is also subject to confidentiality and noncompete restrictions under his
employment agreement. The enforcement of these noncompete restrictions may be
limited under California law. Our agreement with Mr. Thiel terminates in April
2001.
We entered into an employment agreement in December 1999 with Steven V.
Cotton, who serves as our Chief Financial Officer and Chief Operating Officer.
The agreement provides that Mr. Cotton's employment is at-will and sets his
annual base salary at $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
46
<PAGE>
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.
We entered into an employment agreement in September 1998 with Johannes
Rietchsel, our Chief Technology Officer. The agreement provides that Mr.
Rietchsel's employment is at-will and sets his annual base salary at $155,000
per year and incentive compensation of up to 30% of his annual base salary.
Mr. Rietchsel is subject to confidentiality and noncompete restrictions under
his employment agreement. The enforcement of these noncompete restrictions
maybe limited under California law. Our agreement with Mr. Rietchsel terminates
on December 31, 2001.
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 of ours, accounting for $5.0 million of net
revenues in the year ended June 30, 1997, $5.1 million of net revenues in the
year ended June 30, 1998, $3.8 million of net revenues in the year ended June
30, 1999, and $2.5 million of net revenues in the nine months ended March 31,
2000.
In addition, we entered into a software maintenance contract with transtec
AG in January 1999 under which we pay $90,000 in maintenance fees per year
through December 2003.
Certain Transactions with Directors and Executive Officers
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, 340,000 of which were granted pursuant to his employment agreement.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 22, 2000 and as adjusted to reflect
the sale of the 9,000,000 shares of common stock offered by this prospectus for
the following individuals or groups:
. each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Lantronix, Inc., 15353 Barranca Parkway, Irvine, California 92618.
Except as otherwise noted, and subject to applicable community property laws,
to our knowledge, the persons named in this table have sole voting and
investing power with respect to all of the shares of common stock held by them.
Options to purchase shares of our common stock that are exercisable within
sixty days of June 22, 2000 are deemed to be beneficially owned by the persons
holding these options or warrants for the purpose of computing percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing any other person's ownership percentage.
<TABLE>
<CAPTION>
Shares
Beneficially Owned Shares Beneficially
Prior to the Number of Owned After the
Offering(1) Shares Offering
------------------ Being ---------------------
Name Number Percent Offered(2) Number Percentage
<S> <C> <C> <C> <C> <C>
Bernhard Bruscha+......... 22,506,720 75.6% 450,000 22,506,720 58.0%
Johannes Rietschel(3)..... 3,437,988 11.5 3,437,988 8.9
W. Brad Freeburg+(4)...... 2,408,600 8.0 450,000 2,408,600 6.1
Frederick Thiel+(5) ...... 484,994 1.6 50,000 484,994 1.2
Thomas Burton............. 100,000 * 100,000 *
Steven V. Cotton+......... 48,572 * 25,000 48,572 *
All directors and
executive officers as a
group (six persons)(6)... 28,986,874 95.8% 28,986,874 73.9%
</TABLE>
--------
* Less than 1%.
+ Mr. Bruscha, Mr. Freeburg, Mr. Thiel and Mr. Cotton are the only selling
Stockholders.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting and investment power with respect to
securities. Beneficial ownership also includes shares subject to options
currently exercisable or exercisable within 60 days of the date of this
table.
(2) These shares will be sold in this offering only in the event the
underwriters exercise their overallotment option.
(3) Includes shares owned by his spouse.
(4) Includes 468,880 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of June 22, 2000.
(5) Includes 25,640 shares of common stock issuable upon exercise of a stock
option exercisable within 60 days of June 22, 2000.
(6) Includes 494,520 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of June 22, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following is a description of the material terms of our capital stock.
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 200,000,000 shares of common
stock, $0.0001 par value and 5,000,000 shares of preferred stock, $0.0001 par
value. From time to time, our board of directors might establish the rights and
preferences of the preferred stock. As of March 31, 2000, 28,993,820 shares of
common stock and no shares of preferred stock were issued and outstanding and
held by stockholders. The following description of our capital stock is, by
necessity, not complete. We encourage you to refer to our certificate of
incorporation and bylaws which will be in effect upon the closing of this
offering, which are included as exhibits to the registration statement of which
this prospectus forms a part, and applicable provisions of Delaware law for a
more complete description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that might be applicable to any
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared time to time by the board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are
entitled to share in our assets remaining after the payment of liabilities and
the satisfaction of any liquidation preference granted to the holders of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by the rights of the holders of shares of any
series of preferred stock which we might designate in the future.
Preferred Stock
Following the completion of this offering, our board of directors will have
the authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, which may be superior to the
rights of the common stock. We cannot state with certainty the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. Nonetheless, the effects might include, among
other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of the company without
further action by the stockholders.
We currently have no plans to issue any shares of preferred stock.
Charter and Bylaw Provisions and Delaware Law
Provisions of Delaware law and our certificate of incorporation and bylaws
which will be in effect upon completion of the offering could make the
following more difficult:
. the acquisition of our company by means of a tender offer;
. acquisition of our company by means of a proxy contest or otherwise; or
. the removal of our company incumbent officers and directors.
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<PAGE>
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of
increased protection of its potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure our company
outweigh the disadvantages of discouraging proposals because negotiation of the
proposals could result in an improvement of their terms.
Election and Removal of Directors
Following the completion of this offering, our board of directors will be
divided into three classes. The directors in each class will serve for a three-
year term, with our stockholders electing one class each year. See
"Management--Board Composition." This system of electing and removing directors
might tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company, because it generally makes it more
difficult for stockholders to replace a majority of the directors.
Indemnification of Directors
Our certificate of incorporation will limit the liability of our directors.
See "Management--Limitations of Liabilities and Indemnification Matters."
Stockholder Meetings
Under our bylaws, after the completion of this offering only the board of
directors, the chairman of the board, the president and the holders of a
majority of the outstanding capital stock may call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws will establish advance notice procedures for stockholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner. Generally, a "business combination" includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent
Our certificate of incorporation will eliminate the right of stockholders to
act by written consent without a meeting.
No Cumulative Voting
Our certificate of incorporation and bylaws will not provide for cumulative
voting in the election of directors.
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<PAGE>
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
our company. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management of Lantronix.
Amendment of Charter Provisions
The amendment of many of the provisions described above would require
approval by holders of at least 66 2/3% of the outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services LLC.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options, in the public market following this offering could adversely affect
market prices prevailing from time to time and could impair our ability to
raise capital through sale of our equity securities. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding 38,774,432 shares
of common stock based upon shares outstanding as of June 22, 2000, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options that do not expire prior to completion of this offering. Of
these shares, the 9,000,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act of 1933, except for any
shares held by our "affiliates" as Rule 144 under the Securities Act defines
that term. All 29,774,432 shares of common stock held by existing stockholders
are "Restricted Shares" as Rule 144 defines that term. Approximately 95.8% of
the Restricted Shares are subject to lock-up agreements providing that, with
certain limited exceptions, the stockholder will not offer, sell, contract to
sell or otherwise dispose of any common stock or any securities that are
convertible into common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. However, holders of such restricted shares who have not
been employees of our company on or since the date of this prospectus may
offer, sell or otherwise dispose of 25% of their shares on the earlier of 90
days after the date of this offering or on the second trading day after the
first public release of our quarterly results if the last recorded sale price
on the Nasdaq National Market for 20 of the 30 trading days ending on such date
is at least twice the price per share in the initial public offering. These
stockholders may also offer, sell or otherwise dispose of an additional 25% of
their shares 135 days after the date of this offering if the price per share of
common stock has achieved the same target level. Beginning 181 days after the
date of this prospectus, approximately 29,774,432 Restricted Shares will be
eligible for sale in the public market, subject in some cases to volume
restrictions under Rule 144 or any applicable repurchase rights in favor of
Lantronix. In addition, as of June 22, 2000, there were outstanding options to
purchase 5,737,987 shares of common stock. We intend to obtain lock-up
agreements from substantially all employee optionholders. Donaldson, Lufkin &
Jenrette Securities Corporation may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
Rule 144
In general, under Rule 144, as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates," would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 387,744 shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
Lantronix at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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<PAGE>
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with some restrictions, including the holding
period requirement, of Rule 144. Any employee, officer or director of or
consultant to Lantronix who purchased shares pursuant to a written compensatory
plan or contact may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144. All holders of Rule 701
shares are required to wait until 90 days after the date of this prospectus
before selling such shares.
After this offering, we intend to file a registration statement under the
Securities Act registering shares of common stock subject to outstanding
options or reserved for future issuance under our stock plans. As of June 22,
2000, options to purchase a total of 5,737,987 shares were outstanding and
8,139,416 shares were reserved for future issuance under our stock plans.
Common stock issued upon exercise of outstanding vested options or issued
pursuant to our employee stock purchase plan, other than common stock issued to
our affiliates is available for immediate resale in the open market.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated ,
2000, the underwriters named below, who are represented by Donaldson, Lufkin &
Jenrette Securities Corporation, Lehman Brothers Inc. and DLJdirect Inc. have
severally agreed to purchase from Lantronix, Inc. the number of shares of
common stock shown opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Lehman Brothers Inc. ..............................................
DLJdirect Inc......................................................
---------
Total............................................................ 9,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval by their counsel of
legal matters and other conditions. The underwriters must purchase and accept
delivery of all of the shares of common stock offered by this prospectus, other
than those shares covered by the over-allotment option described below, if any
are purchased.
The underwriters propose initially to offer some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of these shares of common stock to dealers, including
the underwriters, at the public offering price less a concession not in excess
of $ per share. The underwriters may allow, and these dealers may re-allow, a
concession not in excess of $ per share on sales to other dealers. After the
initial offering of the common stock to the public, the representatives of the
underwriters may change the public offering price and other selling terms.
The underwriters have advised us that they do not expect sales to accounts
over which they exercise discretionary authority to exceed five percent of the
total number of shares offered.
We and the selling shareholders have granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase up to
1,350,000 additional shares of common stock at the initial public offering
price less underwriting discounts and commissions. The underwriters may
exercise this option solely to cover over-allotments, if any, made in
connection with the offering. To the extent that the underwriters exercise this
option, each underwriter will become obligated, under conditions specified in
the underwriting agreement, to purchase its pro rata portion of the additional
shares based on that underwriter's percentage underwriting commitment as
indicated in the preceding table.
The following table shows the underwriting fees to be paid by us in this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per Share..........................................
Total..............................................
</TABLE>
We will pay the offering expenses, estimated to be approximately $1.7
million.
We, our officers and directors and substantially all of our stockholders has
agreed, for a period of 180 days after the date of this prospectus, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer
directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
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<PAGE>
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences of ownership of the common stock, whether
any such transaction described above is to be settled by delivery of
common stock or other securities, in cash or otherwise.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
However, holders of shares who have not been employees since the date of
this prospectus may offer, sell or otherwise dispose of:
. 25% of the shares they own on the date of this prospectus if at end of
the 90-day period after the date of this prospectus or the second
trading day following the first public release of our quarterly results
after the date of this prospectus, whichever is later, the reported last
sale price of the common stock on the Nasdaq National Market has been at
least twice the price per share in this offering for 20 of the 30
trading days ending on the last trading day of such 90-day period; and
. an additional 25% of those shares if at the end of the 135-day period
after the date of this prospectus the reported last sale price of the
common stock on the Nasdaq National Market is at least twice the price
per share in this offering for 20 of the 30 trading days ending on the
last trading day of this 135-day period.
In addition, during this 180-day period, we have also agreed not to file any
registration statement for, and each of our executive officers, directors and
stockholders have agreed not to make any demand for, or exercise any right for,
the registration of any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock without the prior written
consent Donaldson, Lufkin & Jenrette Securities Corporation.
An electronic prospectus is available on the website maintained by DLJdirect
Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make because of these
liabilities.
Prior to the offering, there has been no established trading market for the
common stock. We and the underwriters negotiated the initial public offering
price for the shares of common stock offered by this prospectus. The factors
considered in determining the public offering price included:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general condition of the securities markets at the time of the
offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LTRX" upon official notification of issuance.
At our request, certain of the underwriters have reserved for sale at the
initial public offering price up to 450,000 shares of common stock offered by
this prospectus for sale to our employees, directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the
same basis as the other shares offered through this prospectus.
55
<PAGE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover a syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed common stock in syndicate covering
transactions, in stabilization transactions or in some other way or if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates clients of such syndicate members have "flipped" the common stock.
These activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
Other than in the United States, no action has been taken by us, the selling
shareholders or the underwriters that would permit a public offering of the
shares of common stock offered by this prospectus in any jurisdiction where
action for that purpose is required. The shares of common stock offered by this
prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements associated with the
offer and sale of any the shares of common stock offered through this
prospectus be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. You should inform yourself and observe any
restrictions relating to the offering of the common stock and the distribution
of this prospectus. This prospectus is not constitute an offer to sell or a
solicitation of an offer to buy any shares of common stock offered in this
prospectus in any jurisdiction in which an offer or a solicitation is unlawful.
56
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Lantronix by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with this offering will
be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at June 30, 1998 and 1999 and March 31, 2000
and for the years ended June 30, 1998 and 1999 and the nine months ended March
31, 2000 as set forth in their reports. We have included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's reports given on their authority
as experts in accounting and auditing.
The consolidated financial statements and schedule of Lantronix, Inc. for
the year ended June 30, 1997 have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. This
prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules which are part of the Registration Statement. The rules
and regulations of the Securities and Exchange Commission allow us to omit
certain information included in the Registration Statement from this
prospectus. Accordingly, any statements made in this prospectus as to the
contents of any contract, agreement, or other document are not necessarily
complete. With respect to each such contract, agreement, or other document
filed as an exhibit to the Registration Statement, we refer you to the exhibit
for a more complete description of the matter involved, and each statement in
this prospectus shall be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the Registration Statement or any
reports, statements, or other information in the files at the following public
reference facilities of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Securities and Exchange Commission. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of its public reference rooms. Our filings, including the
Registration Statement, will also be available to you on the Internet website
maintained by the Securities and Exchange Commission at http://www.sec.gov. We
intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each year containing unaudited interim
financial information.
57
<PAGE>
LANTRONIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Report of KPMG LLP, Independent Auditors.................................. F-3
Financial Statements
Consolidated Balance Sheets at June 30, 1998 and 1999 and March 31,
2000................................................................... F-4
Consolidated Income Statements for the Years ended June 30, 1997, 1998
and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years ended June
30, 1997, 1998 and 1999 and the nine months ended March 31, 2000....... F-6
Consolidated Statements of Cash Flows for the Years ended June 30, 1997,
1998 and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000................................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated balance sheets of Lantronix,
Inc. as of June 30, 1998 and 1999 and March 31, 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended June 30, 1998 and 1999 and the nine months ended March 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lantronix,
Inc. at June 30, 1998 and 1999 and March 31, 2000, and the consolidated results
of its operations and its cash flows for the years ended June 30, 1998 and 1999
and the nine months ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Orange County, California
May 15, 2000, except for
Note 9, as to which the
date is July 28, 2000
F-2
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Lantronix, Inc. for the year ended June
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Lantronix, Inc. for the year ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
August 13, 1997
F-3
<PAGE>
LANTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-------------- March 31,
1998 1999 2000
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,759 $ 5,833 $ 4,118
Accounts receivable, (net of allowance for doubtful
accounts of $452, $203 and $154 at June 30, 1998
and 1999 and March 31, 2000, respectively)........ 3,541 4,156 5,070
Related party receivable........................... 219 158 152
Inventories........................................ 2,484 3,306 4,123
Deferred income taxes.............................. 1,062 1,220 1,709
Prepaid expenses and other current assets.......... 134 251 355
------ ------- -------
Total current assets........................... 9,199 14,924 15,527
Property and equipment, net.......................... 583 876 1,158
Intangible assets, net............................... -- 1,399 789
Other assets......................................... 18 93 53
------ ------- -------
Total assets................................... $9,800 $17,292 $17,527
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $1,031 $ 2,547 $ 2,245
Accrued payroll and related expenses............... 330 629 796
Accrued commissions payable........................ -- 672 525
Accrued warranty costs............................. 496 619 525
Income taxes payable............................... 537 583 403
Other current liabilities.......................... 478 999 848
Bank line of credit................................ -- 766 --
------ ------- -------
Total current liabilities...................... 2,872 6,815 5,342
Capital lease obligations, net of current portion.... -- 97 110
Minority interest.................................... -- 68 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 5 million
shares authorized; none issued and outstanding.... -- -- --
Common stock, $0.0001 par value; 200 million shares
authorized; 25,209,028, 28,745,512 and 28,993,820
shares issued and outstanding at June 30, 1998 and
1999 and March 31, 2000, respectively............. 3 3 3
Additional paid-in capital......................... 2,339 2,944 9,396
Deferred compensation.............................. -- -- (5,823)
Retained earnings.................................. 4,586 7,372 8,507
Accumulated other comprehensive loss............... -- (7) (8)
------ ------- -------
Total stockholders' equity..................... 6,928 10,312 12,075
------ ------- -------
Total liabilities and stockholders' equity..... $9,800 $17,292 $17,527
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
LANTRONIX, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues (A).............. $30,680 $28,300 $32,980 $23,157 $32,631
Cost of revenues (B).......... 20,430 16,812 16,824 12,468 15,644
------- ------- ------- ------- -------
Gross profit.................. 10,250 11,488 16,156 10,689 16,987
------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative (B)......... 7,455 7,857 9,768 6,494 11,904
Research and development
(B)........................ 2,471 1,770 2,615 1,849 2,330
Amortization of deferred
compensation (B)........... -- -- -- -- 587
------- ------- ------- ------- -------
Total operating expenses...... 9,926 9,627 12,383 8,343 14,821
------- ------- ------- ------- -------
Income from operations........ 324 1,861 3,773 2,346 2,166
Minority interest............. -- -- (30) (57) (49)
Interest income (expense),
net.......................... (168) (5) 151 121 154
Other income (expense), net... 9 1 (10) (106) (55)
------- ------- ------- ------- -------
Income before income taxes.... 165 1,857 3,884 2,304 2,216
Provision (benefit) for income
taxes........................ (37) 554 1,098 682 1,081
------- ------- ------- ------- -------
Net income.................... $ 202 $ 1,303 $ 2,786 $ 1,622 $ 1,135
======= ======= ======= ======= =======
Earnings per share:
Basic....................... $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.04
======= ======= ======= ======= =======
Diluted..................... $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.03
======= ======= ======= ======= =======
Weighted average shares:
Basic....................... 25,128 25,207 26,977 26,964 28,870
======= ======= ======= ======= =======
Diluted..................... 25,427 25,443 28,880 28,967 33,293
======= ======= ======= ======= =======
---------------------
(A) Revenues from related
parties...................... $ 5,037 $ 5,065 $ 3,753 $ 2,890 $ 2,486
(B) Amortization of deferred
compensation:
Cost of revenues............ $ -- $ -- $ -- $ -- $ 21
Selling, general and
administrative expense..... -- -- -- -- 560
Research and development
expense.................... -- -- -- -- 6
------- ------- ------- ------- -------
$ -- $ -- $ -- $ -- $ 587
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-In Deferred Retained Comprehensive Stockholders'
Shares Amount Capital Compensation Earnings Loss Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... 25,050,760 $ 3 $2,323 $ -- $3,081 $ -- $ 5,407
Repurchase of common
stock................. (16,000) -- (3) -- -- -- (3)
Stock options
exercised............. 169,600 -- 18 -- -- -- 18
Net income............. -- -- -- -- 202 -- 202
-------
Comprehensive income... 202
---------- --- ------ ------- ------ ---- -------
Balance at June 30,
1997................... 25,204,360 3 2,338 -- 3,283 -- 5,624
Stock options
exercised............. 4,668 -- 1 -- -- -- 1
Net income............. -- -- -- -- 1,303 -- 1,303
-------
Comprehensive income... 1,303
---------- --- ------ ------- ------ ---- -------
Balance at June 30,
1998................... 25,209,028 3 2,339 -- 4,586 -- 6,928
Sale of common stock... 3,522,004 -- 602 -- -- -- 602
Stock options
exercised............. 14,480 -- 3 -- -- -- 3
Foreign currency
translation
adjustment............ -- -- -- -- -- (7) (7)
Net income............. -- -- -- -- 2,786 -- 2,786
-------
Comprehensive income... 2,779
---------- --- ------ ------- ------ ---- -------
Balance at June 30,
1999................... 28,745,512 3 2,944 -- 7,372 (7) 10,312
Stock options
exercised............. 248,308 -- 42 -- -- -- 42
Deferred compensation
related to grant of
stock options......... -- -- 6,410 (6,410) -- -- --
Amortization of
deferred
compensation.......... -- -- -- 587 -- -- 587
Foreign currency
translation
adjustment............ -- -- -- -- -- (1) (1)
Net income............. -- -- -- -- 1,135 -- 1,135
-------
Comprehensive income... 1,134
---------- --- ------ ------- ------ ---- -------
Balance at March 31,
2000................... 28,993,820 $ 3 $9,396 $(5,823) $8,507 $ (8) $12,075
========== === ====== ======= ====== ==== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
------------------------- -------------------
1997 1998 1999 1999 2000
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $ 202 $1,303 $ 2,786 $ 1,622 $ 1,135
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation................. 490 441 378 279 248
Amortization of intangible
assets...................... -- -- 595 391 610
Amortization of deferred
compensation................ -- -- -- -- 587
Loss on disposal of assets... 1 8 3 -- --
Provision for doubtful
accounts.................... 36 396 (136) 81 (11)
Deferred income taxes........ (284) (173) (158) (80) (490)
Changes in operating assets
and liabilities, net of
acquisitions in 1999:
Accounts receivable........ 1,038 (190) 93 (398) (897)
Inventories................ 4,140 840 (592) (629) (817)
Prepaid expenses and other
current assets............ 135 38 111 -- (104)
Other assets............... 7 -- (76) (807) 40
Accounts payable........... (4,074) (677) 1,002 633 (302)
Income taxes payable....... -- -- 46 46 (180)
Other current liabilities.. 132 520 1,513 2,662 (262)
Minority interest.......... -- -- 30 58 49
-------- ------ ------- ------- -------
Net cash provided by (used
in) operating activities.. 1,823 2,506 5,595 3,858 (394)
Cash flows from investing
activities:
Acquisition of marketing
rights....................... -- -- (1,694) (1,694) --
Acquisitions, net of cash
acquired..................... -- -- (655) (655) (116)
Purchases of property and
equipment, net............... (95) (121) (543) (300) (480)
-------- ------ ------- ------- -------
Net cash used in investing
activities................ (95) (121) (2,892) (2,649) (596)
Cash flows from financing
activities:
Net (repayment of) proceeds
from bank lines of credit.... (1,800) (800) 766 876 (766)
Sale of common stock.......... -- -- 602 602 --
Stock options exercised....... 18 1 3 3 42
Repurchase of common stock.... (3) -- -- -- --
-------- ------ ------- ------- -------
Net cash provided by (used
in) financing activities.. (1,785) (799) 1,371 1,481 (724)
-------- ------ ------- ------- -------
Effect of exchange rates on
cash.......................... -- -- -- (4) (1)
Net (decrease) increase in
cash.......................... (57) 1,586 4,074 2,686 (1,715)
Cash and cash equivalents at
beginning of period........... 230 173 1,759 1,759 5,833
-------- ------ ------- ------- -------
Cash and cash equivalents at
end of period................. $ 173 $1,759 $ 5,833 $ 4,445 $ 4,118
======== ====== ======= ======= =======
Supplemental disclosure of cash
flow information:
Interest paid................. $ 171 $ 5 $ 23 $ 1 $ 5
Income taxes paid............. $ 193 $ 671 $ 781 $ 781 $ 1,662
</TABLE>
See accompanying notes.
F-7
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1998, 1999 and March 31, 2000
1. Summary of Significant Accounting Policies
The Company
Lantronix, Inc. (the Company) was incorporated in California in June 1989
and is engaged primarily in the design and distribution of networking and
Internet connectivity products on a worldwide basis. The actual assembly and a
significant portion of the engineering of the Company's products is outsourced
to third parties.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Certain amounts reported in prior years have been reclassified to conform to
the fiscal year 2000 presentation.
The Company's operations are subject to certain risks and uncertainties,
including rapid technological changes, success of the Company's product
marketing and product distribution strategies, the need to manage growth, the
need to retain key personnel and protect intellectual property, and the
availability of additional capital financing on terms acceptable to the
Company.
Revenue Recognition
Revenue is recognized upon product shipment. The Company grants certain
distributors limited rights to return products and provides price protection
for inventories held by resellers at the time of published price reductions.
The Company establishes an estimated allowance for future product returns based
on historical returns experience when the related revenue is recorded and
provides for appropriate price protection reserves when pricing adjustments are
approved.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with financial
institutions. The Company's accounts receivable are derived from revenues
earned from customers located primarily in the United States and Europe. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. Credit losses
have historically been within management's expectations. The Company generally
does not require collateral or other security from its customers.
Warranty
Upon shipment to its customers, the Company provides for the estimated cost
to repair or replace products to be returned under warranty. The Company's
warranty period is generally five years from the date of shipment.
Foreign Currency Translation
The financial statements of foreign subsidiaries whose functional currency
is not the U.S. dollar have been translated to U.S. dollars in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52, Foreign Currency
Translation. Foreign currency assets and liabilities are remeasured into U.S.
dollars at the end-of-period exchange rates. Revenues and expenses are
translated at average exchange rates in effect during
F-8
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
each period, except for those expenses related to balance sheet amounts which
are translated at historical exchange rates. Exchange gains and losses from
foreign currency translations are reported as a separate component of
stockholders' equity.
Exchange gains and losses from foreign currency transactions are recognized
in the consolidated income statement and historically have not been material.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of ninety days or less.
Comprehensive Income
FASB Statement No. 130, Reporting Comprehensive Income, requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. The Company's
only component of other comprehensive income is the foreign currency
translation adjustment.
Income Taxes
Income taxes are computed under the liability method. This method requires
the recognition of deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. The impact on deferred taxes of changes in
tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and are reflected in the consolidated
financial statements in the period of enactment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. As a result,
estimates are required to provide for doubtful accounts, product returns,
product obsolescence and warranty returns, as well as other matters.
Historically, amounts incurred under these programs have not varied
significantly from estimated amounts. However, future results may differ from
current estimates.
401(k) Plan
The Company has a savings plan (the Plan) which is qualified under Section
401(k) of the Internal Revenue Code. Eligible employees may elect to make
contributions to the Plan through salary deferrals up to 15% of their base pay,
subject to limitations. The Company's contributions are discretionary and are
subject to limitations. For the years ended June 30, 1997, 1998 and 1999 and
the nine months ended March 31, 1999 (unaudited) and 2000, the Company
contributed $0.50 for each $1.00 of employee salary deferral contributions up
to a maximum of 6% of the employee's annual gross wages, subject to
limitations. Selling, general and administrative expense includes approximately
$71,000, $80,000, $93,000, $64,000 and $90,000 for the Company's contributions
for the years ended June 30, 1997, 1998 and 1999 and the nine months ended
March 31, 1999 (unaudited) and 2000, respectively.
F-9
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development Costs
Costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred. The Company
believes its current process for developing products is essentially completed
concurrently with the establishment of technological feasibility. Product costs
incurred after the establishment of technological feasibility have not been
material and, therefore, have been expensed.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $613,000, $934,000, $929,000, $656,000 and $589,000 for the years
ended June 30, 1997, 1998 and 1999 and the nine months ended March 31, 1999
(unaudited) and 2000, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over the estimated useful lives
of the related assets, generally three to seven years.
Intangible Assets
Intangible assets consist of marketing rights and patents. Intangible assets
are amortized on a straight-line basis over periods not exceeding five years.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
Stock-Based Compensation
The Company accounts for its employee stock compensation arrangements using
the intrinsic value method prescribed under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has adopted the disclosure only option of FASB Statement No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 requires
that companies that do not choose to account for stock-based compensation as
prescribed by the statement, shall disclose the pro forma effects on earnings
as if SFAS No. 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value due to the relatively short maturity
of these instruments.
F-10
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by adjusting outstanding shares assuming any
dilutive effects of options.
<TABLE>
<CAPTION>
Nine months ended
Years ended June 30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
(In thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator: Net income................. $ 202 $1,303 $2,786 $1,622 $1,135
Denominator for basic earnings per
share:
Weighted average shares
outstanding........................ 25,128 25,207 26,977 26,964 28,870
Effect of dilutive securities:
Stock options....................... 299 236 1,903 2,003 4,423
------ ------ ------ ------ ------
Denominator for diluted earnings per
common share......................... 25,427 25,443 28,880 28,967 33,293
====== ====== ====== ====== ======
Basic earnings per share.............. $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.04
====== ====== ====== ====== ======
Diluted earnings per share............ $ 0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.03
====== ====== ====== ====== ======
</TABLE>
Segment Information
FASB Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has only one reportable
segment.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
The Company has not yet determined the effect of SFAS No. 133 on the operations
and financial position of the Company. The Company will be required to
implement SFAS No. 133 beginning in fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Lantronix believes that its current revenue recognition policies
comply with SAB 101.
In March 2000, the Financial Accounting Standards Board 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
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), 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-11
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Interim Results
The accompanying consolidated statements of income and cash flows for the
nine months ended March 31, 1999 are unaudited. In the opinion of management,
these financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the Company's
consolidated results of operations and cash flows for the interim period
presented. The data for the nine months ended March 31, 1999 included in notes
to the consolidated financial statements is also unaudited.
2. Components of Balance Sheet
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1998 1999 2000
(In thousands)
<S> <C> <C> <C>
Raw materials................................... $ 2,199 $2,527 $ 3,482
Finished goods.................................. 1,426 1,546 1,907
------- ------ -------
3,625 4,073 5,389
Reserve for excess and obsolete inventory....... (1,141) (767) (1,266)
------- ------ -------
$ 2,484 $3,306 $ 4,123
======= ====== =======
</TABLE>
Property and Equipment
A summary of property and equipment, at cost, follows:
<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1998 1999 2000
(In thousands)
<S> <C> <C> <C>
Computer and office equipment.................. $ 1,419 $ 1,858 $ 2,481
Furniture and fixtures......................... 581 657 704
Production and warehouse equipment............. 418 513 540
Transportation equipment....................... 109 108 154
------- ------- -------
2,527 3,136 3,879
Accumulated depreciation....................... (1,944) (2,260) (2,721)
------- ------- -------
$ 583 $ 876 $ 1,158
======= ======= =======
</TABLE>
Intangible Assets
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
(In thousands)
<S> <C> <C>
Marketing rights........................................ $1,694 $ 1,694
Patents................................................. 300 300
------ -------
1,994 1,994
Accumulated amortization................................ (595) (1,205)
------ -------
$1,399 $ 789
====== =======
</TABLE>
F-12
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to an agreement dated September 27, 1998, the Company purchased
marketing rights from an individual which allow the Company to sell products in
certain geographical regions. Per the terms of the agreement, the Company paid
$1,694,170 for the marketing rights. Additionally, the Company pays a sales
commission to the same individual for sales of certain products made to various
customers through December 31, 2000. The initial payment is being amortized
over a period of 27 months. The commission payments are expensed in the period
of the related product sale. Commissions paid and amortization of marketing
rights during the year ended June 30, 1999 and the nine months ended March 31,
1999 (unaudited) and 2000 were $1,580,184, $719,782 and $2,198,822,
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,
---------------
1998 1999
(In thousands,
except per
share data)
(unaudited)
<S> <C> <C>
Net revenues.............................................. $31,354 $35,473
Net income................................................ $ 1,743 $ 3,311
Basic earnings per share.................................. $ 0.07 $ 0.12
Diluted earnings per share................................ $ 0.07 $ 0.11
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what actually would have occurred if ProNet had been owned for the entire
periods presented or a projection of the Company's results of operations for
any future period.
In September 1998, the Company sold 3,437,988 shares of common stock to
certain former shareholders of ProNet for an amount representing the deemed
fair market value of the common stock on the date of purchase.
During the nine-month period ended March 31, 2000, the Company acquired the
remaining 35% interest of Acola GmbH. The Company paid $115,920 to the minority
shareholder, increasing the Company's ownership in Acola GmbH to 100%. The
Company accounted for the acquisition of the minority interest using the
purchase method. The purchase price approximated the book value of minority
interest recorded on the Company's consolidated balance sheet on the
acquisition date.
F-13
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Bank Lines of Credit
As of March 31, 2000, the Company had a bank line of credit which provides
for borrowings of up to $5,000,000, subject to borrowing base limitations, at
the banks prime interest rate (9% at March 31, 2000) plus 2% per annum.
Borrowings are collateralized by a continuing security interest in all the
assets of the Company. As of March 31, 2000, no borrowings were outstanding
under this line of credit. The line of credit expires on December 2, 2000 and
requires the Company to maintain compliance with certain covenants and
conditions. As of March 31, 2000, the Company was in compliance with these
covenants and conditions.
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. Outstanding borrowings are
payable at a fixed rate which is renegotiated every six months (3.45% as of
June 30, 1999).
5. Stockholders' Equity
Stock Option Plans
Under the Company's 1993 Incentive Stock Option Plan (the 1993 Plan), the
Company has reserved 3,000,000 shares of common stock for the granting of
options. Such options are to be granted at or above the fair market value of
the Company's stock on the date of grant. All stock options are to vest over a
period determined by the Board of Directors (generally four years) and expire
not more than ten years from the date of grant. As of March 31, 2000, 313,232
options were available for grant.
Under the Company's 1994 Nonstatutory Stock Option Plan (the 1994 Plan), the
Company has reserved 10,000,000 shares of common stock for grant at prices and
vesting periods to be determined by the Company's Board of Directors. In
certain cases, the Company has granted options which became fully vested on the
date granted. As of March 31, 2000, 6,938,264 options were available for grant.
F-14
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of all stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
options price
<S> <C> <C>
Outstanding at June 30, 1996.............................. 1,926,880 $0.18
Granted................................................. 201,800 0.19
Canceled................................................ 617,760 0.23
Exercised............................................... 169,600 0.11
--------- -----
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................................................. 1,892,040 0.50
Canceled................................................ 54,332 0.18
Exercised............................................... 248,308 0.17
--------- -----
Outstanding at March 31, 2000............................. 5,502,956 $0.37
========= =====
Exercisable at June 30, 1998.............................. 2,242,624
=========
Exercisable at June 30, 1999.............................. 2,442,624
=========
Exercisable at March 31, 2000............................. 2,420,584
=========
</TABLE>
The weighted average exercise price of options outstanding and of options
exercisable as of March 31, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------- --------------------------
Number of Weighted average Weighted Weighted
options remaining average Options average
outstanding contractual life exercise price exercisable exercise price
<S> <C> <C> <C> <C> <C>
$0 to $0.14............. 832,580 5.11 $0.07 672,320 $0.09
$0.18 to $0.29.......... 1,942,324 7.67 0.19 1,075,404 0.19
$0.50................... 1,972,000 9.59 0.50 84,852 0.50
$0.79................... 756,052 8.53 0.79 588,008 0.79
</TABLE>
At March 31, 2000, 12,754,452 shares of the Company's common stock are
reserved for issuance pursuant to the stock option plans.
In connection with the issuance of stock options to employees during the
nine months ended March 31, 2000, the Company has recorded deferred
compensation in the aggregate amount of approximately $6,410,000, 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
F-15
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is typically 48 months. For the nine-month period ended March 31, 2000,
amortization expense was approximately $587,000. Deferred compensation is
decreased in the period of forfeiture arising from the early termination of an
option holder's services. No compensation expense related to stock options that
existed for any other period has been recorded. The weighted average grant date
fair value of options granted during the years ended June 30, 1997, 1998 and
1999 and the nine months ended March 31, 2000 was $0.05, $0.05, $0.14 and
$4.77, respectively.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
No. 123. The fair value of these options was estimated at the date of grant
using the minimum value option pricing method with the following weighted-
average assumptions: risk-free interest rates of 6.5%, and a weighted-average
expected life of the option of five years. Volatility and dividend yields are
not factors in the Company's minimum value calculation.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Years ended Nine months ended
June 30, March 31,
------------------- ------------------
1997 1998 1999 1999 2000
(In thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C>
Pro forma net income................ $ 188 $1,283 $2,738 $1,585 $1,086
Pro forma basic earnings per share.. $0.01 $ 0.05 $ 0.10 $ 0.06 $ 0.04
Pro forma diluted earnings per
share.............................. $0.01 $ 0.05 $ 0.09 $ 0.05 $ 0.03
</TABLE>
6. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years ended June Nine months ended
30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal.......................... $ 246 $ 524 $ 817 $508 $1,148
State............................ 1 203 329 199 349
Foreign.......................... -- -- 110 55 74
----- ----- ------ ---- ------
Total current.................. 247 727 1,256 762 1,571
Deferred
Federal.......................... (241) (122) (161) (82) (359)
State............................ (43) (51) 3 2 (131)
----- ----- ------ ---- ------
Total deferred................. (284) (173) (158) (80) (490)
----- ----- ------ ---- ------
Total...................... $ (37) $ 554 $1,098 $682 $1,081
===== ===== ====== ==== ======
</TABLE>
F-16
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-------------- March 31,
1998 1999 2000
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Reserves not currently deductible................ $1,063 $ 962 $ 606
State taxes...................................... 51 29 --
Inventory capitalization......................... 46 111 948
Depreciation..................................... 26 118 131
Federal tax loss carryforwards and tax credits... 332 -- 24
------ ------ ------
1,518 1,220 1,709
Valuation allowance................................ (456) -- --
------ ------ ------
Net deferred tax assets............................ $1,062 $1,220 $1,709
====== ====== ======
</TABLE>
The Company removed its valuation allowance on its deferred tax assets at
June 30, 1999, based upon management's estimate that it is more likely than not
that the Company will realize its entire net deferred tax asset.
A reconciliation of the income tax provision to taxes computed at the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years ended June Nine months ended
30, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
(In thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax statutory
rate............................ $ 56 $ 631 $1,321 $ 783 $ 753
State taxes (net of federal tax
benefit)........................ 10 100 219 136 144
Provision for (reduction of)
valuation allowance............. 169 -- (456) (231) --
Permanent differences............ -- -- -- -- 36
Research and development credit.. (94) (19) -- -- (13)
Foreign sales corporation
benefit......................... (129) (166) (53) (27) (42)
Foreign taxes.................... -- -- 109 55 74
Net foreign losses without
benefit......................... -- -- -- -- 73
Other............................ (49) 8 (42) (34) 56
----- ----- ------ ----- ------
$(37) $ 554 $1,098 $ 682 $1,081
===== ===== ====== ===== ======
</TABLE>
7. Commitments and Contingencies
Leases
The Company leases office equipment and its office and warehouse facility
under noncancelable operating leases. The Company began subleasing a portion of
the office and warehouse facility in June of 1998.
As of March 31, 2000, the Company has recorded $150,500 of property held
under capital leases, less $20,400 in accumulated amortization.
F-17
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedule represents minimum lease payments remaining under
capital leases, future minimum lease obligations for all noncancelable
operating leases, and aggregate sublease rentals to be received as of March 31,
2000.
<TABLE>
<CAPTION>
Sublease Operating Capital
(In thousands)
<S> <C> <C> <C>
Quarter ending June 30, 2000......................... $67 $119 $ 9
Year ending June 30:
2001............................................... -- 43 38
2002............................................... -- 4 38
2003............................................... -- 4 38
2004............................................... -- 1 38
2005............................................... -- -- 3
--- ---- ----
Total minimum lease payments..................... $67 $171 164
=== ====
Less imputed interest (at approximately 7.75%)... (28)
----
Present value of minimum lease payments.......... 136
Less current portion............................. (26)
----
Total long-term capital lease obligations...... $110
====
</TABLE>
Rent expense, including month-to-month rentals, totaled approximately
$380,000, $474,000, $643,000, $482,000 and $438,000 for years ended June 30,
1997, 1998 and 1999 and the nine months ended March 31, 1999 (unaudited) and
2000, respectively. Sublease income totaled approximately $276,000, $207,000
and $211,000 for the years ended June 30, 1999 and the nine months ended March
31, 1999 (unaudited) and 2000, respectively.
Royalties
The Company outsources a substantial portion of its engineering and
production development activities under contract. Certain development contracts
contain royalty provisions based upon sales and/or margin activity of the
underlying products. Approximately $1,648,000, $1,539,000 $2,011,000,
$1,231,000 and $1,488,000 is included in cost of sales in the accompanying
consolidated income statements for the years ended June 30, 1997, 1998 and 1999
and the nine months ended March 31, 1999 (unaudited) and 2000, respectively,
relating to royalties paid on applicable product sales. As of June 30, 1998 and
1999 and March 31, 2000, accrued royalties were approximately $301,000,
$293,000 and $280,000, respectively, and are included in other current
liabilities in the accompanying consolidated balance sheets.
Litigation
The Company is party to certain claims and litigation arising in the normal
course of business. Management believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
8. Segment, Geographic, Significant Customer and Supplier Information
Revenue by Product Family
The Company designs and markets three major distinct product families within
one industry segment: network and Internet connectivity products, which consist
primarily of device, multiport device, and print servers.
F-18
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net revenues by product family is provided below for the year ended June 30,
1999 and the nine months ended March 31, 1999 (unaudited) and 2000. Revenues by
product family prior to the year ended June 30, 1999 are not readily
determinable.
<TABLE>
<CAPTION>
Nine months ended
Year ended March 31,
June 30, -------------------
1999 1999 2000
(In thousands)
(unaudited)
<S> <C> <C> <C>
Device servers.............................. $11,595 $ 6,768 $17,043
Multiport device servers.................... 9,146 6,500 7,520
Print servers............................... 8,466 6,805 5,159
Other....................................... 3,773 3,084 2,909
------- ------- -------
Total net revenues...................... $32,980 $23,157 $32,631
======= ======= =======
</TABLE>
Revenue by Geographic Area
Net revenues by geographic area is provided below for the year ended June
30, 1999 and the nine months ended March 31, 1999 (unaudited) and 2000. Revenue
by geographic area is based on where products are shipped.
<TABLE>
<CAPTION>
Year ended Nine months ended March 31,
June 30, ------------------------------
1999 1999 2000
(Amounts in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States..................... $21,780 66% $ 15,562 67% $ 21,410 66%
Europe............................ 9,530 29% 6,422 28% 9,590 29%
Other............................. 1,670 5% 1,173 5% 1,631 5%
------- --- -------- ---- -------- ----
$32,980 100% $ 23,157 100% $ 32,631 100%
======= === ======== ==== ======== ====
</TABLE>
Revenues to customers outside of the United States approximated 38% for the
years ended June 30, 1997 and 1998, principally from sales to European value-
added resellers.
Accounts receivable attributable to international sales represented
approximately 23%, 22%, and 24% of total accounts receivable at June 30, 1998
and 1999 and at March 31, 2000, respectively.
Substantially all of the Company's long-lived assets are located in the
United States.
Significant Customer Information
Two domestic customers accounted for approximately 30%, 35%, 27%, 29%, and
23% of the Company's net revenues for the years ended June 30, 1997, 1998 and
1999 and the nine months ended March 31, 1999 (unaudited) and 2000,
respectively. Accounts receivable attributable to these two domestic customers
accounted for approximately 46%, 32%, and 32% of total accounts receivable at
June 30, 1998 and 1999 and at March 31, 2000, respectively.
One international customer, a related party due to common ownership by the
Company's major stockholder, accounted for approximately 16%, 18%, 11%, 13% and
8% of the Company's net revenues the years ended June 30, 1997, 1998 and 1999,
and the nine months ended March 31, 1999 (unaudited) and 2000, respectively.
Included in accounts receivable in the accompanying consolidated balance sheets
are approximately $219,000, $158,000 and $152,000 due from this related party
at June 30, 1998 and 1999 and March 31, 2000, respectively. The Company also
has an agreement with the same related international
F-19
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
customer for the provision of technical support services to the Company at the
rate of $7,500 per month ($5,000 per month through December 1998). Pursuant to
the terms of the agreement, the Company paid $60,000, $60,000, $75,000, $52,500
and $67,500 during the years ended June 30, 1997, 1998 and 1999 and the nine
months ended March 31, 1999 (unaudited) and 2000, respectively.
9. Subsequent Events
In May 2000, the Company's Board of Directors authorized the re-
incorporation of the Company in the State of Delaware. Such reincorporation was
completed on July 28, 2000. The par value and shares of common stock
authorized, issued and outstanding at each balance sheet date presented, and
for each period presented in the consolidated statement of stockholders' equity
have been retroactively adjusted to reflect the reincorporation.
In May 2000, the Company's Board of Directors authorized the filing of a
Registration Statement with the Securities and Exchange Commission, which would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering.
In May 2000, the Company's Board of Directors, subject to stockholder
approval, approved the increase in authorized shares of common stock to
200,000,000 shares. The Company's Board of Directors also approved a four-for-
one stock split to be effective upon the filing of re-incorporation in
Delaware. All references to common share and per common share data in the
accompanying financial statements have been retroactively restated to reflect
the effects of this stock split. Additionally, following the completion of the
proposed initial public offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of preferred stock. The
accompanying financial statements have been retroactively restated to reflect
the authorized preferred stock.
In May 2000, the Board of Directors approved an increase of 1,000,000 in the
number of shares authorized for issuance under the 1993 Plan. In addition, the
Board of Directors granted options under the 1993 Plan (Note 5) to employees to
purchase 920,894 shares of the Company's common stock at an exercise price of
$6.00 per share. In connection with this option grant, the Company will record
deferred compensation aggregating $8.3 million that will be amortized to the
statement of income over the vesting period of the options.
In May 2000, the Company's Board of Directors approved the 2000 Stock Plan
(the Stock Plan) effective upon the completion of the proposed initial public
offering. A total of 1,000,000 shares of the Company's common stock were
reserved for issuance pursuant to option grants under the Stock Plan. The
number of shares available for issuance increases annually commencing in 2001.
The Stock Plan also provides an initial automatic grant of an option to
purchase 25,000 shares of common stock to a director who first becomes an
outside director after the Company's initial public offering. Each outside
director will automatically be granted an option to purchase 10,000 shares of
common stock annually, subject to certain eligibility requirements.
In May 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan) effective upon the completion of the proposed
initial public offering. A total of 750,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The number of shares available
for issuance pursuant to the Plan increases annually commencing in 2001. The
Purchase Plan permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's compensation, as defined. Amounts
deducted and accumulated by the participants are to be used to purchase shares
of common stock at the end of each offering period, as defined, at 85% of the
lower of the fair market value of the common stock at the beginning or end of
the offering period.
F-20
<PAGE>
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is in the process of negotiating the renewal of its office and
warehouse facility lease which expires on July 31, 2000. The proposed terms of
the renewal, which is expected to be executed on or about June 30, 2000,
provide for monthly rental payments of $56,805 commencing on August 1, 2000 and
the monthly rental payments increase by $1,535 on an annual basis. The proposed
lease expires on July 31, 2005.
F-21
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
2000
[LOGO OF LANTRONIX, INC.]
9,000,000 Shares of Common Stock
---------------------
PROSPECTUS
---------------------
Donaldson, Lufkin & Jenrette
Lehman Brothers
DLJdirect Inc.
-------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Lantronix,
Inc. have not changed since the date hereof.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be
required to deliver a prospectus. This is in addition to the dealer's
obligation to deliver a prospectus when acting as an underwriter in this
offering and when selling previously unsold allotments or subscriptions.
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all fees and expenses payable by Lantronix in
connection with the registration of the common stock hereunder. All of the
amounts shown are estimates except for the SEC registration fee and the NASD
filing fee.
<TABLE>
<CAPTION>
Amount To
Be Paid
----------
<S> <C>
SEC Registration Fee........................................... $ 43,718
NASD Filing Fee Nasdaq National Market Listing Fee............. 84,935
Printing and Engraving Expenses................................ 300,000
Legal Fees and Expenses........................................ 600,000
Accounting Fees and Expenses................................... 350,000
Transfer Agent and Registrar Fees and Expenses................. 25,000
Miscellaneous Expenses......................................... 339,587
----------
Total........................................................ $1,743,240
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General
Corporation Law. We have also entered into agreements with our directors and
executive officers that require Lantronix among other things to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors and executive officers to the fullest extent permitted by Delaware
law. We have also purchased directors and officers liability insurance, which
provides coverage against certain liabilities including liabilities under the
Securities Act.
Item 15. Recent Sales of Unregistered Securities
The registrant has sold and issued the following securities since March 19,
1997:
(1) In February 1997, we issued and sold an aggregate of 1,584 shares of
our common stock for an aggregate purchase price of $445.40 to an
employee.
(2) In June 1997, we issued and sold an aggregate of 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
II-1
<PAGE>
(7) 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.
(8) In September 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) 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.
(18) 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.
(19) 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.
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.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation of registrant 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.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement entered into by registrant with
each of its directors and executive officers.
10.2** 1993 Stock Option Plan and forms of agreements thereunder.
10.3** 1994 Nonstatutory Stock Option Plan and forms of agreements
thereunder.
10.4** 2000 Stock Plan and forms of agreements thereunder.
10.5** 2000 Employee Stock Purchase Plan.
10.6** Form of Warranty.
10.7** Employment Agreement between registrant and Fredenrick 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** Subsdiaries of registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of KPMG LLP, independent auditors.
24.1** Power of Attorney (see page II-4).
27.1** Financial Data Schedule.
99.1** Auditor's Letter
</TABLE>
--------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
II-3
<PAGE>
Item 17. Undertakings
Insofar as indemnification by Lantronix for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Lantronix, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Lantronix of expenses incurred or paid by a director, officer or controlling
person of Lantronix in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by Lantronix is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by Lantronix pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration statement as of
the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Lantronix has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irvine, State of California, on the 2nd day of August, 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 (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same Offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto in all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board August 2, 2000
______________________________________
Bernhard Bruscha
* Chief Executive Officer, August 2, 2000
______________________________________ President (Principal
Frederick G. Thiel Executive Officer)
/s/ Steven V. Cotton Chief Financial Officer August 2, 2000
______________________________________ and Chief Operating
Steven V. Cotton Officer (Principal
Financial and Accounting
Officer)
* Director August 2, 2000
______________________________________
Thomas W. Burton
* Director August 2, 2000
______________________________________
W. Brad Freeburg
</TABLE>
/s/ Steven V. Cotton
By: _____________________________
Steven V. Cotton
Attorney-in-fact
II-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Lantronix Inc. at
June 30, 1998 and 1999 and March 31, 2000, and for the years ended June 30,
1998 and 1999 and the nine months ended March 31, 2000, and have issued our
report thereon dated May 15, 2000 (except for Note 9, as to which the date is
July 28, 2000), included elsewhere in this Registration Statement. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, as it
relates to the years ended June 30, 1998 and 1999 and the nine months ended
March 31, 2000, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ Ernst & Young LLP
Orange County, California
May 15, 2000
S-1
<PAGE>
SCHEDULE II
LANTRONIX, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Charged
Balance (recovered)
at to Costs Charged Balance
Beginning and to Other End of
of Period Expenses Accounts Deductions Period
Description --------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for doubtful
accounts ................. $ 166 $ 36 $-- $ -- $ 202
Reserve for excess and
obsolete inventory........ 606 1,706 -- 1,077 1,235
Accrued warranties......... 301 630 -- 642 289
------ ------ --- ------ ------
Total................... $1,073 $2,372 $-- $1,719 $1,726
====== ====== === ====== ======
Year ended June 30, 1998:
Allowance for doubtful
accounts ................. $ 202 $ 396 $-- $ 146 $ 452
Reserve for excess and
obsolete inventory........ 1,235 1,163 -- 1,257 1,141
Accrued warranties......... 289 297 -- 90 496
------ ------ --- ------ ------
Total................... $1,726 $1,856 $-- $1,493 $2,089
====== ====== === ====== ======
Year ended June 30, 1999:
Allowance for doubtful
accounts ................. $ 452 $ (136) $-- $ 113 $ 203
Reserve for excess and
obsolete inventory........ 1,141 637 -- 1,011 767
Accrued warranties......... 496 153 -- 30 619
------ ------ --- ------ ------
Total................... $2,089 $ 654 $-- $1,154 $1,589
====== ====== === ====== ======
Nine-month period ended March
31, 2000:
Allowance for doubtful
accounts ................. $ 203 $ (11) $-- $ 38 $ 154
Reserve for excess and
obsolete inventory........ 767 869 -- 370 1,266
Accrued warranties......... 619 129 -- 223 525
------ ------ --- ------ ------
Total................... $1,589 $ 987 $-- $ 631 $1,945
====== ====== === ====== ======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation of registrant and registrant.
3.2** Form of Certificate of Incorporation of registrant to be filed upon
the closing of the offering made under the registration statement.
3.3** Bylaws of the registrant.
3.4** Bylaws of registrant to be filed upon the closing of the offering
made under the registration statement.
4.1** Form of registrant's common stock certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement entered into by registrant with
each of its directors and executive officers.
10.2** 1993 Stock Option Plan and Forms of Agreements thereunder.
10.3** 1994 Nonstatutory Stock Option Plan and forms of agreements
thereunder.
10.4** 2000 Stock Plan and forms of agreements thereunder.
10.5** 2000 Employee Stock Purchase Plan.
10.6** Form of Warranty.
10.7** Employment Agreement between registrant and Frederick Thiel.
10.8** Employment Agreement between registrant and Steven Cotton.
10.9** Employment Agreement between registrant and Johannes Rietschel
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.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of KPMG LLP, independent auditors.
24.1** Power of Attorney (see page II-4).
27.1** Financial Data Schedule.
99.1** Auditor's Letter
</TABLE>
--------
* To be filed by amendment.
** Previously filed.
+ Confidential Treatment requested.
