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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K/A
AMMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to ____________
Commission File Number 1-16027
__________
LANTRONIX, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0362767
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15353 Barranca Parkway, Irvine, California 92618
(Address of principal executive offices)
(949) 453-3990
(Registrant's telephone number, including area code)
__________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 24, 2001, there were 49,929,300 shares of the company's
common stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the Company (based on the closing sale price of such shares on
the NASDAQ National market on September 24, 2001) was approximately
$146,556,260. Shares of the Company's common stock held by each executive
officer, director and holder of five percent or more of the registrant's common
stock outstanding as of September 24, 2001 have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for Lantronix, Inc.'s Annual
Meeting of Stockholders to be held on November 9, 2001 are incorporated by
reference into Part III of this Form 10-K.
Certain exhibits filed in connection with Lantronix, Inc.'s Registration
Statement On Form S-1, originally filed May 19, 2000, and Registration Statement
On Form S-1, originally filed June 13, 2001, are incorporated by reference into
Part IV of this Form 10-K.
EXPLANATORY NOTE
This Amendment No. 1 to Annual Report on Form 10-K/A of Lantronix, Inc.
(the "Company") amends Item 1 of Part I (with respect to net revenues from
products), Items 6, 7 and 8 of Part II and Item 14 of Part IV of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2001, as filed by
the Company on September 28, 2001 (the "Original 10-K"), to reflect the change
described below.
The Company changed its accounting method for recognizing revenue on sales
to distributors effective as of the beginning of fiscal 2001, July 1, 2000.
Under the new accounting method, recognition of revenue and related gross profit
on sales to distributors is deferred until the distributor resells the product
to an end customer. Previously, the Company had recognized revenue from these
transactions upon shipment of product to the distributor, net of estimates for
possible returns and allowances. The restatement for the year ended June 30,
2001 results in a reduction in revenue of approximately $6.2 million and an
increase in the loss before cumulative effect of accounting change of $2.9
million or $0.07 per share. The cumulative effect of the accounting change
recorded as of July 1, 2000 was a charge of $597,000 (net of income taxes of
$176,000) or $0.02 per share. See Note 2 to the financial statements,
"Accounting Change and Restatement of Financial Statements," for more detail.
Conforming changes reflecting the foregoing are made in: Item 1 of Part I in the
"Products" section included in the Description of Business section; and in Part
II, Item 6 - Selected Consolidated Financial Data, Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations
(including risk factors), and Item 8 Financial Statements (and footnotes
thereto).
In addition, the Company made changes to the Original 10-K to clarify or
correct information with respect to the following:
. Item 1 "Recent Acquisitions and Investments": information
concerning additional acquisitions and investments made after the
original filing and before the filing of this Form 10-K/A;
. Item 5 "Use of Proceeds": a clarification the number of shares
sold in our secondary offering;
. Part IV, Item 14 "Consolidated Financial Statements" and
"Financial Statement Schedules":
. Consolidated Statements of Operations: reclassification
of stock compensation related to cost of revenues from
stock compensation to cost of revenue;
. Footnote 1: a clarification related to the paragraph on
"Investments";
. Footnote 3: a clarification regarding the acquisition
of U.S. Software; and
. Footnote 12: information concerning additional
acquisitions and investments made after the original
filing and before the filing of this Form 10-K/A; a
clarification of the number of shares sold in our
secondary offering; a clarification regarding the
acquisition of U.S. Software.
. Schedule II-Consolidated Valuation and Qualifying
Accounts: Reclassification of amounts charged to other
accounts to amounts charged to costs and expenses
Except for the foregoing, no other information included in the Original
10-K is amended by this Form 10-K/A. All information in this Annual Report on
Form 10-K/A is as of June 30, 2001 or as of September 28, 2001, the date of the
filing of the Original 10-K, as required, and does not reflect, unless otherwise
explicitly noted, any subsequent information or events occurring after such
dates, nor does it otherwise purport to modify or update the disclosures
contained in the Original 10-K.
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2
LANTRONIX, INC.
FORM 10-K/A
For the Year Ended June 30, 2001
TABLE OF CONTENTS
Page
PART 1
ITEM 1. Business .................................................................................... 4
ITEM 2. Properties .................................................................................. 14
ITEM 3. Legal Proceedings ........................................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders ......................................... 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 15
ITEM 6. Selected Consolidated Financial Data ........................................................ 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 17
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk .................................. 32
ITEM 8. Financial Statements and Supplementary Data ................................................. 32
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........ 32
PART III
ITEM 10. Directors and Executive Officers of the Registrant .......................................... 33
ITEM 11. Executive Compensation ...................................................................... 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management .............................. 33
ITEM 13. Certain Relationships and Related Transactions .............................................. 33
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K ........................... 34
FORWARD-LOOKING STATEMENTS
FROM TIME TO TIME, WE MAY PUBLISH STATEMENTS THAT ARE NOT HISTORICAL FACTS
BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW
PRODUCTS, ENGINEERING AND DEVELOPMENT ACTIVITIES AND SIMILAR MATTERS. SUCH
STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND
PHRASES, SUCH AS "INTENDED," "EXPECTS," "ANTICIPATES" AND "IS (OR ARE) EXPECTED
(OR ANTICIPATED)." THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED
TO STATEMENTS CONCERNING INDUSTRY TRENDS, ANTICIPATED DEMAND FOR OUR PRODUCTS,
OUR STRATEGY, THE FUTURE BENEFITS OF RECENT ACQUISITIONS, INCLUDING THE BENEFITS
OF USING THE TECHNOLOGY DEVELOPED BY THE COMPANIES WE ACQUIRE IN OUR EXISTING
PRODUCT LINE AND THE POSSIBLE SALES OF OUR PRODUCTS TO THE ACQUIRED COMPANIES'
EXISTING CUSTOMERS, THE POSSIBILITY OF FUTURE INVESTMENTS OR ACQUISITIONS,
FUTURE CUSTOMER AND SALES DEVELOPMENTS, MANUFACTURING FORECASTS, INCLUDING THE
POTENTIAL BENEFITS OF TWO OF OUR CONTRACT MANUFACTURERS SOURCING AND SUPPLYING
RAW MATERIALS, COMPONENTS AND INTEGRATED CIRCUITS, THE POSSIBILITY OF AN
EXPANDING ROLE FOR ORIGINAL EQUIPMENT MANUFACTURERS IN OUR BUSINESS, THE FUTURE
COST AND POTENTIAL BENEFITS OF OUR RESEARCH AND DEVELOPMENT EFFORTS, AND
LIQUIDITY AND CASH RESOURCES FORECASTS. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND OUR STOCKHOLDERS WE
SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-K,
INCLUDING FACTORS THAT MAY AFFECT FUTURE RESULTS. WE MAY FROM TIME TO TIME MAKE
ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS
CONTAINED IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS
REPORTS TO STOCKHOLDERS. WE DO NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE FROM TIME TO TIME BY US OR ON OUR BEHALF.
3
PART I
ITEM 1. BUSINESS
Overview
Lantronix designs, develops and markets network hardware and software
solutions that enable network connectivity and system management for a broad
range of devices and equipment. Our products enable almost any electronic device
to be accessed, managed, controlled, and configured over the Internet or other
networks using standard protocols for connectivity, including fiber optic,
Ethernet and wireless. Our hardware, which includes external and embedded Device
Servers, such as Multiport Device Servers, are fully integrated systems that
contain memory, processors, operating systems, software applications and
communication ports. Our software includes an open standards-based operating
system, proprietary protocol stacks which manage complex data and tasks, and
applications that can operate with our Device Servers and our customers'
existing hardware. Users of our products 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 grown our business through internal product
development and strategic acquisitions to provide a broad suite of
network-enabling solutions and system management products. Our solutions provide
network connectivity and system management capabilities to multiple market
segments, including industrial, commercial, retail, and building and home
automation. Our technology is used with devices such as networking routers,
medical instruments, manufacturing equipment, bar code scanners, building HVAC
systems, elevators, process control equipment, vending machines, thermostats,
security cameras, temperature sensors, card readers and point of sale terminals.
We sell our products directly to end-users and through multiple channels
including OEMs, systems integrators, distributors and VARs and to a wide variety
of end-markets, including industrial, automation, healthcare, security/access
control, retail/point of sale, commercial/information technology and
telecommunications.
4
We were initially formed as "Lantronix," a California corporation, in June
1989. We reincorporated as a Delaware corporation in May 2000.
Industry Background and Trends
Key functions in a variety of applications are managed by closed control
systems of varying complexity. The devices found in closed control systems may
perform relatively simple tasks such as the operation of in-room lighting or
more complex functions such as the coordination of minute operations of
manufacturing equipment operating on an automobile factory floor. Some control
systems rely upon the logic capabilities of a microprocessor in order to enhance
the effectiveness of the devices within the closed control system. For example,
a closed control system containing a microprocessor may be used in an office
building to manage such functions as HVAC, elevators, fire detection equipment,
lighting, security and access control. Other devices lack a microprocessor, but
remain capable of being controlled by remote input. An example of such a device
is the actuator of an electronic door.
Networking technology can expand the utility of existing closed control
systems and other devices. For example, network-enabling technology allows for
the extension of direct control beyond the perimeter of the original closed
control system. Network connectivity can enable an automotive manufacturer to
access and examine the inventory level of manufacturing components to determine
the demand, timing and quantity of new materials remotely from any location in
the world. The immediate access to information provided by the network allows
the manufacturer to lower its component carrying costs by managing demand in
real time. In addition, the manufacturer can monitor the performance, downtime,
maintenance and scheduling of future production. Network connectivity increases
the speed, efficiency and accuracy with which information can be shared and
used.
The continued adoption and evolution of networking technology has largely
been driven by economic considerations. For example, an owner/operator of
manufacturing equipment with a high replacement cost may be unwilling to replace
the existing equipment in favor of a networked replacement provided by the
manufacturer due to the high incremental replacement cost required to gain the
functionality of a networked product. However, an equipment operator may be
willing to add network connectivity to the equipment if it can be added
incrementally at a reasonable cost and if it will not require the replacement of
the existing equipment. In this case, external networking equipment can provide
connectivity to devices that could derive a benefit from a network connection,
but were not originally designed for networking capabilities. We believe in most
cases network connectivity supplied by an external device will eventually give
way to an embedded solution, and the networking capability will be designed into
the equipment's control system. Embedded networking devices will be designed
into future generations of this equipment by the OEM as network connectivity
initially represents a point of differentiation and eventually becomes a
standard product feature within the particular industry.
We believe that demand is increasing for technology that delivers network
connectivity to closed control systems and other devices. Many of the available
technologies today require significant investments in hardware and require
special installation or are based on closed, or proprietary, standards and
software. We believe that users of networking connectivity products generally
prefer highly integrated, open, standards-based systems that provide reliable,
real-time network connectivity.
The Lantronix Solution
We are a leading provider of hardware and software solutions that enable
network connectivity and system management for a broad range of devices and
equipment. Our Device Servers and software products enable almost any electronic
device 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 or system management capability. Our products are designed
to offer network connectivity and system management 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 network-enable their current and future
product lines. Because our products are based on open standards, OEMs can avoid
some potentially complicated hardware and software integration issues and can
network-enable their products quickly and seamlessly.
5
Our products can be segmented into three major categories: external Device
Servers, embedded Device Servers and software. Our software operating system,
protocol stacks and applications have been developed for use with our device
server products or with existing networking devices. Our external Device
Servers, which include multiport servers, software operating systems, protocol
stacks and applications, are often used to open network connectivity and bring
system management capability to electronic devices within an existing closed
network. Our embedded products and software are designed into new electronic
devices by OEMs. By offering multiple product lines, we allow manufacturers to
uniformly connect the end-users' new and existing equipment and offer a broad
system management solution.
We believe our networking and system management products enable our
customers and end-users to compete more effectively by allowing them to expand
the number of networked devices and increase the utility of their existing
network. We provide distributed intelligence across a network rather than closed
systems requiring one or more dedicated servers. In this way, we believe our
customers and end-users can improve their business models by automating tasks
previously performed by human resources, thereby increasing control and creating
cost efficiencies. Our networking products have been deployed in many markets,
including industrial automation, healthcare, security access/control,
retail/point of sale, commercial/information technology, and telecommunications.
We believe our products offer end-users and manufacturers the following key
advantages:
. Fully Integrated Solution. Our Device Server technology includes fully
integrated hardware, firmware, protocols, application software and a
real-time operating system. We believe our solution enables OEMs to
quickly integrate the products they manufacture and significantly
reducing their time-to-market. In addition, our technology is based on
widely accepted industry standards, which we believe will provide
Internet and other network compatibility today and in the future. We
design our products and train our customer support personnel in order
to facilitate full integration of our networking products with our
customers' new and existing equipment and systems.
. 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 them 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.
. Remote Real-Time Communication. By enabling our end-users to manage
devices in real-time from a remote location, our Device Server
Technology can significantly reduce labor costs and eliminate the need
for expensive gateways and redundant wiring. 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. Our remote real-time solution is also used for
out-of-band management which enables our customers to access, manage
and control networking equipment through an alternative port when they
are unable to access their device when their network goes down.
. Improved Reliability. Our Device Servers contain a built-in web server
and software, operate independently and do not rely on a centrally
located gateway or server. We believe that this distributed
intelligence of our Device Server Technology improves the reliability
and up-time of the network. In addition, by using its built-in
processor power, our Device Server Technology has the capability of
tracking the status of the electronic device and can report early
detection of problems.
6
Our Strategy
Our objective is to be the leading global provider of network-enabling
technology and system management solutions. The following elements are central
to our strategy:
. Extend Existing Customer Relationships to Expand Future Revenue
Streams. We intend to extend our existing customer relationships by
providing network-enabling and system management solutions for a
greater percentage of the products and services our customers
currently offer, and also by providing connectivity and system
management solutions for our customers' new products and services. For
example, our customers include many OEMs that 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 plan to migrate current customers of our
external solutions to our cost-effective, highly integrated embedded
solutions. We expect to be able to grow with our customers by
providing continually enhanced embedded networking technology and
system management solutions to better suit our customers' needs.
. Target Strategic Acquisitions and Investments. We plan to continue to
make strategic acquisitions of and investments in companies and key
technologies which we believe will have synergistic benefits with our
existing technology and product offerings. In October 1998, we
acquired ProNet GmbH, which increased our industrial application
Device Server product offerings. In December 2000, we acquired United
States Software Corporation, or USSC, which extended our product
offerings into embedded logic software products and enhanced our
direct sales channel. In June 2001, we acquired Lightwave
Communications, Inc., or Lightwave, which augmented our console
management product line. We expect to continue to enter into
alliances, make equity investments and complete acquisitions of
companies and technologies in order to grow our business. In March
2001, we made a cash investment in Premise Systems, a developer of
client-side applications. We believe Premise Systems may develop
software applications that enhance the ability of our networking
products. In September 2001, we entered into definitive agreements
with Synergetic Micro Systems, Incorporated, or Synergetic, a provider
of embedded network communications solutions, in which we agreed to
acquire all of the outstanding capital stock of Synergetic, and to
assume each outstanding option to acquire Synergetic common stock. The
acquisition is subject to the receipt of approval by no less than 90%
of the Synergetic shareholders and other customary conditions. We
believe this strategy will enable us to increase our market share,
expand our product offering and gain access to larger product and
customer bases and cross sell our products. In September 2001, we
purchased a convertible promissory note from Xanboo Inc. in the
principal amount of $1.5 million. The note has a ten year maturity and
will automatically convert into the next round of equity securities of
Xanboo that raises at least $5.0 million. In addition, from time to
time we will make strategic investments in companies that we believe
complement or expand our existing business.
. Develop New Products and Services. We intend to invest in our research
and development efforts to develop additional cost-efficient
network-enabling and system management solutions, and other
technologies, in order to meet evolving customer needs. We believe
that we have substantial expertise in developing network-enabling
technology and system management products, and we intend to use this
expertise to continue to deliver products with high-functionality at
competitive prices.
. Acquire New Customers. We plan to continue to acquire new customers
and develop additional relationships with OEMs, VARs and system
integrators that are leaders in our targeted industry markets.
Currently we have relationships with approximately 1,300 customers. We
will seek to strengthen and expand our relationships as well as
aggressively increase our customer base by penetrating new markets and
providing timely, cost-effective networking solutions and customer
service.
. 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.
7
Recent Acquisitions and Investments
We have completed four acquisitions since our initial public offering in
August 2000 that have expanded our range of products and customers and announced
one equity investment as described below:
United States Software Corporation. In December 2000, we completed the
acquisition of USSC, a developer of a software operating system, protocol stacks
and an application development environment for embedded technology. The total
purchase price consisted of $2.5 million in cash and 653,846 shares of our
common stock. In addition, we assumed options to acquire 133,333 shares of our
common stock at a weighted average exercise price of $1.00 per share. USSC
provides an open standards-based operating system and supports a variety of
processors. USSC technology enables us to sell products directly to OEMs,
systems integrators and other users who already have existing network
connectivity devices but lack the key elements to provide system management
solutions. We believe the acquisition of USSC helps expand our product offering
and enables us to provide USSC and our customers' customers with an integrated
software and hardware embedded solution.
Lightwave Communications. In June 2001, we completed the acquisition of
Lightwave, a developer of console management products. The purchase price
includes 3,428,571 shares of common stock and $12.0 million in cash. In
addition, we assumed options issued to employees to acquire 870,513 shares of
our common stock at a weighted average exercise price of $3.67 per share. We
also paid off approximately $6.7 million of debt to a creditor of Lightwave.
Lightwave develops and markets a variety of console management products
including keyboard, video and mouse, or KVM, switches and multiport management
devices. The Lightwave KVM switch allows a single keyboard, monitor and mouse to
be switched among multiple workstations providing immediate access to each
workstation from a single location. The Company's console management products
allow remote access to a variety of equipment that often exists in a redundant
scheme, including workstations, servers and networking equipment, as if the user
were physically at the remote site where the equipment is aggregated. The
benefits of the Lightwave products include reduced costs to access, manage and
upgrade remote equipment through a secure and fail-safe networked system. We
believe we will be able to sell our Multiport Device Server products to
Lightwave customers.
Synergetic Micro Systems. In October 2001, we completed the acquisition of
Synergetic, a provider of high performance embedded network communication
solutions that complement our external device products. In connection with the
acquisition, we paid cash consideration of $2.7 million and issued an aggregate
of 2,234,715 shares of our common stock in exchange for all outstanding shares
of Synergetic common stock and reserved 615,705 additional shares of common
stock for issuance upon exercise of outstanding employee stock options and other
rights of Synergetic. Portions of the cash consideration and shares issued will
be held in escrow pursuant to the terms of acquisition agreement.
Premise Systems. In January 2002, we completed the acquisition of Premise,
a developer of client-side software applications that complement our device
networking products by providing superior management and control capabilities
for devices that have been network and internet enabled. Prior to the
acquisition, we held shares of Premise representing 19.9% ownership and, in
addition, held convertible promissory notes of $1.2 million with interest
accrued there-on at the rate of 9.0%. The convertible promissory notes were
converted into equity securities of Premise at the closing of the transaction.
We issued an aggregate of 1,063,371 shares of our common stock in exchange for
all remaining outstanding shares of Premise common stock and reserved 875,000
additional shares of common stock for issuance upon exercise of outstanding
employee stock options and other rights of Premise. Pursuant to the acquisition
agreement, 106,337 shares will be held in escrow to secure certain
indemnification obligations, and 531,686 of such shares will be held in escrow
pending achievement of certain performance obligations. In connection with the
acquisition, we expect to record a one-time charge for purchased in-process
research and development expenses related to the acquisition in our fourth
fiscal quarter ending June 30, 2002.
Other equity investments. From time to time we will make strategic
investments in companies that we believe complement or expand our existing
business. In September and October 2001, we paid an aggregate of $3.0 million to
Xanboo Inc. ("Xanboo") for convertible promissory notes, which converted in
January 2002, in accordance with their terms, into Xanboo preferred stock. In
addition, we purchased $4.0 million of Xanboo preferred stock in January 2002.
We currently hold an 18.7% ownership interest in Xanboo. Our investment in
Xanboo is accounted for using the equity method of accounting based on our
ability through representation on Xanboo's board of directors to exercise
significant influence over its operations.
8
Products
We develop, market and support a variety of versatile, 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.
Net Revenues for
Year Ended
June 30, 2001
Product Family (millions) Primary Product Function Products
-------------- ---------- ------------------------ --------
Device Servers $ 31.8 Enable almost any electronic External and embedded
(including software) Device to become network-enabled, CoBox, MSS and UDS
Allowing the user to control the products. VoiceOver IP,
Device by way of the Internet using TCP/IP, RTOS, and File
a wide range of network protocols. System software packages.
Multiport Device Servers $ 14.0 Enable multiple devices to become ETS and LRS products.
(including software) Network-enabled, allowing the user
to control the devices by way of
the Internet using a wide range of
network protocols.
Print Servers and Other $ 3.2 Allow multiple users to share EPS, MPS and LPS
Printers anywhere on an Ethernet products.
Network using a wide range of
Network protocols.
Financial Accounting Standards Board ("FASB") Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information establishes
standards for disclosures about operating segments in annual consolidated
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. We operate in
one segment, networking and Internet connectivity.
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 to our VoiceOver IP,
TCP/IP, RTOS and File System software packages.
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, which gives OEMs
a quick and compatible way to embed open standards-based Internet capability and
computing power into almost any electronic device. We also provide 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. We recently announced a line
of Device Servers based on our new DSTni chip, which is a single chip solution
providing the key elements of network connectivity in a semiconductor. The DSTni
chip is currently in beta testing. Device Servers are easy to manage using any
standard web browser, due to a built-in HTTP server and Java management program.
9
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. These devices assist in maintaining network
integrity and effectiveness by providing remote monitoring and control over
networked equipment.
Software. Our software supports our hardware platform and includes a
standards-based operating system that includes protocol stacks, device drivers
and application protocol interfaces. The acquisition of USSC expanded our
ability to be used on multiple CPUs. It also provided us a product offering with
a TRON API, or application protocol interface, and other standard-based
protocols that are used extensively in the Japanese consumer and industrial
electronics market an is currently being sold separate for our hardware
solution.
Non-Core Products
Print Servers and Other. We also sell connectivity peripherals that our
customers may request in conjunction with our Device Servers, Multiport Device
Servers and Print Server products. We offer our MPS, LPS and EPS line of print
servers, which enable multiple users to share printers anywhere on a 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 network-enabling and system management technologies have a broad range
of applications across a variety of markets, including telecommunication,
industrial automation, healthcare, security/access control, retail/point of
sales and commercial/information technologies. We primarily service these
markets by selling our products directly to OEMs, and end-users or indirectly
through channel partners such as distributors, VARs and systems integrators.
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.
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.
See those sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors" in Part II of
this Form 10-K/A and Note 10 to the Notes to Consolidated Financial Statements
for information regarding the geographic distribution of our revenue for the
years ended June 30, 2001, 2000 and 1999 and information regarding each customer
whose sales constitute 10% or more of our consolidated net revenues.
Substantially all of the Company's long-lived assets are located in the United
States. See those sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors" in Part II of
this Form 10-K/A and Note 4 to the Notes to Consolidated Financial Statements
for information regarding our assets.
10
Sales and Marketing
We maintain regional sales offices in Irvine, California; Milford,
Connecticut; Hillsboro, Oregon; Switzerland and Singapore. Additionally, we have
local sales offices in France, Germany, Netherlands, the United Kingdom and the
United States. Our sales and marketing force consists of 118 professionals as of
June 30, 2001, and 74 professionals located worldwide as of June 30, 2000. Since
we believe that our networking products have application in a broad variety of
end markets and geographies, we have aggressively expanded our sales force to
pursue these opportunities. 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 multiple
contract 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.
Historically, we have supplied our own raw materials to our contract
manufacturers and testing is performed by the manufacturer using test equipment
we supply to them. Recently, we have implemented a new manufacturing strategy
with two of our contract manufacturers. Under these agreements, the manufacturer
sources and supplies raw materials, components and integrated circuits in
accordance with our pre-determined specifications and forecasts. We believe that
this arrangement will decrease our working capital requirements, allow us to
re-deploy procurement personnel and provide us with better raw material and
component pricing, which may enhance our gross and operating margins. We expect
the volume of our business under this new manufacturing strategy to increase
over time. 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
employed 51 people in our research and development organization as of June 30,
2001, and 28 people as of June 30, 2000. Our research and development expenses
were $4.5 million (excluding $2.6 million of acquired in-process research and
development) for the year ended June 30, 2001, $3.2 million for the year ended
June 30, 2000 and $2.6 million for the year ended June 30, 1999.
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.
11
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 with network-enabling technologies, such as Avocent,
Echelon, JUMPtec, Moxa and Windriver;
. companies in the automation industries, such as Schneider and Siemens;
and
. companies with significant networking expertise and research and
development resources, including Cisco Systems, IBM, Lucent
Technologies.
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; and
. price of our products; and potential customers' awareness and
perception of our products as well as network-enabling technologies.
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 June 30, 2001, 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.
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.
In July 2001, Digi International, Inc. filed a lawsuit against us alleging
that our Multiport Device Servers, specifically our ETS line of products, when
coupled with our Comm Port Redirector software infringe a patent held by Digi.
We believe we have meritorious defenses to Digi's lawsuit and we intend to
vigorously defend our position in the appropriate venue. See Risk Factors--We
might become involved and are currently involved in litigation over proprietary
rights, which could be costly and time consuming.
12
Limitations on Our Rights to Intellectual Property
Gordian, Inc. has 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 net revenues. Under the terms of an
agreement dated February 29, 1989, Gordian owns the rights to the intellectual
property developed by it under the agreement, 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 relation to
gross margin of products sold under the agreement. For the years ended June 30,
2001, 2000 and 1999, we paid Gordian approximately $2.2 million, $2.2 million
and $2.0 million for royalties, respectively. Our agreement with Gordian
terminates at the end of the sales life of the product. The agreement may also
be terminated by either party upon 30 days notice or under other specified
conditions. In the event that the Gordian agreement is terminated, we may lose
our rights to the intellectual property developed under the Gordian agreement
and this might prevent us from marketing some or all of our MSS line of products
in the future. Although we believe that other products developed by us using
alternative technology can be substituted in the future for the products sold by
us using the technology developed by Gordian, Inc., in the event our agreement
with Gordian, Inc. is terminated, we might lose customers and net 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 nine of our 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 cannot 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 June 30, 2001, we had 264 full-time employees. As of that date, we
had 51 employees in research and development, 118 in sales and marketing
department, 39 in operations department and 56 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.
Executive Officers of the Registrant
The following table and notes set forth information about our executive
officers as of September 28, 2001:
Name Age Position(s)
Frederick G. Thiel 40 President and Chief Executive Officer
Steven V. Cotton 38 Chief Financial Officer and Chief Operating Officer
Johannes G. Rietschel 38 Chief Technology Officer
Frederick G. Thiel has served as our President and Chief Executive Officer
since April 1998, and was appointed as a director in August 2000. From July 1996
to April 1998, Mr. Thiel served as a Corporate Vice President, Marketing and
General Manager, Storage Division for CMD Technology, a developer of RAID
storage controllers. From June 1994 to March 1996, Mr. Thiel was with Standard
Microsystem Corporation, a manufacturer of networking technology, as the
Director of Worldwide Marketing from January 1996 to March 1996, and as the
Director of Product Marketing from June 1994 to January 1996. Mr. Thiel also
serves as a director for Patriot Scientific Corporation, a provider of data
communications products.
Steven V. Cotton has served as our Chief Financial Officer and Chief
Operating Officer since December 1999. From August 1996 to December 1999, Mr.
Cotton served as the Chief Financial Officer and Chief Operating Officer at M2
Automotive, an automotive repair business. From August 1991 to August 1996, Mr.
Cotton was a Senior Vice President and Chief Financial Officer at Panda
Management Company, a restaurant management business.
13
Johannes G. Rietschel has served as our Chief Technology Officer since
January 1999. From December 1987 to December 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, a software solutions company, and IZY Communications, Inc.
ITEM 2. PROPERTIES
Our headquarters are located in a leased facility in Irvine, California
consisting of approximately 51,000 square feet. The lease for this facility
expires in July 2005. The headquarters of Lightwave are located in a leased
facility in Milford, Connecticut consisting of approximately 50,000 square feet.
We are currently leasing the property on a month-to-month basis. Pursuant to a
letter agreement with the owners of the property, we are currently negotiating a
15-year lease. The headquarters of USSC are located in a leased facility in
Hillsboro, Oregon consisting of approximately 10,700 square feet. The lease for
this facility expires on August 31, 2005.
Lantronix International AG Switzerland, which is our wholly owned
subsidiary, operates out of a leased office in Cham, Switzerland. We also lease
a research and development facility in Germany and sales offices in Germany and
the Netherlands. We recently leased office space in Singapore which is used to
support our Asia Pacific Region sales efforts.
We consider the above facilities suitable to meet our requirements.
ITEM 3. LEGAL PROCEEDINGS
On July 3, 2001, Digi International, Inc., filed a complaint in the United
States District Court for the district of Minnesota claiming patent infringement
and alleging that certain of Lantronix's Multiport Device Servers, including the
ETS line of products, when coupled with a device driver called the Comm Port
Redirector Software, infringe upon U.S. Patent No. 6,047,319 owned by Digi. Digi
alleges that Lantronix has willfully and intentionally infringed Digi's patent,
and its complaint seeks injunctive relief as well as unspecified damages, treble
damages, attorneys fees, interest and costs. On August 17, 2001, Lantronix filed
its answer to the complaint, asserting affirmative defenses, and counterclaiming
for a declaratory judgment that the patent in issue is invalid. Lantronix
believes that a pre-trial conference will take place before November 30, 2001,
however, to date, discovery has not begun and a trial date has not been set.
Based on the facts known to date, Lantronix believes that the claims are without
merit and intends to vigorously defend this suit.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company currently is not aware of
any such legal proceedings or claims that it believes will have, individually or
in the aggregate, a material adverse effect on its business, prospects,
financial position, operating results or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Lantronix's common stock has been traded on the National Association of
Securities Dealers Automated Quote system ("NASDAQ") under the symbol "LTRX"
since August 4, 2000. The number of record holders of the Company's common stock
as of September 21, 2001 was approximately 49,928,832. The following table sets
forth, for the period indicated, the high and low per share closing prices for
our common stock:
Fiscal Year 2001 High Low
First Quarter ............................................ $10.75 $6.75
Second Quarter ........................................... $ 8.75 $4.69
Third Quarter ............................................ $ 9.25 $4.50
Fourth Quarter ........................................... $10.30 $5.06
Dividend Policy
We have never declared or paid cash dividends on our common stock. We do
not 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.
Recent Sales of Unregistered Securities
Lantronix has issued and sold the following unregistered securities since
July 1, 2000:
In July 2000, we issued and sold an aggregate of 10,000 shares of our
common stock for an aggregate purchase price of $1,580.00 to an employee.
In July 2000, we issued and sold an aggregate of 2,400 shares of our common
stock for an aggregate purchase price of $456.00 to an employee.
In July 2000, we issued and sold an aggregate of 3,075 shares of our common
stock for an aggregate purchase price of $553.50 to an employee.
In August 2000, we issued and sold an aggregate of 1,090 shares of our
common stock for an aggregate purchase price of $207.00 to an employee.
In December 2000, we issued an aggregate of 653,846 shares of our common
stock to the former stockholders of USSC in connection with our purchase of the
capital stock of USSC.
In June 2001, we issued an aggregate of 3,428,571 shares of our common
stock to the former stockholders of Lightwave in connection with our purchase of
the capital stock of Lightwave.
The sales 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, such
information. There were no underwritten offerings employed in connection with
any of the transactions set forth above.
15
Use of Proceeds
In August 2000, we completed our initial public offering of 6,000,000
shares of our common stock, including an underwriter's over-allotment option to
purchase an additional 900,000 shares from two selling stockholders, at an
offering price of $10.00 per share. We received net aggregate proceeds of
approximately $53.7 million after deducting underwriters' commissions and fees
and other costs of $6.3 million.
In July 2001, we completed a public offering of 8,534,000 shares of our
common stock, including 534,000 shares sold pursuant to an underwriter's
over-allotment option, at an offering price of $8.00 per share. We sold
6,000,000 shares and selling shareholders sold 2,000,000 shares of the primary
offering. Additionally, we sold 400,500 shares and selling shareholders sold
133,500 shares of the over-allotment option. We received net aggregate proceeds
of approximately $47.1 million after deducting underwriting discounts,
commissions and offering costs.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included below. The consolidated statements of operations data for
the years ended June 30, 2001, 2000 and 1999 and the balance sheet data as of
June 30, 2001 and 2000, are derived from the audited consolidated financial
statements included elsewhere in this report. The consolidated statements of
operations data for the years ended June 30, 1998 and 1997, and the balance
sheet data as of June 30, 1999, 1998 and 1997, are derived from the audited
consolidated financial statements not included elsewhere in this report. The
historical results are not necessarily indicative of results to be expected for
future periods.
Year ended June 30,
-------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(restated)
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues ....................................................... $ 48,972 $44,975 $32,980 $28,300 $30,680
Cost of revenues ................................................... 24,530 21,526 16,824 16,812 20,430
--------- ------- ------- ------- -------
Gross profit ....................................................... 24,442 23,449 16,156 11,488 10,250
--------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative ........................... 23,998 16,744 9,173 7,857 7,455
Research and development ...................................... 4,478 3,186 2,615 1,770 2,471
Stock-based compensation ...................................... 3,019 1,093 -- -- --
Amortization of goodwill ...................................... 800 -- -- -- --
Amortization of purchased intangible assets ................... 690 813 595 -- --
In-process research and development ........................... 2,596 -- -- -- --
--------- ------- ------- ------- -------
Total operating expenses ................................. 35,581 21,836 12,383 9,627 9,926
--------- ------- ------- ------- -------
Income (loss) from operations ...................................... (11,139) 1,613 3,773 1,861 324
Minority interest .................................................. -- (49) (30) -- --
Interest income (expense), net ..................................... 2,182 187 151 (5) (168)
Other income (expense), net ........................................ (167) (47) (10) 1 9
--------- ------- ------- ------- -------
Income (loss) before income taxes and cumulative effect of
accounting change ................................................ (9,124) 1,704 3,884 1,857 165
Provision (benefit) for income taxes ............................... (1,876) 649 1,098 554 (37)
--------- ------- ------- ------- -------
Income (loss) before cumulative effect of accounting change ........ (7,248) 1,055 2,786 1,303 202
Cumulative effect of accounting change, net of income taxes of
$176 ............................................................... (597) -- -- -- --
--------- ------- ------- ------- -------
Net income (loss) .................................................. $ (7,845) $ 1,055 $ 2,786 $ 1,303 $ 202
========= ======= ======= ======= =======
Basic income (loss) per share before cumulative effect
of accounting change ............................................ $ (0.19) $ 0.04 $ 0.10 $ 0.05 $ 0.01
Cumulative effect of accounting change per share ................... (0.02) - - - -
--------- ------- ------- ------- -------
Basic net income (loss) per share .................................. $ (0.21) $ 0.04 $ 0.10 $ 0.05 $ 0.01
========= ======= ======= ======= =======
Diluted income (loss) per share before cumulative
effect of accounting change ..................................... $ (0.19) $ 0.03 $ 0.10 $ 0.05 $ 0.01
Cumulative effect of accounting change per share ................... (0.02) - - - -
--------- ------- ------- ------- -------
Diluted net income (loss) per share ................................ $ (0.21) $ 0.03 $ 0.10 $ 0.05 $ 0.01
========= ======= ======= ======= =======
16
Weighted average shares (basic) ....................................... 36,946 29,274 26,977 25,207 25,128
======= ====== ====== ====== ======
Weighted average shares (diluted)...................................... 36,946 34,178 28,880 25,443 25,427
======= ====== ====== ====== ======
As of June 30,
--------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(restated)
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................................. $15,367 $1,988 $5,833 $1,759 $ 173
Short-term investments ................................................ 1,973 -- -- -- --
Working capital ....................................................... 36,963 11,042 8,109 6,327 4,812
Goodwill and other purchased intangible assets, net ................... 55,601 586 1,399 -- --
Total assets .......................................................... 116,861 20,210 17,292 9,800 9,570
Retained earnings ..................................................... 582 8,427 7,372 4,586 3,284
Total stockholders' equity ............................................ 99,496 12,547 10,312 6,928 5,624
====== ====== ====== ===== =====
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. In
addition to historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from those anticipated by these forward-looking
statements due to factors including, but not limited to, those factors set forth
under "Risk Factors" and elsewhere in this report.
We have restated our consolidated financial statements for our fiscal year
ended June 30, 2001 herein. To the extent the following discussion and analysis
refers to data from our consolidated financial statements for such period, such
references are to the data as restated.
Accounting Change and Restatement of Financial Statements
In May 2002, we undertook a special investigation of our accounting,
which revealed that beginning in the third and fourth quarters of fiscal 2001
certain shipments made to distributors and recorded as revenues in fiscal 2001
and 2002 did not qualify for revenue recognition upon shipment due to terms
present in agreements with the distributors that were not considered in our
original accounting decisions. The accompanying consolidated financial
statements for the year ended June 30, 2001 have been restated to change as of
July 1, 2000 the accounting policy for recognizing revenue from sales to
distributors. Formerly, revenue from sales to distributors was recognized upon
shipment, but in some cases during fiscal 2001 this resulted in improper revenue
recognition because we granted product return privileges, extended payment terms
or other rights to certain distributors in connection with specific shipments
that either converted such transactions into what in substance were consignment
arrangements or precluded us from using our historical experience in product
sales to make a reasonable estimate of future product returns at the time of
shipment.
Under the newly adopted accounting policy, revenue from sales to
distributors is not recognized until the distributor sells our products to end
user customers. This manner of correcting the errors in sales recognition made
in the previously issued financial statements for fiscal 2001 is deemed to be
preferable in the circumstances because (1) it eliminates from revenue any
effect of shipping excessive levels of inventory to the distributors; (2) all
revenue from distributor sales in fiscal 2001 and thereafter will be recognized
on a common basis; and (3) there is assurance that any additional agreements
with distributors that may have existed with respect to specific orders but are
presently unknown will not have an impact on amounts reported as revenue after
the restatement.
17
The restatement for the year ended June 30, 2001, results in a
reduction in revenue of approximately $6.2 million and an increase in the loss
before cumulative effect of accounting change of $2.9 million or $0.07 per
share. The cumulative effect of the accounting change recorded as of July 1,
2000 was a charge of $597,000 (net of income taxes of $176,000) or $0.02 per
share. A comparison of restated and originally reported amounts in the
consolidated statement of operations for the year ended June 30, 2001 follows:
As previously As
reported restated
-------- --------
(in thousands, except per share data)
Net revenues ............................................................ $ 55,198 $ 48,972
Cost of revenues ........................................................ 26,582 24,530
--------- ---------
Gross profit ............................................................ 28,616 24,442
Operating expense ....................................................... 35,668 35,581
---------- ---------
Loss from operations .................................................... (7,052) (11,139)
Interest and other income, net........................................... 2,015 2,015
Benefit for income taxes ................................................ (662) (1,876)
---------- ---------
Loss before cumulative effect of accounting change ...................... (4,375) (7,248)
Cumulative effect of accounting change, net of income taxes of $176 ..... -- (597)
---------- ---------
Net loss ................................................................ $ ( 4,375) $ (7,845)
========== =========
Basic and diluted net loss per share:
Before cumulative effect of accounting change ....................... $ (0.12) $ (0.19)
Cumulative effect of accounting change .............................. - (0.02)
---------- ---------
Net loss ............................................................ $ (0.12) $ (0.21)
========== =========
Information needed to determine the pro forma effects of applying the
new revenue recognition policy for sales to distributors to years prior to
fiscal 2001 is not available; therefore, such pro forma information is not
presented.
Under the leadership of new management, we are actively working to strengthen
our policies, procedures, personnel, controls and internal communications in
response to the circumstances that led to the restatement.
Overview
Lantronix designs network-enabling and system management solutions
consisting of hardware and software that permit almost any electronic device to
be accessed, managed and controlled over the Internet, Intranets or other
networks. Since our inception in 1989, we have developed an array of
network-enabling products including external Device Servers, embedded 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 in our
Device Server business will continue to represent an increasing percentage of
our net revenues in the future. Our strategy for continuing to increase sales of
our Device Server product line involves a two-fold approach. First, we intend to
substantially increase our research and development expenditures over the next
two years to enhance our Device Server product line and develop new products.
Second, we intend to grow our Device Server business through strategic
acquisitions, investments and partnerships, which we believe will support our
product lines and allow us to secure additional intellectual property, increase
our customer base and provide access to new markets.
Our products are sold to OEMs, VARs, systems integrators and distributors,
as well as directly to end-users. One of our distributors, Ingram Micro,
accounted for 13.7% of our net revenues for the year ended June 30, 2001, 12.8%
of our net revenues for the year ended June 30, 2000 and 15.5% for the year
ended June 30, 1999. Another distributor, Tech Data, accounted for 9.9% of our
net revenues for the year ended June 30, 2001, 12.0% of our net revenues for the
year ended June 30, 2000 and 11.5% for the year ended June 30, 1999. transtec
AG, an international OEM and related party due to common ownership by our major
stockholder, accounted for 8.7% of our net revenues for the year ended June 30,
2001, 7.2% of our net revenues for the year ended June 30, 2000 and 11.4% for
the year ended June 30, 1999.
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,
18
excluding Germany and Switzerland. Under this agreement, we were required to
make royalty payments to Dr. Weisser through December 31, 2000. We recognized
$726,000 of royalty expense and amortization relating to the marketing rights
agreement for the six months ended December 31, 2000 and $1.6 million for the
year ended June 30, 1999. No amounts have been incurred after December 31, 2000.
In December 2000, we completed the acquisition of USSC, a software
solutions provider for embedded technology applications. This acquisition was
accounted for as a purchase transaction. Accordingly, the accompanying
consolidated financial statements include the results of operations of USSC
subsequent to its acquisition date.
In June 2001, we completed the acquisition of Lightwave, a provider of
console management solutions. This acquisition was accounted for as a purchase
transaction. Accordingly, the accompanying consolidated financial statements
include the results of operations of Lightwave subsequent to its acquisition
date.
In September 2001, we entered into definitive agreements with Synergetic, a
provider of embedded network communications solutions, in which we agreed to
acquire all of the outstanding capital stock of Synergetic, and to assume each
outstanding option to acquire Synergetic common stock. The acquisition is
subject to the receipt of approval by no less than 90% of the Synergetic
shareholders and other customary conditions.
Under our newly adopted accounting policy, we do not recognize revenue
until all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; our
price to the buyer is fixed or determinable; and collectibility is reasonably
assured. Retroactively effective July 1, 2000, recognition of revenue and
related gross profit from sales to distributors are deferred until the
distributor resells the product (Note 2 of Notes to Consolidated Financial
Statements) to provide assurance that all revenue recognition criteria are met
at or prior to the point at which revenue is recognized. Revenues from product
sales to original equipment manufacturers, end-user customers, other resellers
and from sales to distributors prior to July 1, 2000 generally are or have been
recognized upon product shipment, but may be deferred to a later date if all
revenue recognition criteria are not met at the date of shipment. When product
sales revenue is recognized, we establish an estimated allowance for future
product returns based on historical returns experience; when price reductions
are approved, we establish an estimated liability for price protection payable
on inventories owned by product resellers. Revenue from the licensing of
software is recognized at the time of shipment (or at the time of resale in the
case of software products sold through distributors), provided we have
vendor-specific objective evidence of the fair value of each element of the
software offering and that collectibility is probable. Revenue from
post-contract customer support and any other future deliverables, which
comprised approximately one-half of one per cent of net revenues for the fiscal
year ended June 30, 2001, is deferred and recognized over the support period or
as contract elements are delivered.
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 as well as the fair
market value of the vested portion of non-employee stock options utilizing the
Black-Scholes option pricing model. Deferred compensation also includes the
value of employee stock options assumed in connection with the acquisitions of
USSC and Lightwave calculated in accordance with current accounting guidelines.
Deferred compensation is presented as a reduction to stockholders' equity and is
amortized over the vesting period of the related stock options, which is
generally four years. At June 30, 2001, a balance of $10.0 million remains and
will be amortized as follows: $3.0 million in fiscal 2002, $3.0 million in
fiscal 2003, $2.5 million in fiscal 2004, $1.4 million in fiscal 2005, and
$153,000 in fiscal 2006. The amount of stock-based compensation in future
periods will increase if we grant stock options where the exercise price is less
than the quoted market price of the underlying shares or if we assume employee
stock options in connection with additional acquisitions of businesses. The
amount of stock-based compensation actually recognized in future periods could
decrease if options for which deferred compensation has been recorded are
forfeited.
19
Consolidated Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net revenues represented by each item in our consolidated statements of
operations:
Year ended June 30,
-------------------
2001 2000 1999
---- ---- ----
(restated)
Net revenues .................................................................. 100.0% 100.0% 100.0%
Cost of revenues .............................................................. 50.1 47.9 51.0
----- ----- -----
Gross profit .................................................................. 49.9 52.1 49.0
----- ----- -----
Operating expenses:
Selling, general and administrative ...................................... 49.0 37.2 27.8
Research and development ................................................. 9.1 7.1 7.9
Stock-based compensation ................................................. 6.2 2.4 --
Amortization of goodwill ................................................. 1.6 -- --
Amortization of purchased intangible assets .............................. 1.4 1.8 1.8
In-process research and development ...................................... 5.3 -- --
----- ----- -----
Total operating expenses ............................................. 72.6 48.5 37.5
----- ----- -----
Income (loss) from operations ................................................. (22.7) 3.6 11.5
Minority interest ............................................................. -- (0.1) (0.1)
Interest income (expense), net ................................................ 4.4 0.4 0.4
Other income (expense), net ................................................... (0.3) (0.2) --
----- ----- -----
Income (loss) before income taxes and cumulative effect of accounting change .. (18.6) 3.7 11.8
Provision (benefit) for income taxes .......................................... (3.8) 1.4 3.4
------ ----- -----
Income (loss) before cumulative effect of accounting change ................... (14.8) 2.3 8.4
Cumulative effect of accounting change, net of income taxes of $176 ........... (1.2) -- --
------ ----- -----
Net income (loss) ............................................................. (16.0)% 2.3% 8.4%
====== ===== =====
Comparison of the Years Ended June 30, 2001 and 2000
Net Revenues
Net revenues increased $4.0 million, or 8.9%, to $49.0 million for the year
ended June 30, 2001 from $45.0 million for the year ended June 30, 2000. The
increase was primarily attributable to an increase in net revenues of our Device
Server and Multiport Device Server products, partially offset by a decline in
our Print Server and other products. Device Server net revenues increased $7.6
million, or 31.2%, to $31.8 million or 64.9% of net revenues for the year ended
June 30, 2001 from $24.2 million or 53.8% of net revenues for the year ended
June 30, 2000. This increase is attributable to the rapid adoption rates of
OEMs, as well as strong sales of our UDS-10 Device Server, which was introduced
during the fourth quarter of fiscal 2000. Device Server net revenues for the
year ended June 30, 2001 includes $1.5 million of software revenue generated
from USSC. Multiport Device Server net revenues increased $3.1 million, or
28.5%, to $14.0 million or 28.6% of net revenues for the year ended June 30,
2001 from $10.9 million or 24.3% of net revenues for the year ended June 30,
2000. The increase in Multiport Device Server net revenue is primarily
attributable to the acquisition of Lightwave effective June 8, 2001. Print
Server and other revenues decreased $6.7 million, or 67.6%, to $3.2 million, or
6.5% of net revenues for the year ended June 30, 2001 from $9.9 million, or
21.9% of net revenues for the year ended June 30, 2000.
Net revenues generated from sales in the Americas increased $2.9 million,
or 9.5%, to $33.1 million or 67.7% of net revenues for the year ended June 30,
2001 from $30.3 million or 67.3% of net revenues for the year ended June 30,
2000. Our net revenues derived from customers located in Europe increased $1.3
million, or 10.1%, to $13.9 million or 28.4% of net revenues for the year ended
June 30, 2001 from $12.7 million or 28.2% of net revenues for the year ended
June 30, 2000. Our net revenues derived from customers located in other
geographic areas decreased slightly to $1.9 million or 3.9% of net revenues for
the year ended June 30, 2001 from $2.0 million or 4.5% of net revenues for the
year ended June 30, 2000.
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of
revenues consists primarily of the cost of raw material components, subcontract
labor assembly from outside manufacturers and associated overhead costs. As part
of our agreement with Gordian, 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 $1.0 million, or 4.2%, to $24.4
million or 49.9% of net revenues for the year ended June 30, 2001 from $23.4
million or 52.1% of net revenues for the year ended June 30, 2000. Gordian
royalties were $2.2 million for the years ended June 30, 2001 and 2000. The
increase in gross profit was primarily attributable to increased sales
20
volume of our Device Server product line, competitive pricing strategies and
cost containment initiatives offset by a one-time inventory reserve charge
related to the acquisition of Lightwave in the amount of $1.8 million.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of
personnel-related expenses including salaries and commissions, facilities
expenses, information technology, trade show expenses, advertising, and
professional fees. Selling, general and administrative expenses increased $7.3
million, or 43.3%, to $24.0 million or 49.0% of net revenues for the year ended
June 30, 2001 from $16.7 million or 37.2% of net revenues for the year ended
June 30, 2000. This increase is due primarily to an increase in our sales force,
including new offices in Europe and Asia and an increase in marketing and
advertising expenses to increase brand awareness. We expect selling, general and
administrative expenses in absolute dollars will continue to increase in the
foreseeable future to support the global expansion of our operations but will
decrease as a percentage of net revenues due to increased net revenues.
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
$1.3 million, or 40.6%, to $4.5 million or 9.1% of net revenues for the year
ended June 30, 2001, from $3.2 million or 7.1% of net revenues for the year
ended June 30, 2000. This increase resulted primarily from increased headcount,
expenses related to new product development and the acquisitions of USSC and
Lightwave.
Stock-based compensation
Stock-based compensation generally represents the amortization of deferred
compensation. We recorded approximately $4.2 million and $10.1 million of
deferred compensation in fiscal 2001 and 2000, respectively. Deferred
compensation represents the difference between the fair value of the underlying
common stock for accounting purposes and the exercise price of the stock options
at the date of grant. Deferred compensation is presented as a reduction of
stockholders' equity and is amortized ratably over the respective vesting
periods of the applicable options, generally four years. Stock-based
compensation charged to operating expenses increased $1.9 million, or 176.2%, to
$3.0 million or 6.2% of net revenues for the year ended June 30, 2001 from $1.1
million or 2.4% of net revenues for the year ended June 30, 2000. Additionally,
cost of revenues includes stock-based compensation of $87,000 and $26,000 in the
fiscal year 2001 and 2000, respectively. The increase in stock-based
compensation for the year ended June 30, 2001 reflects stock options assumed in
the two purchase transactions completed during the year that were accounted for
in accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB Opinion No.
25. We expect to incur additional stock-based compensation incurred in future
periods as a result of the continued amortization of stock-based compensation
related to these purchase transactions.
Amortization of goodwill and purchased intangible assets
In connection with the two purchase transactions completed during fiscal
2001, we recorded approximately $56.6 million of goodwill and purchased
intangible assets. Goodwill is recorded as the difference, if any, between the
aggregate consideration paid for an acquisition and the fair value of the net
tangible and intangible assets acquired. We obtained independent appraisals of
the fair value of tangible and intangible assets acquired in order to allocate
the purchase price. Goodwill and purchased intangible assets are amortized on a
straight-line basis over the economic lives of the respective assets, generally
three to seven years. The amortization of goodwill and purchased intangible
assets increased $677,000 or 83.3%, to $1.5 million or 3.0% of net revenues for
the year ended June 30, 2001 from $813,000 or 1.8% of net revenues for the year
ended June 30, 2000. In addition, approximately $220,000 of amortization of
purchased intangible assets has been classified as cost of revenue for the year
ended June 30, 2001. The increase in the amortization of goodwill and purchased
intangible assets is primarily attributable to goodwill and purchased intangible
asset amortization from our acquisitions of USSC and Lightwave which occurred in
the second and fourth quarters of fiscal 2001, respectively.
In-process research and development
In-process research and development ("IPR&D") aggregated $2.6 million for
the purchase transactions completed during fiscal 2001. No amounts of IPR&D were
recorded during fiscal 2000. The amounts allocated to IPR&D were determined
through established valuation techniques in the high-technology industry and
were expensed upon acquisition as it was determined that the underlying projects
had not reached technological feasibility and no alternative future uses
existed. We expect to acquire additional IPR&D in the future.
21
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair market value of IPR&D performed to date.
The fair value of completed technology is included in identifiable intangible
assets, and the fair values of IPR&D to be completed and future research and
development are included in goodwill. We believe the amounts recorded as IPR&D,
as well as developed technology, represent fair values and approximate the
amounts an independent party would pay for these projects.
As of the closing date of each purchase transaction, development projects
were in process. Although the costs to bring the products from the acquired
companies to technological feasibility are not expected to have a material
impact on our future results of operations or financial condition, the
development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products and significant competitive
threats from numerous companies. The nature of the efforts to develop the
acquired technologies into commercially viable products consists principally of
planning, designing and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in loss of a market share or a lost opportunity to capitalize on emerging
markets and could have a material and adverse impact on our business and
operating results.
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest earned on
cash, cash equivalents and short-term and long-term investments. Interest income
(expense), net was $2.2 million for the year ended June 30, 2001 and $187,000
for the year ended June 30, 2000. The increase is primarily due to higher
average investment balances for the year ended June 30, 2001, as a result of the
proceeds from our initial public offering completed August 9, 2000.
Provision (Benefit) for Income Taxes
We utilize the liability method of accounting for income taxes as set forth
in FASB Statement No. 109, Accounting for Income Taxes. Our effective tax rate
was 21% for the year ended June 30, 2001, and 38% for the year ended June 30,
2000. The federal statutory rate was 34% for both periods. Our effective tax
rate associated with the income tax benefit for the year ended June 30, 2001,
was lower than the federal statutory rate primarily due to nondeductible
goodwill amortization and in-process research and development costs associated
with current year acquisitions, as well as the amortization of stock-based
compensation for which no current year tax benefit was provided. Our effective
tax rate associated with the income tax expense for the year ended June 30,
2000, was higher than the statutory rate primarily due to the amortization of
stock-based compensation for which no benefit was provided, and the effects of
an unfavorable foreign tax rate variance.
Comparison of the Years Ended June 30, 2000 and 1999
Net Revenues
Net revenues increased $12.0 million, or 36.4%, to $45.0 million for the
year ended June 30, 2000 from $33.0 million for the year ended June 30, 1999.
The increase was primarily attributable to an increase in net revenues of our
Device Server products, offset by a decline in our Print Server and other
products. Device Server net revenues increased $12.6 million, or 108.8%, to
$24.2 million or 53.8% of net revenues for the year ended June 30, 2000 from
$11.6 million or 35.2% of net revenues for the year ended June 30, 1999. A
portion of this growth resulted from the acquisition of ProNet GmbH. Multiport
Device Server net revenues increased $1.8 million, or 19.3%, to $10.9 million or
24.3% of net revenues for the year ended June 30, 2000 from $9.1 million or
27.7% of net revenues for the year ended June 30, 1999. Print Server and other
revenues decreased $2.4 million, or 19.5%, to $9.9 million, or 21.9% of net
revenues for the year ended June 30, 2000 from $12.2 million, or 37.1% of net
revenues for the year ended June 30, 1999.
Net revenues generated from sales in the Americas increased $8.5 million,
or 39.0%, to $30.3 million or 67.3% of net revenues for the year ended June 30,
2000 from $21.8 million or 66.0% of net revenues for the year ended June 30,
1999. Our net
22
revenues derived from customers located in Europe increased $3.1 million, or
32.9%, to $12.7 million or 28.2% of net revenues for the year ended June 30,
2000 from $9.5 million or 28.9% of net revenues for the year ended June 30,
1999. Our net revenues derived from customers located in other geographic areas
increased $371,000, or 22.2%, to $2.0 million or 4.5% of net revenues for the
year ended June 30, 2000 from $1.7 million or 5.1% of net revenues for the year
ended June 30, 1999.
Gross Profit
Gross profit increased by $7.2 million, or 44.4%, to $23.4 million or 52.1%
of net revenues for the year ended June 30, 2000 from $16.2 million or 49.0% of
net revenues for the year ended June 30, 1999. For the year ended June 30, 2000,
the Gordian royalties were $2.2 million as compared to $2.0 million for the year
ended June 30, 1999. The increase in gross profit resulted primarily from a
change in product mix with more emphasis on our higher margin Device Server
products and a decrease in royalties as a percentage of net revenues.
Selling, General and Administrative
Selling, general and administrative expenses increased $7.6 million, or
82.5%, to $16.7 million or 37.2% of net revenues for the year ended June 30,
2000 from $9.2 million or 27.8% of net revenues for the year ended June 30,
1999. This increase is primarily due 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.
Research and Development
Research and development expenses increased $571,000, or 21.8%, to $3.2
million or 7.1% of net revenues for the year ended June 30, 2000 from $2.6
million or 7.9% of net revenues for the year ended June 30, 1999. This increase
resulted primarily from increased headcount and expenses related to new product
development.
Stock-Based Compensation
Stock-based compensation increased $1.1 million. No amounts of stock-based
compensation were recorded during fiscal 1999. The increase in stock-based
compensation relates to the grant of stock options to employees where the
exercise price is less than the estimated fair value of the underlying shares of
common stock on the date of grant.
Amortization of goodwill and purchased intangible assets
The amortization of goodwill and purchased intangible assets increased
$218,000 or 36.6% to $813,000 or 1.8% of net revenues for the year ended June
30, 2000 from $595,000 or 1.8% of net revenues for the year ended June 30, 1999.
The increase in the amortization of goodwill and purchased intangible assets is
primarily attributable to a full year of amortization from our acquisition of
ProNet GmbH compared to a partial year of amortization in fiscal 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was $187,000 and $151,000 for the
years ended June 30, 2000 and 1999, respectively.
Provision (Benefit) for Income Taxes
Our effective tax rate was 38.1% for the year ended June 30, 2000, and
28.3% for the year ended June 30, 1999. The federal statutory rate was 34% for
both periods. Our effective tax rate for the year ended June 30, 2000 was higher
than the federal statutory rate primarily due to the amortization of stock-based
compensation for which a current tax benefit was not provided and due to an
unfavorable foreign tax rate variance. Our effective tax rate for the year ended
June 30, 1999, was lower than the federal statutory rate primarily due to the
reversal of the valuation allowance due to the expected recoverability of
deferred tax assets.
Liquidity and Capital Resources
Since inception, we have financed our operations through the issuance of
common stock and through net cash generated from operations. We consider all
highly liquid investments purchased with original maturities of 90 days or less
to be cash equivalents. Cash and cash equivalents consisting of money-market
funds and commercial paper totaled $15.4 million at June 30,
23
2001. Short-term investments consist of investments maturing in 12 months or
less and totaled $2.0 million at June 30, 2001. Long-term investments consist of
investments maturing after 12 months and investments in two privately held
companies and totaled $2.4 million at June 30, 2001. 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.
Our operating activities used cash of $5.0 million for the year ended June
30, 2001. We incurred a net loss of $7.8 million, which includes a cumulative
effect of accounting change of $597,000, amortization of goodwill and purchased
intangibles of $1.7 million, depreciation of $909,000, $2.6 million of
in-process research and development and $3.1 million of stock-based compensation
which was reduced by increases in accounts receivable of $1.4 million, increases
in inventory of $2.6 million, increases in prepaid expenses and other current
assets of $2.6 million, offset by an increase in accounts payable of $2.2
million. The increase in accounts receivable was due to increased sales in the
last month of the fourth quarter of fiscal 2001, slower collections from some of
our U.S. distributors and European customers, and extended payment terms to
certain customers, offset by the effects of the change in our accounting policy
made as of July 1, 2000 under which sales to distributors are not recognized
until the distributor sells our product to end user customers. The increase in
inventory was primarily due to increased levels of inventory at distributors
resulting from the change in our accounting policy for sales to distributors.
The increase in prepaid expenses and other current assets is primarily
attributable to receivables from our contract manufacturers who purchase our raw
materials. The increase in accounts payable is primarily attributable to our
increase in raw materials to support our product demand for the last month of
the year and increases in amounts due to a related party. Our operating
activities used cash of $1.6 million for the year ended June 30, 2000, and
provided cash of $5.6 million for the year ended June 30, 1999.
Our investing activities used $29.3 million of cash for the year ended June
30, 2001. We used $32.6 million of our public offering proceeds to purchase
$30.5 million of held-to-maturity investments and $2.1 million of minority
investments. We received proceeds from sale of held-to-maturity investments of
$28.5 million. We used $16.3 million of cash for the acquisitions of USSC and
Lightwave. Officer loans relate to taxes on exercised non-qualified stock
options, in the amount of $4.1 million. We also used $4.6 million of cash to
purchase property and equipment, primarily computer hardware and software of
$2.6 million pertaining to Oracle software enhancements to support our Order
Entry function, international operations and a customer resource management
software package to support our sales force. In addition, we invested $2.0
million in computer equipment, furniture and fixtures and leasehold improvements
for an office expansion project. Our investing activities used cash of $1.6
million for the year ended June 30, 2000 and $2.9 million for the year ended
June 30, 1999. During the year ended June 30, 1999, we used $2.3 million for the
acquisition of ProNet GmbH and related marketing rights.
Cash provided by financing activities was $47.7 million for the year ended
June 30, 2001, primarily related to the net proceeds from our initial public
offering in August 2000. Cash used for financing activities was $702,000 for the
year ended June 30, 2000, related to the repayment of a line of credit used in
the acquisition of ProNet GmbH. Cash provided by financing activities was $1.4
million for the year ended June 30, 1999, primarily related to borrowings on our
bank line of credit related to our acquisition.
In July 2001, we completed a public offering of 8,534,000 shares of our
common stock, including 534,000 shares sold pursuant to an underwriter's
over-allotment option, at an offering price of $8.00 per share. We sold
6,000,000 shares and selling shareholders sold 2,000,000 shares of the primary
offering. Additionally, we sold 400,500 shares and selling shareholders sold
133,500 shares of the over-allotment option. We received net aggregate proceeds
of approximately $47.1 million after deducting underwriting discounts,
commissions and offering costs.
We believe that the net proceeds from our initial public offering and
secondary offering, and our existing cash resources 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 as well
as our intentions to make strategic acquisitions or investments in other
companies, which will affect our ability to generate additional cash. If cash
generated from operations and financing activities is insufficient to satisfy
our working capital requirements, we may need to borrow funds through bank
loans, 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
On June 29, 2001, the FASB approved the issuance of Statement No. 141,
Business Combinations ("Statement No. 141"), and Statements of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement
No. 142") (collectively the "Statements"). Statement No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Additionally, Statement No.
24
141 changes the criteria to recognize intangible assets apart from goodwill. The
requirements of Statement No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.
Statement No. 141 supersedes APB Opinion No. 16, Business Combinations ("APB
16"), and amends or supersedes a number of interpretations of APB 16. Certain
purchase accounting guidance in APB 16, as well as certain of its amendments and
interpretations, have been carried forward to Statement No. 141 without the
FASB's reconsideration. Statement No. 141 also supersedes, but carries forward
without reconsideration, the guidance in FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises.
Statement No. 142 supersedes APB Opinion No. 17, Intangible Assets, and
carries forward its provisions related to internally developed intangible assets
without the FASB's reconsideration. Under Statement No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise, for impairment.
Goodwill is required to be tested for impairment between the annual tests if an
event occurs or circumstances change that more likely than not reduce the fair
value of a reporting unit below its carrying value. An indefinite-lived
intangible asset is required to be tested for impairment between the annual
tests if an event occurs or circumstances change indicating that the asset might
be impaired. Separable intangible assets that have finite lives will continue to
be amortized over their useful lives.
The amortization provisions of Statement No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization provisions of
Statement No. 142 are effective upon adoption of Statement No. 142. In addition,
the impairment provisions of Statement No. 142 are effective upon adoption of
Statement No. 142. Companies are required to adopt Statement No. 142 in their
fiscal year beginning after December 15, 2001. Early adoption is permitted for
companies with fiscal years beginning after March 15, 2001, provided that their
first quarter financial statements have not been issued. In all cases, the
provisions of Statement No. 142 must be adopted as of the beginning of a fiscal
year. If the Company chooses to adopt Statement No. 141 and Statement No. 142 in
fiscal 2002, $6.6 million of goodwill and other intangibles amortization will
not be charged to operations during the year ending June 30, 2002.
Risk Factors
Before deciding to invest in our company or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this Report and in our other filings with
the SEC, including our subsequent reports on Forms 10-Q, 8-K and 8-K/A. The
risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose all or part of your investment.
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
would likely 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;
. variations in the 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
25
. changes in demand for devices that incorporate our connectivity
products.
If we make unprofitable acquisitions or are unable to successfully integrate any
future acquisitions, our business could suffer.
We have in the past and intend to continue in the future to acquire
businesses, client lists, products or technologies that we believe complement or
expand our existing business. In October 1998, we acquired ProNet GmbH, a German
supplier of industrial application Device Server technology. In December 2000,
we acquired USSC, a company that provides software solutions for use in embedded
technology applications. In June 2001, we acquired Lightwave, a company that
provides console management solutions. In September 2001, we entered into a
definitive agreement with Synergetic, a provider of embedded network
communication solutions. We have also announced that we may acquire Premise
Systems, a developer of client-side software applications. Acquisitions of this
type involve a number of risks, including:
. difficulties in assimilating the operations and employees of acquired
companies;
. diversion of our management's attention from ongoing business
concerns;
. our potential inability to maximize our financial and strategic
position through the successful incorporation of acquired technology
and rights into our products and services;
. additional expense associated with amortization of acquired assets;
. maintenance of uniform standards, controls, procedures and policies;
and
. impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new management employees.
Any acquisition or investment could result in the incurrence of debt and
the loss of key employees. Moreover, we often assume specified liabilities of
the companies we acquire. Some of these liabilities, such as environmental and
tort liabilities, are difficult or impossible to quantify. If we do not receive
adequate indemnification for these liabilities our business may be harmed. In
addition, acquisitions are likely to result in a dilutive issuance of equity
securities. For example, we issued common stock and assumed options to acquire
our common stock in connection with our acquisitions of USSC and Lightwave. We
cannot assure you that any acquisitions or acquired businesses, client lists,
products or technologies associated therewith will generate sufficient net
revenues to offset the associated costs of the acquisitions or will not result
in other adverse effects. Moreover, from time to time we may enter into
negotiations for the acquisition of businesses, client lists, products or
technologies, but be unable or unwilling to consummate the acquisition under
consideration. This could cause significant diversion of managerial attention
and out of pocket expenses to us. We could also be exposed to litigation as a
result of an unconsummated acquisition, including claims that we failed to
negotiate in good faith, misappropriated confidential information or other
claims.
In addition, from time to time we intend to invest in businesses that we
believe present attractive investment opportunities, or provide other synergetic
benefits. For example, in March 2001, we purchased 283,476 shares of Series A
Preferred Stock of Premise Systems for $2.0 million. In September 2001, we paid
approximately $1.5 million to Xanboo Inc. for a note with a ten year maturity
that is convertible into equity securities of Xanboo. These investments are
speculative in nature, and there is a significant chance we will lose part or
all of our investments.
We intend to continue to devote significant resources to our research and
development which, if not successful, could cause a decline in our revenues and
could harm our business.
We intend to continue to devote significant resources to research and
development in the coming years to enhance and develop additional products. For
the years ended June 30, 2001, 2000 and 1999 we spent $4.5 million (excluding
$2.6 million of acquired in-process research and development) $3.2 million and
$2.6 million on research and development, representing 9.1%, 7.1% and 7.9%,
respectively, of our net revenues. Over the next two years, we intend to
substantially increase our research and development expenditures, including
planned increases in personnel, material costs and depreciation resulting from
higher expenditures. 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, the net revenues from these products might not be sufficient to
justify our investment in research and development.
Net revenues from our legacy products, which include our Print Servers,
switches, hubs and other products, have decreased significantly and we expect
that net revenues from these lines of products will continue to decline in the
future as we focus our efforts on the development of other product lines.
26
Since 1993, net revenues from our legacy products have accounted for a
significant portion of our net revenues but have declined significantly
recently. For example, for the year ended June 30, 2001, net revenues from our
legacy products were $3.2 million or 6.5% of our net revenues, compared to $9.9
million or 21.9% of our net revenues for the year ended June 30, 2000 and $12.2
million or 37.1% of our net revenues for the year ended June 30, 1999. We
anticipate that net revenues from our legacy products will continue to decline
in the future as we plan to continue to focus on 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 legacy products is not offset by increases in net revenues
from our Device Server line of products, our business would be harmed.
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.
For most of our existence we primarily sold our products to VARs, system
integrators and OEMs. Although we intend to continue to use all of these sales
channels, we have begun to focus more heavily on selling our products to OEMs.
Selling products to OEMs involves unique risks, including the risk that OEMs
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, our business
would be harmed.
Our business has grown rapidly. At June 30, 2001, we had 264 employees and
as of June 30, 2000, we had 126 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 any future growth. If we are unable to successfully expand and
improve our systems as required, or if we are otherwise unable to manage any
future growth, our business will be harmed.
Business interruptions, including terrorist attacks or threats of attacks, and
electrical blackouts in the state of California, could adversely affect our
business.
Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan. Our facilities in the State of
California may be subject to electrical blackouts as a consequence of a shortage
of available electrical power. In the event these blackouts continue or increase
in severity, they could disrupt the operations of our affected facilities.
Interruptions in business as a result of terrorist attacks or military action
could disrupt our operations in the United States and worldwide. Disruptions
could include, but are not limited to, physical damage to our facilities,
disruptions caused by trade restrictions imposed by the United States or foreign
governments, a general economic downturn in any of our target markets or general
disruption of the financial markets.
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 and companies with
significant networking expertise and research and development resources. Our
competitors might offer new products with features or functionality that are
equal to or better than our products. In addition, since we offer an open
architecture, our customers could develop products based on our technology that
compete with our offerings. 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 net revenues could decline and our
business could be harmed. See "Competition".
We primarily depend on three third-party manufacturers to manufacture all of our
products, which reduces our control over the manufacturing process. If these
manufacturers are unable or unwilling to manufacture our products at the quality
and quantity we request, our business could be harmed and our stock price could
decline.
We primarily outsource all of our manufacturing to three third-party
manufacturers, APW, Inc., Irvine Electronics and Express Manufacturing. We have
only recently entered into relationships with APW, Inc. and Irvine Electronics,
and we intend to transition a significant portion of our workload to these
manufacturers during approximately the next six months. Our reliance on these
third-party manufacturers exposes us to a number of significant risks,
including:
27
. reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
. lack of guaranteed production capacity or product supply; and
. reliance on third-party manufacturers to maintain competitive
manufacturing technologies.
Our agreements with these manufacturers provide for services on a purchase-order
basis. 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.
We may also experience unforeseen problems as we attempt to transition a
significant portion of our manufacturing requirements to APW, Inc. and Irvine
Electronics. We do not have a significant operating history with either of these
entities and if these entities are unable to provide us with satisfactory
service, or we are unable to successfully complete the transition, our
operations could be interrupted. As a result, we would have to attempt to
identify and qualify substitute 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 net revenues would harm our business. In addition, we
are responsible for forecasting the demand for our individual products by
regional location. These forecasts are used by our contract manufacturers to
procure raw materials and manufacture our finished goods. If we forecast demand
too high, we may invest too much cash in inventory and we may be forced to take
a write-down of our inventory balance, which would reduce our earnings. If our
forecast is too low for one or more products, we may be required to pay expedite
charges which would increase our cost of sales or we may be unable to fulfill
customer orders thus reducing net revenues and therefore earnings.
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.
Our contract manufacturers and 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. From time to
time in the past, 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. 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. 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 a major customer cancels, reduces, or delays purchases, our net revenues
might decline and our business could be adversely affected.
For the year ended June 30, 2001, our two largest customers, Ingram Micro
and Tech Data, accounted for 23.6% of our net revenues. Our top five customers
accounted for 37.1% and our top ten customers accounted for 45.3% of our net
revenues for the year ended June 30, 2001. Ingram Micro and Tech Data, domestic
distributors, accounted for 13.7% and 9.9% of our net revenues for the year
ended June 30, 2001, respectively. transtec AG, a major international customer,
accounted for 8.7% of our net revenues for the year ended June 30, 2001.
Bernhard Bruscha, our Chairman of the Board, is the majority stockholder and
Chief Executive Officer of transtec AG. The number and timing of sales to our
distributors have been difficult for us to predict. For the year ended June 30,
2001, large individual sales to the distributors, as well as sales to other
customers, have occurred in the last weeks or even days of a quarter, which has
resulted in a substantial portion of the net revenues for that quarter being
realized in the last month of the quarter. The loss or deferral of one or more
significant sales in a quarter could harm our operating results. 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
28
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.
In the past, we have experienced some reduction in the average selling
prices of products and we expect that this will continue for our products as
they mature. For example, for the year ended June 30, 2001 over the year ended
June 30, 2000 embedded Device Servers' average selling prices have decreased
20.4%, external Device Servers' average selling prices have decreased 11.3% and
Print Server average selling prices have decreased 5.4%. 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.
We might become involved and are currently 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, current developers of our intellectual property, our manufacturing
partners, or parties with which we have contemplated a business combination will
claim that our products, or our customers' products, infringe on their
intellectual property rights or that we have misappropriated their intellectual
property. 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 infringe on the proprietary rights we use.
Any of these third parties might make a claim of infringement against us.
From time to time we have received letters claiming that our products
infringe upon patents or other intellectual property of third-parties. On July
3, 2001, Digi International, Inc. filed a complaint against us in the United
States District Court for the District of Minnesota claiming patent infringment
and alleging that certain of our Multiport Device Servers, specifically our ETS
line of products, when coupled with a device driver called the Comm Port
Redirector, infringe upon U.S. Patent No. 6,047,319 owned by Digi. Digi alleges
that Lantronix has willfully and intentionally infringed Digi's patent, and its
complaint seeks injunctive relief as well as unspecified damages, treble
damages, attorneys fees, interest and costs. On August 17, 2001, Lantronix filed
its answer to the complaint, asserting affirmative defenses, and counterclaiming
for a declaratory judgment that the patent in issue is invalid. Lantronix
believes that a pre-trial conference will take place before November 30, 2001,
however, to date, discovery has not begun and a trial date has not been set.
Based on the facts known to date, Lantronix believes that the claims are without
merit and intends to vigorously defend this suit.
Although we believe that the claims or any litigation arising therefrom
will have no material impact on us or our business, the litigation is in the
preliminary stage, and we cannot predict its outcome with certainty. The
litigation process is inherently uncertain and we may not prevail. Patent
litigation is particularly complex and can extend for a protracted time, which
can substantially increase the cost of such litigation. The Digi litigation will
likely divert the efforts and attention of some of our key management and
technical personnel. Should the outcome of the litigation be adverse to us, we
would be required to pay monetary damages to Digi and we could be enjoined from
selling those of our products found to infringe Digi's patent unless and until
we are able to negotiate a license from Digi which may not be available on
acceptable terms or at all. If we are required to pay significant monetary
damages, are enjoined from selling any of our products or are required to make
substantial royalty payments pursuant to any such license agreement, our
business would be harmed. This litigation, or other similar 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 other disputes over
rights and obligations concerning intellectual property. We cannot assume that
we will prevail in intellectual property disputes regarding infringement,
misappropriation or other
29
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, require us to enter into royalty or license
agreements, which might not be available on acceptable terms, or at all, or
require us to pay substantial damages, including treble damages if we are held
to have willfully infringed. 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 were
to require 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.
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 32.4% of net revenues for
the year ended June 30, 2001 and 32.7% of net revenues for the year ended June
30, 2000. Net revenues from Europe represented 28.5% of our net revenues for the
year ended June 30, 2001 and 28.2% for the year ended June 30, 2000.
We expect that international revenues will continue to represent a
significant portion of our net revenues in the foreseeable future. Doing
business internationally involves greater expense and many additional risks. For
example, because the products we sell abroad and the products and services we
buy abroad are priced in foreign currencies, we are affected by fluctuating
exchange rates. In the past, we have from time to time lost money because of
these fluctuations. We might not successfully protect ourselves against currency
rate fluctuations, and our financial performance could be harmed as a result. In
addition, we face other risks of doing business internationally, including:
. unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
. reduced protection for intellectual property rights in some countries;
. differing labor regulations;
. compliance with a wide variety of complex regulatory requirements;
. changes in a country's or region's political or economic conditions;
. greater difficulty in staffing and managing foreign operations; and
. increased financial accounting and reporting burdens and complexities.
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
Frederick G. Thiel, who serves as our President and Chief Executive Officer, and
Steven V. Cotton, who serves as our Chief Operating Officer and Chief Financial
Officer. We are also dependent upon our technical personnel, due to the
specialized technical nature of our business. If we lose the services of Mr.
Thiel, Mr. Cotton 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 continue to hire and retain
operations, sales and support personnel. 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.
The market for our products is new and rapidly evolving. If we are not able to
develop or enhance our products to respond to changing market conditions, our
net revenues will suffer.
Our future success depends in large part on our ability to continue to
enhance existing products, lower product cost and develop new products that
maintain technological competitiveness. The demand for network-enabled products
is relatively new
30
and can change as a result of innovations or changes. 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 net
revenue might not grow at the rate we anticipate, or could decline.
Undetected product errors or defects could result in loss of net revenues,
delayed market acceptance and claims against us.
We currently offer warranties ranging from 90 days to five years on each 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.
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;
. current federal laws that prohibit software copying provide only
limited protection from software "pirates"; and
. the companies we acquire may not have taken similar precautions to
protect their proprietary rights.
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 net revenues. Under the
terms of this agreement Gordian owns the rights to the intellectual property
developed by it but has agreed that for the term of the agreement it will not
develop products for any other party that will directly compete with a product
Gordian developed for us. The agreement with Gordian currently provides that we
are required to pay royalties based on the gross margin of products sold under
the agreement. We paid Gordian $2.2 million for each of the years ended June 30,
2001 and 2000. 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. If the Gordian contract is cancelled, we could lose
customers and net revenues, which would harm our business.
Stock-based compensation will negatively affect our operating results.
We have recorded deferred 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 net of
forfeitures within stockholders' equity of $14.2 million at June 30, 2001, which
is being amortized over the vesting period of the related stock options, which
is generally four years. A balance of
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$10.0 million remains at June 30, 2001 and will be amortized as follows: $3.0
million in fiscal 2002, $3.0 million in fiscal 2003, $2.5 million in fiscal
2004, $1.4 million in fiscal 2005, and $153,000 in fiscal 2006.
The amount of stock-based compensation in future periods will increase if
we grant stock options where the exercise price is less than the quoted market
price of the underlying shares. The amount of stock-based compensation
amortization in future periods could decrease if options for which accrued, but
unvested deferred compensation has been recorded are forfeited.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments for
speculative or trading purposes. We place our investments in instruments that
meet high credit quality standards, as specified in our investment policy.
Information relating to quantitative and qualitative disclosure about market
risk is set forth below and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Interest Rate Risk
Our exposure to interest rate risk is limited to the exposure related to
our cash and cash equivalents and our credit facilities, which is tied to market
interest rates. As of June 30, 2001, we had cash and cash equivalents of $15.4
million, which consisted of cash and short-term investments with original
maturities of 90 days or less, both domestically and internationally. We believe
our short-term investments will decline in value by an insignificant amount if
interest rates increase, and therefore would not have a material effect on our
financial condition or results of operations.
Foreign Currency Risk
We sell products internationally. As a result, our financial results could
be harmed by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets.
Investment Risk
As of June 30, 2001, we have invested $2.5 million in two privately held
companies, both of which can still be considered in the start-up or development
stages. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire initial investment in
these companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
included in Part IV, Item 14 of this Form 10-K and are presented beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information regarding Directors appearing under the caption "Election
of Directors" in the Company's Proxy Statement related to the Annual
Meeting of Stockholders to be held on November 9, 2001, is incorporated
herein by reference. The information with respect to executive officers
appears in Part I of this Form 10-K.
(b) The information appearing under the caption "Compliance with Section 16 of
the Securities Exchange Act of 1934" in the Company's Proxy Statement
related to the Annual Meeting of Stockholders to be held November 9, 2001,
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation and
Related Information" in the Company's Proxy Statement related to the Annual
Meeting of Stockholders to be held on November 9, 2001, is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the captions "Election of Directors" and
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement related to the Annual Meeting of Stockholders to be
held on November 9, 2001, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" and "Executive Compensation and Related
Information" in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held on November 9, 2001, is incorporated herein by
reference.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements.
Page
----
Report of Independent Auditors .................................................................................. F-1
Consolidated Balance Sheets as of June 30, 2001 (restated) and 2000 ............................................. F-2
Consolidated Statements of Operations for the years ended June 30, 2001 (restated), 2000 and 1999 ............... F-3
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001 (restated), 2000 and 1999 ..... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2001 (restated), 2000 and 1999 ............... F-5
Notes to Consolidated Financial Statements ...................................................................... F-6 - F-23
2. Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Form 10-K/A. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the consolidated
financial statements or notes thereto.
Page
----
(1) Report of Independent Auditors on Financial Statement Schedule .................................. S-1
(2) Schedule II--Consolidated Valuation and Qualifying Accounts ..................................... S-2
3. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby incorporated
by reference into, this Form 10-K.
(b) Reports on Form 8-K.
The Company filed the following current reports on Form 8-K during the
quarter ended June 30, 2001:
Form 8-K filed on April 5, 2001 reporting its investment in Premise
Systems, Inc. and agreement to acquire Premise Systems, Inc. (Item 5).
Form 8-K filed on June 7, 2001 reporting its acquisition of Lightwave
Communications, Inc. (Items 2 and 7).
34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lantronix, Inc.
We have audited the accompanying consolidated balance sheets of Lantronix, Inc.
as of June 30, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 2001. 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, 2001 and 2000, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2, the accompanying financial statements have been restated
to change, as of July 1, 2000, the accounting policy for recognizing revenue
from sales to distributors. Under the newly adopted policy, revenue from sales
to distributors is not recognized until the distributor sells the Company's
products to end user customers.
/s/ ERNST & YOUNG LLP
Orange County, California
August 8, 2001, except for Note 1
Revenue Recognition, and Notes 2 and 12,
as to which the date is June 19, 2002
F-1
LATRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
--------
2001 2000
---- ----
ASSETS (Restated-
------- Note 2)
Current assets:
Cash and cash equivalents ......................................................................... $ 15,367 $ 1,988
Short-term investments ............................................................................ 1,973 --
Accounts receivable (net of allowance for doubtful accounts of $405 and $159 at
June 30, 2001 and 2000, respectively) .......................................................... 9,134 5,861
Related party receivable .......................................................................... -- 211
Inventories ....................................................................................... 13,560 5,385
Deferred income taxes ............................................................................. 3,621 1,425
Prepaid income taxes .............................................................................. 973 1,639
Prepaid expenses and other current assets ......................................................... 3,805 1,193
-------- -------
Total current assets ......................................................................... 48,433 17,702
Property and equipment, net ............................................................................ 5,492 1,348
Goodwill and other purchased intangible assets, net .................................................... 55,601 586
Long-term investments .................................................................................. 2,424 500
Officer loans .......................................................................................... 4,131 --
Other assets .......................................................................................... 780 74
-------- -------
Total assets ................................................................................. $116,861 $20,210
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable .................................................................................. $ 5,698 $ 3,197
Due to related party ............................................................................. 787 --
Accrued payroll and related expenses .............................................................. 1,243 764
Accrued commissions payable ....................................................................... -- 865
Accrued warranty costs ............................................................................ 562 545
Accrued acquisition costs ......................................................................... 840 --
Other current liabilities ......................................................................... 2,340 1,289
-------- -------
Total current liabilities .................................................................... 11,470 6,660
Deferred income taxes .................................................................................. 5,895 1,003
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and
outstanding .................................................................................... -- --
Common stock, $0.0001 par value; 200,000,000 shares authorized; 43,301,803 and
29,803,232 shares issued and outstanding at June 30, 2001 and 2000, respectively ............... 4 3
Additional paid-in capital ........................................................................ 109,871 13,221
Notes receivable from officers .................................................................... (790) (152)
Deferred compensation ............................................................................. (10,020) (8,942)
Retained earnings ................................................................................. 582 8,427
Accumulated other comprehensive loss .............................................................. (151) (10)
-------- -------
Total stockholders' equity ................................................................... 99,496 12,547
-------- -------
Total liabilities and stockholders' equity ................................................... $116,861 $20,210
======== =======
See accompanying notes.
F-2
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended June 30,
-------------------
2001 2000 1999
---- ---- ----
(Restated-
Note 2)
Net revenues (A) .................................................................. $ 48,972 $ 44,975 $ 32,980
Cost of revenues (B) .............................................................. 24,530 21,526 16,824
-------- -------- --------
Gross profit ...................................................................... 24,442 23,449 16,156
-------- -------- --------
Operating expenses:
Selling, general and administrative (C) ...................................... 23,998 16,744 9,173
Research and development (C) ................................................. 4,478 3,186 2,615
Stock-based compensation (B) (C) ............................................. 3,019 1,093 --
Amortization of goodwill ..................................................... 800 -- --
Amortization of purchased intangible assets .................................. 690 813 595
In-process research and development .......................................... 2,596 -- --
-------- -------- --------
Total operating expenses .......................................................... 35,581 21,836 12,383
-------- -------- --------
Income (loss) from operations ..................................................... (11,139) 1,613 3,773
Minority interest ................................................................. -- (49) (30)
Interest income, net .............................................................. 2,182 187 151
Other income (expense), net ....................................................... (167) (47) (10)
-------- -------- --------
Income (loss) before income taxes and cumulative effect of accounting change ...... (9,124) 1,704 3,884
Provision (benefit) for income taxes .............................................. (1,876) 649 1,098
-------- -------- --------
Income (loss) before cumulative effect of accounting change ....................... (7,248) 1,055 2,786
Cumulative effect of accounting change, net of income tax benefit of $176 ......... (597) -- --
-------- -------- --------
Net income (loss) ................................................................. $ (7,845) $ 1,055 $ 2,786
======== ======== ========
Basic income (loss) per share before cumulative effect
of accounting change ........................................................... $ (0.19) $ 0.04 $ 0.10
Cumulative effect of accounting change per share .................................. (0.02) -- --
-------- -------- --------
Basic net income (loss) per share ................................................. $ (0.21) $ 0.04 $ 0.10
======== ======== ========
Diluted income (loss) per share before cumulative
effect of accounting change .................................................... $ (0.19) $ 0.03 $ 0.10
Cumulative effect of accounting change per share .................................. (0.02) -- --
-------- -------- --------
Diluted net income (loss) per share ............................................... $ (0.21) $ 0.03 $ 0.10
======== ======== ========
Weighted average shares (basic) ................................................... 36,946 29,274 26,977
======== ======== ========
Weighted average shares (diluted) ................................................. 36,946 34,178 28,880
======== ======== ========
(A) Includes revenues from related parties ........................................ $ 4,257 $ 3,226 $ 3,753
======== ======== ========
(B) Cost of revenues includes the following:
Amortization of purchased intangible assets .................................. $ 220 $ -- $ --
Stock-based compensation ..................................................... 87 26 --
-------- -------- --------
$ 307 $ 26 $ --
======== ======== ========
(C) Stock-based compensation is excluded from the following:
Selling, general and administrative expenses ................................. $ 2,589 $ 1,025 $ --
Research and development expenses ............................................ 430 68 --
-------- -------- --------
$ 3,019 $ 1,093 $ --
======== ======== ========
See accompanying notes.
F-3
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Notes Accumulated
Additional Receivable Other Total
Common Stock Paid-In From Deferred Retained Comprehensive Stockholders'
Shares Amount Capital Officers Compensation Earnings Loss Equity
-------------- ------ ---------- ---------- ------------ -------- ------------- -------------
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
Components of
comprehensive income:
Translation
adjustment ............ -- -- -- -- -- -- (7) (7)
Net income .............. -- -- -- -- -- 2,786 -- 2,786
------------
Comprehensive income ....... 2,779
------------ ------ --------- --------- ------------ -------- ------------- ------------
Balance at June 30, 1999 ....... 28,745,512 3 2,944 -- -- 7,372 (7) 10,312
Stock options exercised .... 1,057,720 -- 64 -- -- -- -- 64
Deferred compensation
related to grant of stock
options .................. -- -- 10,061 -- (10,061) -- -- --
Stock-based
compensation ............. -- -- -- -- 1,119 -- -- 1,119
Notes receivable issued to
officers for stock
purchase .................. -- -- 152 (152) -- -- -- --
Components of
comprehensive income:
Translation
adjustment ............ -- -- -- -- -- -- (3) (3)
Net income .............. -- -- -- -- -- 1,055 -- 1,055
------------
Comprehensive income ....... 1,052
------------ ------ --------- --------- ------------ -------- ------------- ------------
Balance at June 30, 2000 ....... 29,803,232 3 13,221 (152) (8,942) 8,427 (10) 12,547
Issuance of common stock
in initial public
offering ................. 6,000,000 1 53,706 -- -- -- -- 53,707
Stock options exercised .... 1,450,656 -- 689 -- -- -- -- 689
Deferred compensation
related to grant of stock
options .................. -- -- 4,184 -- (4,184) -- -- --
Stock-based
compensation ............. -- -- -- -- 3,106 -- -- 3,106
Notes receivable issued to
officers for stock
purchase .................. 1,965,498 -- 670 (670) -- -- -- --
Purchase transactions ...... 4,082,417 -- 37,401 -- -- -- -- 37,401
Payments on notes
receivable from
officers ................. -- -- -- 32 -- -- -- 32
Components of
comprehensive loss:
Translation
adjustment ............ -- -- -- -- -- -- (9) (9)
Change in net
unrealized loss on
investment ............ -- -- -- -- -- -- (132) (132)
Net loss (restated) ..... -- -- -- -- -- (7,845) -- (7,845)
------------
Comprehensive loss
(restated) ................ (7,986)
------------ ------ --------- --------- ------------ -------- ------------- ------------
Balance at June 30, 2001
(restated - Note 2) .......... 43,301,803 $ 4 $ 109,871 $ (790) $ (10,020) $ 582 $ (151) $ 99,496
============ ====== ========= ========= ============ ======== ============= ============
See accompanying notes.
F-4
LANTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended June 30,
--------------------
2001 2000 1999
---- ---- ----
(Restated-
Note 2)
Cash flows from operating activities:
Net income (loss) .................................................................... $ (7,845) $ 1,055 $ 2,786
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change, net of income tax benefit of $176 ........ 597 -- --
Depreciation ..................................................................... 909 502 378
Amortization of goodwill and purchased intangible assets ......................... 1,710 813 595
Stock-based compensation ......................................................... 3,106 1,119 --
Loss on disposal of assets ....................................................... 25 -- 3
Provision for doubtful accounts .................................................. 108 1 (136)
In-process research and development .............................................. 2,596 -- --
Deferred income taxes ............................................................ (2,232) 798 (158)
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable .............................................................. (1,440) (1,759) 93
Inventories ...................................................................... (2,589) (2,079) (592)
Prepaid income taxes ............................................................. 666 (2,222) 46
Prepaid expenses and other current assets ........................................ (2,568) (942) 111
Other assets ..................................................................... (743) 19 (76)
Accounts payable ................................................................. 2,216 650 1,002
Other current liabilities ........................................................ 530 415 1,513
Minority interest ................................................................ -- 48 30
-------- -------- --------
Net cash provided by (used in) operating activities ......................... (4,954) (1,582) 5,595
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ............................................. (4,632) (942) (543)
Purchases of held-to-maturity investments ............................................ (30,470) -- --
Purchases of minority investments .................................................... (2,136) (500) --
Proceeds from sale of held-to-maturity investments ................................... 28,497 -- --
Officer loans ........................................................................ (4,131) -- --
Acquisition of businesses, net of cash acquired ...................................... (16,464) (116) (2,349)
-------- -------- --------
Net cash used in investing activities ....................................... (29,336) (1,558) (2,892)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock ............................ 53,707 -- --
Net proceeds from other issuances of common stock .................................... 689 64 605
Proceeds from repayment of notes receivable from officers ............................ 32 -- --
Payments on debt obligations ......................................................... (6,750) (766) 766
-------- -------- --------
Net cash provided by (used in) financing activities ......................... 47,678 (702) 1,371
Effect of exchange rates on cash .......................................................... (9) (3) --
-------- -------- --------
Net increase (decrease) in cash ........................................................... 13,379 (3,845) 4,074
Cash and cash equivalents at beginning of year ............................................ 1,988 5,833 1,759
-------- -------- --------
Cash and cash equivalents at end of year .................................................. $ 15,367 $ 1,988 $ 5,833
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid ........................................................................ $ 8 $ 5 $ 23
Income taxes paid .................................................................... $ 276 $ 1,828 $ 781
See accompanying notes.
F-5
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
1. Summary of Significant Accounting Policies
The Company
Lantronix, Inc. (the "Company"), incorporated in California in June 1989
and re-incorporated in the State of Delaware in July 2000, is engaged primarily
in the design and distribution of networking and Internet connectivity products
on a worldwide basis. The actual assembly and a significant portion of the
engineering of the Company's products is outsourced to third parties.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The consolidated financial statements for the fiscal year ended June 30,
2001 are restated as further described in Note 2.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Revenue Recognition
The Company does not recognize revenue until all of the following criteria
are met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the Company's price to the buyer is fixed or
determinable; and collectibility is reasonably assured. Commencing July 1, 2000,
recognition of revenue and related gross profit from sales to distributors are
deferred until the distributor resells the product (Note 2) to provide assurance
that all revenue recognition criteria are met at or prior to the point at which
revenue is recognized. Revenues from product sales to original equipment
manufacturers, end-user customers, other resellers and from sales to
distributors prior to July 1, 2000 generally are or have been recognized upon
product shipment, but may be deferred to a later date if all revenue recognition
criteria are not met at the date of shipment. When product sales revenue is
recognized, the Company establishes an estimated allowance for future product
returns based on historical returns experience; when price reductions are
approved, it establishes an estimated liability for price protection payable on
inventories owned by product resellers. Revenue from the licensing of software
is recognized at the time of shipment (or at the time of resale in the case of
software products sold through distributors), provided the Company has
vendor-specific objective evidence of the fair value of each element of the
software offering and collectibility is probable. Revenue from post-contract
customer support and any other future deliverables, which comprised
approximately one-half of one per cent of net revenues for the year ended June
30, 2001, is deferred and recognized over the support period or as contract
elements are delivered.
F-6
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
Concentration of Credit Risk
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.
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, short-term and long-term investments, accounts receivable, accounts
payable and accrued liabilities. The Company believes all of the financial
instruments' recorded values approximate current values.
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 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 component of accumulated other comprehensive loss
within stockholders' equity. Exchange gains and losses from foreign currency
transactions are recognized in the consolidated statement of operations 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.
Investments
The Company has certain minority investments in nonpublic companies for the
promotion of business and strategic objectives. Total investments, net of
goodwill amortization, and the Company's share of the operating results of
Premise Systems, Inc. ("Premise") since March 2001, aggregate to $2.4 million at
June 30, 2001 and are included in long-term investments on the Company's balance
sheet. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary. In March 2001, the
Company purchased 283,476 shares of Series A Preferred Stock of Premise, or
approximately 19.9% of its capital stock, for an aggregate purchase price of
$2.0 million. The Company accounts for this investment using the equity method
of accounting. Premise is a developer of client-side software applications.
Concurrently with making the investment in Premise, the Company entered into an
agreement to acquire all of its remaining equity securities upon Premise's first
bona fide shipment of building automation software. If this does not to occur
prior to March 21, 2002, neither the Company nor Premise will be obligated to
consummate the merger. In the event the Company acquires Premise, it will be
obligated to issue up to an additional 1,150,000 shares of Lantronix common
stock.
The Company accounts for its investments in debt securities and in equity
securities with readily determinable fair values that are not accounted for
under the equity method of accounting under FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. Debt securities,
which are classified as held-to-maturity, are stated at cost, adjusted for
amortization of premiums and discounts to maturity. Realized gains and losses
and declines in value judged to be other than temporary are determined based on
the specific identification method and are reported in the statement of
operations.
F-7
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the assets' estimated useful lives ranging from
three to seven years.
Capitalized Internal Use Software Costs
The Company capitalizes the costs of computer software developed or
obtained for internal use in accordance with Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Capitalized computer software costs consist of purchased software licenses
and implementation costs. Costs capitalized at June 30, 2001 of $2,647,000 are
included in computer and office equipment in the accompanying consolidated
balance sheet. The capitalized software costs are being amortized on a
straight-line basis over a period of three years. Amortization for the year
ended June 30, 2001 totaled $221,000. No amortization has been charged for the
years ended June 30, 2000 and 1999.
Goodwill and Purchased Intangible Assets
Goodwill is recorded as the difference, if any, between the aggregate
consideration paid for an acquisition and the fair value of the net tangible and
intangible assets acquired. Goodwill and purchased intangible assets are
amortized on a straight-line basis over the economic lives of the respective
assets, generally three to seven years. Other purchased intangible assets
include items such as assembled workforce, existing technology, customer lists
and tradenames/trademarks.
Long-Lived Assets
Long-lived assets 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.
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.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25"), and related interpretations, and has adopted the
disclosure-only alternative of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123"). Options granted to
non-employees, as defined, have been accounted for at fair market value in
accordance with Statement No. 123.
The Company also complies with FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25 ("FIN 44") which was issued in March 2000. FIN 44 clarifies the
definition of an employee for purposes of applying 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. FIN 44 was effective July 1, 2000 but certain
conclusions therein cover specific events that occurred after either December
15, 1998 or January 12, 2000.
F-8
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
For stock option grants to non-employees who are consultants to the
Company, the Company complies with the provisions of Emerging Issues Task Force
("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or
Services ("EITF 96-18"). EITF 96-18 requires variable plan accounting with
respect to such non-employee stock options, whereby compensation associated with
such options is measured on the date such options vest, and incorporates the
then-current fair market value of the Company's common stock into the option
valuation model.
Earnings Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the year.
Diluted earnings (loss) per share is calculated by adjusting outstanding shares
assuming any dilutive effects of stock options.
Years ended June 30,
--------------------
2001 2000 1999
---- ---- ----
(restated)
(In thousands, except
per share data)
Numerator:
Income (loss) before cumulative effect of accounting change .............................. $(7,248) $ 1,055 $ 2,786
Cumulative effect of accounting change ................................................... (597) -- --
------- ------- -------
Net income (loss) ........................................................................ $(7,845) $ 1,055 $ 2,786
======= ======= =======
Denominator:
Weighted-average shares outstanding ...................................................... 37,227 29,274 26,977
Less: Non-vested common shares outstanding ............................................... (281) -- --
------- ------- -------
Denominator for basic earnings (loss) per share .............................................. 36,946 29,274 26,977
------- ------- -------
Effect of dilutive securities
Stock options ............................................................................ -- 4,904 1,903
------- ------- -------
Denominator for diluted earnings (loss) per share ............................................ 36,946 34,178 28,880
======= ======= =======
Basic income (loss) per share before cumulative effect of accounting change .................. $ (0.19) $ 0.04 $ 0.10
Cumulative effect of accounting change per share ............................................. (0.02) -- --
------- ------- -------
Basic net income (loss) per share ............................................................ $ (0.21) $ 0.04 $ 0.10
======= ======= =======
Dilutive income (loss) per share before cumulative effect of accounting change ............... $ (0.19) $ 0.03 $ 0.10
Cumulative effect of accounting change per share ............................................. (0.02) -- --
------- ------- -------
Diluted net income (loss) per share .......................................................... $ (0.21) $ 0.03 $ 0.10
======= ======= =======
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. Software
development costs incurred after the establishment of technological feasibility
have not been material and, therefore, have been expensed as incurred.
F-9
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
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 periods generally range from 90 days to five years from the date of
shipment.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $1,127,000, $1,130,000 and $929,000 for the years ended June 30,
2001, 2000 and 1999, respectively.
Comprehensive Income
FASB Statement No. 130, Reporting Comprehensive Income, establishes
standards for reporting and displaying comprehensive income (loss), and its
components in the consolidated financial statements. Other accumulated
comprehensive loss includes foreign currency translation adjustments and
unrealized losses on investments.
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.
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements have
been reclassified to conform with current year presentation.
Recent Accounting Pronouncements
On June 29, 2001, the FASB approved the issuance of Statement No. 141,
Business Combinations ("Statement No. 141"), and Statements of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement
No. 142") (collectively the "Statements"). Statement No. 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Additionally, Statement No. 141 changes the criteria to recognize intangible
assets apart from goodwill. The requirements of Statement No. 141 are effective
for any business combination accounted for by the purchase method that is
completed after June 30, 2001. Statement No. 141 supersedes APB Opinion No. 16,
Business Combinations ("APB 16"), and amends or supersedes a number of
interpretations of APB 16. Certain purchase accounting guidance in APB 16, as
well as certain of its amendments and interpretations, have been carried forward
to Statement No. 141 without the FASB's reconsideration. Statement No. 141 also
supersedes, but carries forward without reconsideration, the guidance in FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises.
Statement No. 142 supersedes APB Opinion No. 17, Intangible Assets, and
carries forward its provisions related to internally developed intangible assets
without the FASB's reconsideration. Under Statement No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise, for impairment.
Goodwill is required to be tested for impairment between the annual tests if an
event occurs or circumstances change that more likely than not reduce the fair
value of a reporting unit below its carrying value. An indefinite-lived
intangible asset is required to be tested for impairment between the annual
tests if an event occurs or circumstances change indicating that the asset might
be impaired. Separable intangible assets that have finite lives will continue to
be amortized over their useful lives.
F-10
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
The amortization provisions of Statement No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization provisions of
Statement No. 142 are effective upon adoption of Statement No. 142. In addition,
the impairment provisions of Statement No. 142 are effective upon adoption of
Statement No. 142. Companies are required to adopt Statement No. 142 in their
fiscal year beginning after December 15, 2001. Early adoption is permitted for
companies with fiscal years beginning after March 15, 2001, provided that their
first quarter financial statements have not been issued. In all cases, the
provisions of Statement No. 142 must be adopted as of the beginning of a fiscal
year. If the Company chooses to adopt Statement No. 141 and Statement No. 142 in
fiscal 2002, $6.6 million of goodwill and other intangibles amortization will
not be charged to operations during the year ending June 30, 2002.
2. Accounting Change and Restatement of Financial Statements
In May 2002, the Company undertook a special investigation of its
accounting, which revealed that beginning in the third and fourth quarters of
fiscal 2001 certain shipments made to distributors and recorded as revenues in
fiscal 2001 and 2002 did not qualify for revenue recognition upon shipment due
to terms present in agreements with the distributors that were not considered in
the Company's original accounting decisions. The accompanying consolidated
financial statements for the year ended June 30, 2001 have been restated to
change as of July 1, 2000 the accounting policy for recognizing revenue from
sales to distributors. Formerly, revenue from sales to distributors was
recognized upon shipment, but in some cases during fiscal 2001 this resulted in
improper revenue recognition because the Company granted product return
privileges, extended payment terms or other rights to certain distributors in
connection with specific shipments that either converted such transactions into
what in substance were consignment arrangements or precluded the Company from
using its historical experience in product sales to make a reasonable estimate
of future product returns at the time of shipment.
Under the newly adopted accounting policy, revenue from sales to
distributors is not recognized until the distributor sells the Company's
products to end user customers. This manner of correcting the errors in sales
recognition made in the previously issued financial statements for fiscal 2001
is deemed to be preferable in the circumstances because (1) it eliminates from
revenue any effect of shipping excessive levels of inventory to the
distributors; (2) all revenue from distributor sales in fiscal 2001 and
thereafter will be recognized on a common basis; and (3) there is assurance that
any additional agreements with distributors that may have existed with respect
to specific orders but are presently unknown will not have an impact on amounts
reported as revenue after the restatement.
The restatement for the year ended June 30, 2001, results in a reduction in
revenue of approximately $6.2 million and an increase in the loss before
cumulative effect of accounting change of $2.9 million or $0.07 per share. The
cumulative effect of the accounting change recorded as of July 1, 2000 was a
charge of $597,000 (net of income taxes of $176,000) or $0.02 per share. A
comparison of restated and originally reported amounts in the consolidated
statement of operations for the year ended June 30, 2001 follows:
F-11
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
As previously As
reported restated
-------- --------
(In thousands, except per share data)
Net revenues .......................................................... $ 55,198 $ 48,972
Cost of revenues ...................................................... 26,582 24,530
--------- ---------
Gross profit .......................................................... 28,616 24,442
Operating expense ..................................................... 35,668 35,581
--------- ---------
Loss from operations .................................................. (7,052) (11,139)
Other income .......................................................... 2,015 2,015
Benefit for income taxes .............................................. (662) (1,876)
--------- ---------
Loss before cumulative effect of accounting change .................... (4,375) (7,248)
Cumulative effect of accounting change, net of income taxes of $176 ... -- (597)
--------- ---------
Net loss .............................................................. $ (4,375) $ (7,845)
========= =========
Basic and diluted net loss per share:
Before cumulative effect of accounting change ..................... $ (0.12) $ (0.19)
Cumulative effect of accounting change ............................ (0.00) (0.02)
--------- ---------
Net loss .......................................................... $ (0.12) $ (0.21)
========= =========
Information needed to determine the pro forma effects of applying the new
revenue recognition policy for sales to distributors to years prior to fiscal
2001 is not available; therefore, such pro forma information is not presented.
3. Business Combinations
During fiscal 2001, the Company completed two acquisitions that were
accounted for using the purchase method of accounting. The consolidated
financial statements include the results of operations of these acquired
companies after their respective acquisition dates. A summary of transactions
accounted for using the purchase method of accounting is outlined below:
Shares Reserved Total Shares
Date Shares for Options Issued or Cash
Company Acquired Acquired Business Issued Assumed Reserved Consideration
---------------- -------- -------- ------ ------- -------- -------------
U.S. Software ............ Dec. 2000 Software solutions provider 653,846 133,333 787,179 $ 2.5 million
Lightwave
Communications, Inc.... Jun. 2001 Developer of console
management products 3,428,571 870,513 4,299,084 12.0 million
If certain revenue targets for the period from December 1, 2000 to June 30,
2004 are satisfied, the Company will issue up to a maximum of 1,625,000
additional shares to the former stockholders of US Software. In the event that
the former owners of U.S. Software are terminated as employees of the Company
prior to June 30, 2004, the Company may be required to issue up to 400,000
shares of common stock to the former owners of U.S. Software.
Allocation of Purchase Consideration
For each of the two purchase transactions, the Company obtained independent
appraisals of the fair value of the tangible and intangible assets acquired in
order to allocate the purchase price in accordance with APB 16. Based upon those
appraisals, the purchase price was allocated as follows (in thousands):
Net Tangible
Assets
(Liabilities) Goodwill and Deferred Deferred Tax Total
Company Acquired Acquired Purchased Intangibles Compensation Liabilities IPR&D Consideration
---------------- -------- --------------------- ------------ ----------- ----- -------------
U.S. Software ............. $ (12) $ 8,869 $ 538 $(1,117) $ 496 $ 8,774
Lightwave Communications,
Inc. ................... 340 47,743 3,474 (4,183) 2,100 49,474
F-12
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
The consideration for each of the purchase transactions was calculated as
follows: a) common shares issued were valued based upon the Company's stock
price for a short period just before and after the companies reached agreement
and the proposed transactions were announced and b) employee stock options were
valued in accordance with FIN 44. Net tangible assets (liabilities) acquired in
connection with the purchase transactions include the acquisition costs incurred
by the Company. Additionally, the net tangible assets of Lightwave reflect an
outstanding note payable and credit facility aggregating $6.7 million, which was
paid in full by the Company in connection with the terms of the merger
agreement.
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 the acquisitions of Adele and ProNet.
(In thousands):
Fair values of assets acquired .................................. $2,266
Liabilities assumed ............................................. (924)
------
Cash paid by the Company ........................................ $1,342
======
In September 1998, the Company sold 3,437,988 shares of common stock to
certain former stockholders of ProNet for an amount representing the deemed fair
market value of the common stock on the date of purchase.
During the year ended June 30, 2000, the Company acquired the remaining 35%
interest of Acola GmbH. The Company paid $115,920 to the minority stockholder,
increasing the Company's ownership in Acola GmbH to 100%. The Company accounted
for the acquisition of the minority interest using the purchase method. The
purchase price approximated the book value of minority interest recorded on the
Company's consolidated balance sheet on the acquisition date.
In-Process Research and Development
In-process research and development ("IPR&D") aggregated $2,596,000 for
purchase transactions completed in fiscal 2001. The amounts allocated to IPR&D
were determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition as it was determined that the
projects had not reached technological feasibility and no alternative future
uses existed.
The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.
The IPR&D charge includes only the fair value of IPR&D performed to date.
The fair value of existing technology is included in identifiable intangible
assets, and the fair values of IPR&D to be completed and future research and
development are included in goodwill. The Company believes the amounts recorded
as IPR&D, as well as developed technology, represent fair values and approximate
the amounts an independent party would pay for these projects.
F-13
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
As of the closing date of each purchase transaction, development projects
were in process. Research and development costs to bring the products from the
acquired companies to technological feasibility are not expected to have a
material impact on the Company's future results of operations or financial
condition.
Pro Forma Data
The unaudited pro forma statements of operations data of the Company set
forth below gives effect to the two purchase transactions as if they had
occurred at the beginning of fiscal 2000 and includes the amortization of
goodwill, purchased intangible assets and stock-based compensation arising from
the purchase transactions. However, it excludes the charge for acquired IPR&D.
This pro forma data is presented for informational purposes only and does not
purport to be indicative of the results of future operations of the Company or
the results that would have actually occurred had the acquisitions taken place
at the beginning of fiscal 2000:
Year ended June 30,
-------------------
2001 2000
---- ----
(restated)
(In thousands, except
per share data)
Net revenues .................................................................................. $ 68,114 $ 62,091
========= =========
Loss before cumulative effect of accounting change ............................................ $ (4,956) $ (4,455)
Cumulative effect of accounting change, net of income taxes of $176 ........................... (597) -
--------- ---------
Net loss ...................................................................................... $ (5,553) $ (4,455)
========= =========
Loss before cumulative effect of accounting change per share .................................. $ (0.12) $ (0.13)
Cumulative effect of accounting change per share .............................................. (0.02) -
--------- ---------
Basic and diluted net loss per share .......................................................... $ (0.14) $ (0.13)
========= =========
4. 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:
June 30,
--------
2001 2000
---- ----
(restated)
(In thousands)
Raw materials .............................................................................. $ 6,752 $4,766
Finished goods ............................................................................. 6,526 1,488
Inventory at distributors .................................................................. 2,772 --
------- ------
16,050 6,254
Reserve for excess and obsolete inventory .................................................. (2,490) (869)
------- ------
$13,560 $5,385
======= ======
F-14
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
Property and Equipment
A summary of property and equipment, at cost, follows:
June 30,
--------
2001 2000
---- ----
(In thousands)
Computer and office equipment ....................... $ 6,869 $ 2,561
Furniture and fixtures .............................. 1,534 727
Production and warehouse equipment .................. 995 603
Transportation equipment ............................ 144 175
------- -------
9,542 4,066
Accumulated depreciation ............................ (4,050) (2,718)
------- -------
$ 5,492 $ 1,348
======= =======
Goodwill and Other Purchased Intangible Assets
A summary of goodwill and other purchased intangible assets is as follows:
June 30,
--------
2001 2000
---- ----
(In thousands)
Goodwill ............................................ $43,025 $ --
Other purchased intangible assets ................... 15,613 1,994
------- -------
58,638 1,994
Less: Accumulated amortization ...................... (3,037) (1,408)
------- -------
$55,601 $ 586
======= =======
5. Bank Line of Credit
As of June 30, 2001, the Company had a bank line of credit, which provides
for borrowings of up to $850,000, subject to borrowing base limitations, and
bears interest at the rate of 7% per annum. Borrowings are collateralized by a
continuing security interest in all of the assets of the Company. As of June 30,
2001, no borrowings were outstanding under this line of credit. The line of
credit expires on March 26, 2002.
6. Stockholders' Equity
Common Stock
In May 2000, the Board of Directors and stockholders approved an increase
in the number of authorized shares of common stock from 25,000,000 to
200,000,000 shares.
Stock Split
The Company effected a 4-for-1 split of its common stock in the form of a
100% stock dividend, effective upon the filing of a re-incorporation in Delaware
in July 2000. All share numbers and per share amounts contained in these notes
and in the accompanying consolidated financial statements have been
retroactively restated to reflect these changes in the Company's capital
structure.
F-15
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
Initial Public Offering
On August 4, 2000, the Company completed its initial public offering (the
"Offering") of common stock. The Company sold 6,000,000 shares, at a price of
$10.00 per share. The Company received aggregate net proceeds from the Offering
of $53,707,000.
Employee Stock Purchase Plan
In May 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan) effective upon the completion of the Offering.
A total of 750,000 shares of common stock have been reserved for issuance under
the Purchase Plan. The number of shares available for issuance pursuant to the
Purchase Plan increases annually commencing in fiscal year 2001. The Purchase
Plan permits participants to purchase common stock at six-month intervals
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.
Stock Option Plans
The Company has in effect several stock-based plans under which
non-qualified and incentive stock options have been granted to employees,
non-employees and board members.
At the discretion of the Board of Directors, the Company may make secured
loans to option holders in amounts up to the exercise price of their options
plus related taxes or permit the option holder to pay the exercise price in
installments over a determined period. The Company had outstanding loans of
$790,000 and $152,000 to officers for the exercise of options at June 30, 2001
and 2000, respectively. These notes are full-recourse, are secured by the shares
of stock issued upon exercise, are interest bearing at rates ranging from 5.06%
to 7.50% per annum, and are due three years from the exercise date. The Company
also loaned $4,131,000 to officers during fiscal 2001 related to taxes on
exercised stock options. These notes are non-recourse, are secured by the shares
of stock issued upon exercise, are interest bearing at rates ranging from 5.19%
to 7.50% per annum. Principal and any unpaid interest are due upon any transfer
or disposition of the common stock.
The Board of Directors determines eligibility, vesting schedules and
exercise prices for options granted under the plans. Options generally have a
term of 10 years and vest and become exercisable, generally over a four-year
period.
Under the Company's 1993 Incentive Stock Option Plan (the 1993 Plan), the
Company has reserved 4,000,000 shares of common stock for the granting of
options. Such options are to be granted at or above the fair market value of the
Company's common stock on the date of grant. All stock options are to vest over
a period determined by the Board of Directors (generally four years) and expire
not more than ten years from the date of grant. As of June 30, 2001, 659,337
options were available for grant under the 1993 Plan.
Under the Company's 1994 Nonstatutory Stock Option Plan (the 1994 Plan),
the Company has reserved 10,000,000 shares of common stock for grant at prices
and vesting periods to be determined by the Company's Board of Directors. In
certain cases, the Company has granted options, which became fully vested on the
date granted. As of June 30, 2001, 7,142,268 options were available for grant
under the 1994 Plan.
Under the Company's 2000 Stock Plan (the 2000 Plan), the Company has
reserved 2,000,000 shares of common stock for issuance pursuant to option
grants. The number of shares available for issuance increases annually
commencing in calendar year 2001. The Stock Plan also provided an initial
automatic grant of an option to purchase 25,000 shares of common stock to a
director who first became an outside director after the Offering. Each outside
director is automatically granted an option to purchase 10,000 shares of common
stock annually, subject to certain eligibility requirements. As of June 30,
2001, 561,724 options were available for grant under the 2000 Plan.
F-16
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
As a result of the Company's acquisitions, the Company assumed stock
options granted under stock option plans established by each acquired company;
no additional options will be granted under those plans. As of June 30, 2001,
1,003,846 shares of common stock were reserved for issuance upon exercise of
outstanding options assumed under these stock option plans.
A summary of all stock option activity under the plans is as follows:
Weighted
average
Number of exercise
options price
------- -----
Outstanding at June 30, 1998 ................................................ 2,548,824 $ 0.11
Granted ................................................................ 1,532,012 0.50
Canceled ............................................................... (152,800) 0.17
Exercised .............................................................. (14,480) 0.21
--------- ------
Outstanding at June 30, 1999 ................................................ 3,913,556 0.29
Granted ................................................................ 2,941,644 2.32
Canceled ............................................................... (58,732) 0.18
Exercised .............................................................. (1,057,720) 0.20
--------- ------
Outstanding at June 30, 2000 ................................................ 5,738,748 1.35
Granted ................................................................ 2,482,436 4.94
Canceled ............................................................... (654,767) 2.10
Exercised .............................................................. (3,416,154) 0.40
--------- ------
Outstanding at June 30, 2001 ................................................ 4,150,263 $ 4.17
========= ======
Exercisable at June 30, 1999 ................................................ 2,442,624
=========
Exercisable at June 30, 2000 ................................................ 1,543,234
=========
Exercisable at June 30, 2001 ................................................ 1,206,839
=========
The weighted average exercise price of options outstanding and of options
exercisable as of June 30, 2001 were as follows:
Outstanding Exercisable
----------- -----------
Weighted
average Weighted Weighted
Number of remaining average average
options contractual exercise Options exercise
Range of Exercise Prices outstanding life (years) price exercisable price
------------------------ ----------- ----------- ----- ----------- -------
$0 to $0.14 ............................................. 384,540 9.91 $0.10 103,519 $0.10
$0.18 to $0.29 .......................................... 88,588 6.40 0.18 71,479 0.19
$0.50 ................................................... 536,812 8.38 0.50 152,654 0.50
$0.79 to $2.50 .......................................... 511,875 7.84 1.04 370,025 0.88
$4.00 to $5.75 .......................................... 1,079,993 9.83 5.24 215,171 5.39
$6.00 to $7.91 .......................................... 1,030,655 9.02 6.15 267,743 6.17
$8.00 to $10.56 ......................................... 517,800 9.79 8.62 26,248 8.00
At June 30, 2001, 13,517,438 shares of the Company's common stock are
reserved for issuance pursuant to the stock option plans.
F-17
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
In connection with the issuance of stock options to employees during the
years ended June 30, 2001 and 2000, the Company has recorded deferred
compensation of $4,184,000 and $10,061,000, respectively, net of forfeitures,
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.
Deferred compensation for the year ended June 30, 2001 includes $4,011,000 for
employee stock options assumed in acquisitions in accordance with FIN 44. The
Company is amortizing the deferred compensation over the shorter of the period
in which the employee provides services or the applicable vesting period, which
is generally four years. For the years ended June 30, 2001 and 2000, stock-based
compensation was approximately $3,106,000 and $1,119,000, respectively. The
amount of stock-based compensation in future periods will increase if we grant
stock options where the exercise price is less than the quoted market price of
the underlying shares or if we assume employee stock options in connection with
additional acquisitions of businesses. 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, 2001, 2000 and 1999 was $4.94,
$4.67 and $0.14, respectively.
Pro Forma Disclosures of the Effect of Stock-based Compensation Plans
Pro forma information regarding net income (loss) per share is required by
Statement No. 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement No. 123.
The value of the Company's stock-based awards granted to employees prior to
the Company's initial public offering in August 2000 was estimated using the
minimum value method, which does not consider stock price volatility.
Stock-based awards granted subsequent to the initial public offering have been
valued using the Black-Scholes option pricing model. Among other things, the
Black-Scholes model considers the expected volatility of the Company's stock
price, determined in accordance with Statement No. 123, in arriving at an option
valuation. Estimates and other assumptions necessary to apply the Black-Scholes
model may differ significantly from assumptions used in calculating the value of
options granted prior to the initial public offering under the minimum value
method.
The fair value of options granted after the initial public offering was
estimated assuming no expected dividends, a weighted average expected life of
five years, a weighted average risk-free interest rate of 6.2% and an expected
volatility of 90%.
The weighted average fair value of options granted to employees during
2001, 2000 and 1999 was $7.32, $4.67 and $0.14, respectively. For pro forma
purposes, the estimated value of the Company's stock-based awards to employees
is amortized over the vesting period of the underlying instruments. The results
of applying Statement No. 123 to the Company's stock-based awards to employees
would approximate the following:
Years ended June 30,
-------------------
2001 2000 1999
---- ---- ----
(restated)
(In thousands, except per
share data)
Net income (loss)
As reported ........................................................... $ (7,845) $1,055 $2,786
Pro forma ............................................................. (11,144) 838 2,738
Basic net earnings (loss) per share
As reported ........................................................... $ (.21) $ .04 $ .10
Pro forma ............................................................. (.30) .03 .10
Diluted net earnings (loss) per share
As reported ........................................................... $ (.21) $ .03 $ .10
Pro forma ............................................................. (.30) .02 .09
F-18
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
7. 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, 2001, 2000 and 1999,
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 expenses include
contributions of approximately $126,000, $149,000 and $93,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
8. Income Taxes
The income tax provision (benefit) is comprised of the following:
Year ended June 30,
----------------------
2001 2000 1999
---- ---- ----
(restated)
(In thousands)
Current:
Federal ..................................................................................... $ 140 $ (310) $ 817
State ....................................................................................... (6) (11) 329
Foreign ..................................................................................... 222 172 110
----- ------ -----
Total current ............................................................................... 356 (149) 1,256
Deferred:
Federal ..................................................................................... (2,091) 735 (161)
State ....................................................................................... (338) 63 3
Foreign ..................................................................................... 21 -- --
----- ------ -----
Total deferred .............................................................................. (2,408) 798 (158)
Less: deferred taxes allocated to cumulative effect of accounting change ......................... 176 -- --
-------- ------ ------
Total income tax provision (benefit) for income (loss) before cumulative effect of accounting
change ........................................................................................... $ (1,876) $ 649 $1,098
======== ====== ======
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
June 30,
--------
2001 2000
---- ----
(restated)
(In thousands)
Deferred tax assets:
Reserves not currently deductible ........................................................... $ 2,836 $ 1,046
State taxes ................................................................................. - 12
Inventory capitalization .................................................................... 965 55
Depreciation ................................................................................ 135 109
Tax losses and credits ...................................................................... 4,436 123
-------- -------
8,372 1,345
Valuation allowance .......................................................................... (2,023) --
-------- -------
Total deferred tax assets ........................................................................ 6,349 1,345
Deferred tax liabilities:
Inventory capitalization .................................................................... (260) --
Identified intangibles ...................................................................... (5,113) --
Deferred compensation ....................................................................... (3,250) (923)
-------- -------
Total deferred tax liabilities ................................................................... (8,623) (923)
-------- -------
Net deferred tax assets (liabilities) ............................................................ $ (2,274) $ 422
======== =======
F-19
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
A reconciliation of the income tax provision for income (loss) before
cumulative effect of accounting change to taxes computed at the U.S. federal
statutory rate is as follows:
Year ended June 30,
----------------------
2001 2000 1999
---- ---- ----
(restated)
(In thousands)
Federal income tax at statutory rate ......................................................... $ (3,102) $ 579 $ 1,321
State taxes (net of federal tax benefit) ..................................................... (228) 89 219
Reduction of valuation allowance ............................................................. -- -- (456)
Permanent differences ........................................................................ (43) 67 --
Research and development credit .............................................................. (263) (96) --
Foreign sales corporation benefit ............................................................ -- (130) (53)
Foreign tax rate variances ................................................................... 770 56 109
Deferred compensation ........................................................................ 156 132 --
Acquisition expenses ......................................................................... 834 -- --
Other ........................................................................................ -- (48) (42)
-------- ------ -------
$ (1,876) $ 649 $ 1,098
======== ====== =======
As of June 30, 2001, the Company has net operating loss carryovers of
$13,281,000 and $6,719,000 for federal and state income tax purposes,
respectively. These losses relate primarily to employee stock option exercises,
the benefit for which has been partially allocated directly to additional
paid-in capital. The federal and state net operating loss carryovers begin to
expire in years 2021 and 2011, respectively.
In addition, the Company has research and development tax credit
carryforwards of $405,000 and $350,000 for federal and state purposes,
respectively. Federal tax credits begin to expire in 2020. California tax
credits have no expiration.
The Company has recorded a valuation allowance in the amount of $2,023,000
against that portion of deferred tax assets related to tax losses allocated
directly to capital in excess of stated value. The valuation allowance was
established due to uncertainties surrounding the realization of this deferred
tax asset.
Due to the "change of ownership" provision of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryfowards may be subject to
an annual limitation against taxable income in future periods. As a result of
the annual limitation, a portion of these carryforwards may expire before
ultimately becoming available to reduce future income tax liabilities.
9. Commitments and Contingencies
Leases
The Company leases office equipment and its office and warehouse facilities
under noncancelable operating leases. The Company subleased a portion of the
office and warehouse facility in Irvine, California through November, 2001. In
July 2000, the Company renewed its office and warehouse facility lease in
Irvine, California commencing in August 2000 and expiring in July 2005.
The following schedule represents minimum lease payments for all
noncancelable operating leases as of June 30, 2001.
Fiscal year ending June 30:
2002 .................................................... $ 1,342
2003 .................................................... 1,221
2004 .................................................... 1,149
2005 .................................................... 1,051
-------
Total minimum lease payments ....................... $ 4,763
=======
F-20
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
Rent expense, including month-to-month rentals, totaled approximately
$1,232,000, $591,000 and $643,000 for the years ended June 30, 2001, 2000 and
1999, respectively. Sublease income totaled approximately $119,000, $281,000 and
$276,000 for the years ended June 30, 2001, 2000 and 1999, respectively.
Royalties
The Company outsources a substantial portion of its engineering and
production development activities under contract. Certain development contracts
contain royalty provisions based upon sales and/or margin activity of the
underlying products. Approximately $2,296,000, $2,168,000 and $2,011,000 is
included in cost of sales in the accompanying consolidated statements of
operations for the years ended June 30, 2001, 2000 and 1999, respectively,
relating to royalties paid on applicable product sales. As of June 30, 2001 and
2000, accrued royalties were approximately $454,000 and $467,000, respectively,
and are included in other current liabilities in the accompanying consolidated
balance sheets.
Marketing Rights
Pursuant to an agreement dated September 27, 1998, the Company purchased
marketing rights from an individual which allows the Company to sell products in
certain geographical regions. Per the terms of the agreement, the Company paid
$1,694,000 for the marketing rights. Additionally, the Company paid a sales
commission to the same individual for sales of certain products made to various
customers through December 31, 2000. The initial payment was 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 for
the years ended June 30, 2001, 2000 and 1999 were $697,000, $2,727,000 and
$1,580,000, respectively.
Litigation
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business. The Company currently is not aware of any
such legal proceedings or claims that it believes will have, individually or in
the aggregate, a material adverse effect on its business, prospects, financial
position, operating results or cash flows.
10. Geographic and Significant Customer Information
Revenue by Geographic Area
Net revenue by geographic area is provided below:
Year ended June 30,
-------------------
2001 2000 1999
---- ---- ----
(restated)
(Amounts in thousands)
America ...................................................... $33,143 68% $30,269 67% $21,780 66%
Europe ....................................................... 13,938 28% 12,665 28% 9,530 29%
Other ........................................................ 1,891 4% 2,041 5% 1,670 5%
------- --- ------- --- ------- ---
Total net revenues ...................................... $48,972 100% $44,975 100% $32,980 100%
Accounts receivable attributable to international sales represented
approximately 31% and 24% of total accounts receivable at June 30, 2001 and
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 24%, 25% and 27% of the
Company's net revenues for the years ended June 30, 2001, 2000 and 1999,
respectively. Accounts receivable attributable to these two domestic customers
accounted for approximately 40% and 34% of total accounts receivable at June 30,
2001 and 2000, respectively.
F-21
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
One international customer, a related party due to common ownership by the
Company's major stockholder, accounted for approximately 9%, 7% and 11% of the
Company's net revenues for the years ended June 30, 2001, 2000 and 1999,
respectively. Included in the accompanying consolidated balance sheets are
approximately $787,000 due to and $211,000 due from this related party at June
30, 2001 and 2000, respectively. The Company also has an agreement with the same
related international customer for the provision of technical support services
to the Company at the rate of $7,500 per month ($5,000 per month through
December 1998). Pursuant to the terms of the agreement, the Company paid
$90,000, $90,000 and $75,000 during the years ended June 30, 2001, 2000 and
1999, respectively.
11. Quarterly Financial Data (Unaudited)
Set forth below is summarized unaudited quarterly data for fiscal 2001 and
fiscal 2000. Information for the quarterly periods in fiscal 2001 has been
restated to conform to the restatements made to the Company's fiscal 2001
consolidated financial statements as discussed in Note 2 (in thousands, except
per share amounts):
Loss before
-----------
Net Gross cumulative effect of
--- ----- --------------------
revenues profit accounting change Net income (loss)
-------- ------ ----------------- -----------------
Diluted
-------
per Diluted
--- -------
Amount share Amount per share
------ ----- ------ ---------
Fiscal 2001 (as originally reported)
First quarter $12,037 $ 6,688 $ (23) $ (0.00) $ (23) $ (0.00)
Second quarter 12,465 6,776 (51) (0.00) (51) (0.00)
Third quarter 14,125 7,743 (99) (0.00) (99) (0.00)
Fourth quarter 16,571 7,409 (4,202) (0.11) (4,202) (0.11)
------- ------- -------- ---------- -------- ----------
Total $55,198 $28,616 $(4,375) $ (0.12)* $(4,375) $ (0.12)*
======= ======= ======== ========== ======== ==========
Fiscal 2001 (as restated)
First quarter $11,644 $ 6,408 $ (229) $ (0.01) $(1,002) $ (0.03)
Second quarter 12,036 6,470 (337) (0.01) (161) (0.01)
Third quarter 12,529 6,682 (851) (0.02) (851) (0.02)
Fourth quarter 12,763 4,882 (5,831) (0.16) (5,831) (0.16)
------- ------- -------- ---------- -------- ----------
Totals $48,972 $24,442 $(7,248) $ (0.19)* $(7,845) $ (0.21)*
======= ======= ======== ========== ======== ==========
Fiscal 2000
First quarter $10,875 $ 6,174 $ 949 $ 0.03 $ 949 $ 0.03
Second quarter 11,417 5,900 561 0.02 561 0.02
Third quarter 10,339 4,892 (375) (0.01) (375) (0.01)
Fourth quarter 12,344 6,483 (80) (0.00) (80) (0.00)
------- ------- -------- ---------- -------- ----------
Totals $44,975 $23,449 $ 1,055 $ 0.04 $ 1,055 $ 0.04
======= ======= ======== ========== ======== ==========
* Annual per share amounts may not agree to the sum of the quarterly per share
amounts due to rounding.
F-22
LANTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2001
12. Subsequent Events
On July 3, 2001, Digi International, Inc. filed a complaint in the United
States District Court for the district of Minnesota claiming patent infringement
and alleging that certain of Lantronix's Multiport Device Servers, including the
ETS line of products, when coupled with a device driver called the Comm Port
Redirector Software, infringe upon U.S. Patent No. 6,047,319 owned by Digi. Digi
alleges that Lantronix has willfully and intentionally infringed Digi's patent,
and its complaint seeks injunctive relief as well as unspecified damages, treble
damages, attorneys fees, interest and costs. On August 17, 2001, Lantronix filed
its answer to the complaint, asserting affirmative defenses, and counterclaiming
for a declaratory judgment that the patent in issue is invalid. Lantronix
believes that a pre-trial conference will take place before November 30, 2001,
however, to date, discovery has not begun and a trial date has not been set.
Based on the facts known to date, Lantronix believes that the claims are without
merit and intends to vigorously defend this suit.
In July 2001, the Company completed a public offering of 8,534,000 shares
of its common stock, including 534,000 shares sold pursuant to an underwriter's
over-allotment option, at an offering price of $8.00 per share. The Company sold
6,000,000 shares and selling stockholders sold 2,000,000 shares of the primary
offering. Additionally, the Company sold 400,500 shares and selling stockholders
sold 133,500 shares of the over-allotment option. The Company received net
aggregate proceeds of approximately $47.1 million after deducting underwriting
discounts, commissions and offering costs.
In August 2001, the Company began negotiations with the former owners of
U.S. Software to remove the earn-out provisions of the merger agreement between
the Company and U.S. Software in exchange for the issuance of a specified number
of shares of the Company's stock to the former owners of U.S. Software. In
August 2001, in order to eliminate an employee bonus arrangement related to the
acquisition, the Company issued 250,000 stock options to employees who were not
former owners of U.S. Software. The issuance of these stock options was
unrelated to and did not remove the earn-out provisions of the merger agreement
between the Company and former owners of U.S. Software. The estimated value of
$500,000 related to these stock options will be accounted for as compensation
expense over the vesting period of the options of up to four years.
On October 18, 2001, the Company completed the acquisition of
Synergetic Micro Systems, Inc. ("Synergetic"), a provider of high performance
embedded network communication solutions that complement our external device
products. In connection with the acquisition, the Company paid cash
consideration of $2.7 million and issued an aggregate of 2,234,715 shares of its
common stock in exchange for all outstanding shares of Synergetic common stock
and reserved 615,705 additional shares of common stock for issuance upon
exercise of outstanding employee stock options and other rights of Synergetic.
Portions of the cash consideration and shares issued will be held in escrow
pursuant to the terms of the acquisition agreement.
On January 11, 2002, the Company completed the acquisition of Premise
Systems, Inc. ("Premise"), a developer of client-side software applications that
complement our device networking products by providing management and control
capabilities for devices that have been network and internet enabled. Prior to
the acquisition, the Company held shares of Premise representing 19.9% ownership
and, in addition, held convertible promissory notes of $1.2 million with
interest accrued thereon at the rate of 9.0%. The convertible promissory notes
were converted into equity securities of Premise at the closing of the
transaction. We issued an aggregate of 1,063,371 shares of our common stock in
exchange for all remaining outstanding shares of Premise common stock and
reserved 875,000 additional shares of common stock for issuance upon exercise of
outstanding employee stock options and other rights of Premise. Pursuant to the
acquisition agreement, 106,337 shares will be held in escrow to secure certain
indemnification obligations, and 531,686 of such shares will be held in escrow
pending achievement of certain performance obligations. In connection with the
acquisition, the Company expects to record a one-time charge for purchased
in-process research and development expenses related to the acquisition in its
fourth fiscal quarter ending June 30, 2002.
In September and October 2001, the Company paid an aggregate of $3.0
million to Xanboo Inc. ("Xanboo") for convertible promissory notes, which
converted in January 2002, in accordance with their terms, into Xanboo preferred
stock. In addition, the Company purchased $4.0 million of Xanboo preferred stock
in January 2002. The Company currently holds an 18.7% ownership interest in
Xanboo, which is accounted for using the equity method of accounting based on
our ability through representation on Xanboo's board of directors to exercise
significant influence over its operations.
F-23
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
Exhibit
Number Description of Document
3.1* Certificate of Incorporation of registrant.
3.4** Bylaws of the registrant.
4.1** Form of registrant's common stock certificate.
10.1** Form of Indemnification Agreement entered into by registrant with
each of its directors and executive officers.
10.2** 1993 Stock Option Plan and forms of agreements thereunder.
10.3** 1994 Nonstatutory Stock Option Plan and forms of agreements
thereunder.
10.4*** 2000 Stock Plan and forms of agreements thereunder.
10.5** 2000 Employee Stock Purchase Plan.
10.6** Form of Warranty.
10.7* Employment Agreement between registrant and Frederick Thiel.
10.8* Employment Agreement between registrant and Steven Cotton.
10.9* Employment Agreement between registrant and Johannes Rietschel.
10.10 Lease Agreement between registrant and The Irvine Company.
10.11** Loan and Security Agreement between registrant and Silicon Valley
Bank.
10.12+** Research and Development Agreement between registrant and Gordian.
10.13+** Distributor Contract between registrant and Tech Data Corporation.
10.14+** Distributor Contract between registrant and Ingram Micro Inc.
21.1**** Subsidiaries of registrant.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (see page II-2).
____________________
* Incorporated by reference to the same numbered exhibit previously filed
with Lantronix's Registration Statement on Form S-1 (SEC file no.
333-37508) originally filed May 19, 2000.
** Incorporated by reference to the same numbered exhibit previously filed
with Lantronix's Registration Statement on Form S-1, Amendment No. 1, (SEC
file no. 333-37508) originally filed June 13, 2000.
*** Incorporated by reference to the same numbered exhibit previously filed
with Lantronix's Registration Statement on Form S-1, Amendment No. 1, (SEC
file no. 333-63030) originally filed June 14, 2001.
**** Incorporated by reference to the same numbered exhibit previously filed
with Lantronix's Annual Report on Form 10-K, originally filed September 28,
2001.
+ Confidential treatment granted as to portions of this exhibit.
FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule ........ S-1
(2) Schedule II--Valuation and Qualifying Accounts ........................ S-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Lantronix has duly caused this Registration Statement on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, State of California, on the 24th day of June, 2002.
LANTRONIX, INC.
By: /s/ James Kerrigan
---------------------------------
James Kerrigan
Interim Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James Kerrigan, his attorney-in-fact,
with the power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Form 10-K/A and to
file the same, with all exhibits thereto in all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this report on Form 10-K/A has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ H. K. Desai Chairman of the Board 6/19/02
---------------------------------------------
H. K. Desai
/s/ Marc Nussbaum Interim Chief Executive Officer, President, 6/19/02
--------------------------------------------- (Principal Executive Officer)
Marc Nussbaum
/s/ James Kerrigan Interim Chief Financial Officer (Principal 6/19/02
--------------------------------------------- Financial and Accounting Officer)
James Kerrigan
/s/ Thomas W. Burton Director 6/19/02
---------------------------------------------
Thomas W. Burton
/s/ Howard T. Slayen Director 6/18/02
---------------------------------------------
Howard T. Slayen
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Lantronix, Inc.
We have audited the consolidated financial statements of Lantronix, Inc. as
of June 30, 2001 and 2000, and for each of the three years in the period ended
June 30, 2001, and have issued our report thereon dated August 8, 2001, (except
for Note 1 Revenue Recognition, and Notes 2 and 12, as to which the date is June
19, 2002). Our audits also included the financial statement schedule listed in
Item 14(a). 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, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
August 8, 2001 and June 19, 2002
S-1
SCHEDULE II
LANTRONIX, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance Charged
At (recovered) Charged Balance
Beginning to Costs and To Other End of
Description Of Period Expenses Accounts Deductions Period
------------ --------- -------- -------- ---------- ------
Year ended June 30, 1999:
Allowance for doubtful accounts ................................ $ 452 $ (136) $ -- $ 113 $ 203
Reserve for excess and obsolete inventory ...................... 1,141 637 -- 1,011 767
Accrued warranties ............................................. 496 153 -- 30 619
--------- --------- -------- ---------- -------
Total ..................................................... $ 2,089 $ 654 $ -- $ 1,154 $1,589
========= ========= ======== ========== =======
Year ended June 30, 2000:
Allowance for doubtful accounts ................................ $ 203 $ 1 $ -- $ 45 $ 159
Reserve for excess and obsolete inventory ...................... 767 570 -- 468 869
Accrued warranties ............................................. 619 260 -- 334 545
--------- --------- -------- ---------- -------
Total ..................................................... $ 1,589 $ 831 $ -- $ 847 $1,573
========= ========= ======== ========== =======
Year ended June 30, 2001:
Allowance for doubtful accounts ................................ $ 159 $ 108 $ 138 $ -- $ 405
Reserve for excess and obsolete inventory (restated) ........... 869 2,013 -- 392 2,490
Accrued warranties ............................................. 545 63 -- 46 562
--------- --------- -------- ---------- -------
Total ..................................................... $ 1,573 $ 2,184 $ 138 $ 438 $3,457
========= ========= ======== ========== =======
S-2