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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to ___________.
Commission file number: 333-37508
LANTRONIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0362767
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15353 BARRANCA PARKWAY
IRVINE, CALIFORNIA 92618
(Address of principal executive offices and zip code)
(949) 453-3990
(Registrant's telephone number, including area code)
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 ___
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As of October 31, 2000, 36,346,421 shares of the Registrant's common stock
were outstanding.
LANTRONIX, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
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PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Unaudited Condensed Consolidated Balance Sheets at
September 30, 2000 and June 30, 2000 1
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999 2
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 1999 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Change in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, June 30,
2000 2000
------------- --------
ASSETS
Current assets:
Cash and cash equivalents $52,638 $ 1,988
Accounts receivable, net 6,961 6,072
Inventories 7,416 5,385
Deferred income taxes 1,425 1,425
Prepaid expenses and other current assets 2,760 2,832
------- -------
Total current assets 71,200 17,702
Property and equipment, net 2,345 1,348
Intangible assets, net 383 586
Other assets 607 574
------- -------
Total assets $74,535 $20,210
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,076 $ 3,197
Accrued payroll and related expenses 1,096 764
Accrued commissions payable - 865
Other current liabilities 1,793 1,738
------- -------
Total current liabilities 5,965 6,564
Deferred income taxes 1,003 1,003
Capital lease obligations, net of current portion 87 96
Stockholders' equity:
Common stock 4 3
Additional paid-in capital 67,517 13,221
Employee notes receivable (152) (152)
Deferred compensation (8,279) (8,942)
Retained earnings 8,406 8,427
Accumulated other comprehensive loss (16) (10)
------- -------
Total stockholders' equity 67,480 12,547
------- -------
Total liabilities and stockholders' equity $74,535 $20,210
======= =======
See accompanying notes.
1
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
September 30,
-----------------
2000 1999
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Net revenues (A) $12,037 $10,875
Cost of revenues (B) 5,349 4,701
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Gross profit 6,688 6,174
Operating expenses:
Selling, general and administrative (B) 5,356 3,594
Research and development (B) 1,052 722
Amortization of deferred compensation 663 -
------- -------
Total operating expenses 7,071 4,316
Income (loss) from operations (383) 1,858
Minority interest (expense), net - (68)
Interest and other income, net 423 62
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Income before income taxes 40 1,852
Provision for income taxes 63 903
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Net income (loss) $ (23) $ 949
======= =======
Basic earnings (loss) per share $ (0.00) $ 0.03
======= =======
Diluted earnings (loss) per share $ (0.00) $ 0.03
======= =======
Weighted average shares (basic) 32,817 29,399
======= =======
Weighted average shares (diluted) 32,817 32,961
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(A) Revenues from related parties $ 790 $ 977
======= =======
(B) Amortization of deferred compensation:
Cost of revenues $ 11 $ -
Selling, general and administrative expenses 571 -
Research and development expenses 81 -
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$ 663 $ -
======= =======
See accompanying notes.
2
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
September 30,
------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $ (23) $ 949
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 360 311
Amortization of deferred compensation 663 -
Provision for doubtful accounts 76 68
Change in operating assets and liabilities:
Accounts receivable (965) (1,900)
Inventories (2,032) (147)
Prepaid expenses and other current assets 40 127
Accounts payable (121) (800)
Income taxes 75 1,014
Other current liabilities (563) 669
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Net cash provided by (used in) operating activities (2,490) 291
Cash flows from investing activities:
Purchases of property and equipment, net (1,152) (97)
Minority interest - 67
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Net cash used in investing activities (1,152) (30)
Cash flows from financing activities:
Net repayment of bank line of credit - (766)
Net proceeds from initial public offering of
common stock 54,286 -
Net proceeds from exercise of stock options 12 38
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Net cash provided by (used in) financing activities 54,298 (728)
Effect of exchange rates on cash (6) 13
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Increase (decrease) in cash and cash equivalents 50,650 (454)
Cash and cash equivalents at beginning of period 1,988 5,833
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Cash and cash equivalents at end of period $52,638 $ 5,379
======= =======
See accompanying notes.
3
LANTRONIX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. Basis of Presentation
The condensed financial statements included herein are unaudited; however,
they contain all normal recurring accruals and adjustments which, in the opinion
of management, are necessary to present fairly the consolidated financial
position of Lantronix, Inc. and its subsidiaries (collectively, the "Company")
at September 30, 2000 and the consolidated results of its operations and cash
flows for the three months ended September 30, 2000 and 1999. All intercompany
accounts and transactions have been eliminated. It should be understood that
accounting measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of operations for the three months
ended September 30, 2000 are not necessarily indicative of the results to be
expected for the full year or any future interim periods.
The accompanying unaudited condensed consolidated financial statements do not
include certain footnotes and financial presentations normally required under
generally accepted accounting principles. Therefore, these financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended June 30, 2000, included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC").
2. Summary of Significant Accounting Policies
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"). Statement 133, as amended, establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet and measure those instruments at fair value. The Company
adopted Statement 133 at the beginning of fiscal 2001. Statement 133 did not
have a significant effect on the Company's consolidated results of operations or
financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition policies
comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation--an
interpretation of APB Opinion No. 25 ("FIN 44"). Fin 44 clarifies the definition
of an employee for purposes of applying Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The provisions of FIN 44
will change the accounting for an exchange of unvested employee stock options
and restricted stock awards in a purchase business combination. The new rules
require the intrinsic value of the
4
unvested awards be allocated to deferred compensation and recognized as non-cash
compensation expense over the remaining future vesting period. The Company
believes that the impact of FIN 44 will not have a material effect on the
Company's consolidated results of operations or financial position.
3. Earnings per Share
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by adjusting outstanding shares assuming any
dilutive effects of options. However, these shares are excluded due to their
antidilutive effect for which the company incurred a net loss. The following
table sets forth the computation of earnings per share:
Three Months Ended
September 30,
-------------------
2000 1999
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(In thousands,except
per share data)
Numerator: Net income (loss) $ (23) $ 949
======= =======
Denominator for basic earnings (loss) per share:
Weighted-average shares outstanding 32,817 28,853
Effect of dilutive securities:
Stock Options - 3,562
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Denominator for diluted earnings (loss) per common share 32,817 32,415
======= =======
Basic earnings (loss) per share $ (0.00) $ 0.03
======= =======
Diluted earnings (loss) per share $ (0.00) $ 0.03
======= =======
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
September 30, June 30,
2000 2000
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(In thousands)
Raw materials $5,814 $4,766
Finished goods 2,433 1,488
------ ------
8,247 6,254
Reserve for excess and obsolete inventory (831) (869)
------ ------
$7,416 $5,385
====== ======
5. Stockholders' Equity
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 and received aggregate net proceeds from the Offering of
$54,286,000.
5
6. 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.
7. Segment, Geographic, Significant Customer and Supplier Information
Revenue by Product Family
The Company designs and markets three major distinct product families
within one industry segment: network and Internet connectivity products, which
consist primarily of device, multiport device, and print servers.
Net revenue by product family is provided below for the quarters ended
September 30, 2000 and 1999.
Quarter ended September 30,
---------------------------
2000 1999
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(In thousands)
Device servers............................. $ 8,027 $ 5,248
Multiport device servers................... 3,011 2,927
Print servers.............................. 998 1,955
Other...................................... 1 745
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Total net revenues.................... $12,037 $10,875
======= =======
Revenue by Geographic Area
Net revenue by geographic area is provided below for the quarters ended
September 30, 2000 and 1999. Revenue by geographic area is based on where
products are shipped.
Quarter ended September 30,
---------------------------
2000 1999
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(Amounts in thousands)
Americas.......................... $ 8,771 73% $ 7,126 66%
Europe............................ 2,681 22% 3,159 29%
Other............................. 585 5% 590 5%
------- --- ------- ---
$12,037 100% $10,875 100%
======= === ======= ===
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes thereto contained elsewhere
in this report. The information in this report is not a complete description of
our business or the risks associated with an investment in our common stock. We
urge you to carefully review and consider the various disclosures made by us in
this Report and in other reports filed with the Securities and Exchange
Commission ("SEC"), including our Registration Statement on Form S-1 for our
Initial Public Offering and our Annual Report on Form 10-K for the year ended
June 30, 2000.
The section entitled "Risk Factors" set forth in this Form 10-Q and in our
Registration Statement on Form S-1 and our Annual Report on Form 10-K for the
year ended June 30, 2000, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. You should
carefully consider those risks, in addition to the other information in this
Report and in our other filings with the SEC, before deciding to invest in our
company or to maintain or increase your investment.
This Report contains forward-looking statements which include, but are not
limited to, statements concerning projected revenues, expenses, gross profit and
income, the need for additional capital, Year 2000 compliance, market acceptance
of our products, our ability to consummate acquisitions and integrate their
operations successfully, our ability to achieve further product integration, the
status of evolving technologies and their growth potential, our production
capacity, our ability to migrate to smaller process geometries, and the success
of pending litigation. These forward-looking statements are based on our current
expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by us. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", "may", "will"
and variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors. We undertake no obligation to revise or update publicly any forward-
looking statements for any reason.
Overview
Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet
7
or other networks using standard protocols for connectivity, including fiber
optic, Ethernet and wireless. Since our inception in 1989, we have developed an
array of network-enabling products including Device Servers, Multiport Device
Servers, Print Servers and other products. Beginning in fiscal year 1999, we
began to experience an increase in sales of our Device Servers reflecting our
focus on this higher margin product line. At the same time, we began to
experience a decline in sales of Print Server and other products as we shifted
resources to our Device Server business, which we believe represents a greater
opportunity for long-term growth. This trend continued into Q1 2001. We believe
sales of our Device Server products will continue to represent an increasing
percentage of our net revenues in the future. Our strategy for continuing to
increase sales of our Device Server product line involves a two-fold approach.
First, we intend to substantially increase our research and development
expenditures over the next two years to enhance our Device Server product line
and develop new products. Second, we intend to grow our Device Server business
through strategic acquisitions, investments and partnerships, which we believe
will support our product lines and allow us to secure additional intellectual
property, increase our customer base and provide access to new markets.
Our products are sold to original equipment manufacturers (OEMs), value added
resellers (VARs), systems integrators and distributors, as well as directly to
end-users. We have two customers that accounted for more than 10% of our net
revenues. One of our distributors, Ingram Micro, accounted for 11.5% of our net
revenues during the quarter ended September 30, 2000, compared to 16.4% for the
quarter ended September 30, 1999. Another distributor, Tech Data, accounted for
15.2% of our net revenues during the quarter ended September 30, 2000, compared
to 9.9% for the quarter ended September 30, 1999. Transtec AG, an international
OEM and related party due to common ownership by our Chairman and major
stockholder, accounted for 6.6% of our net revenues during the quarter ended
September 30, 2000, compared to 9.0% for the quarter ended September 30, 1999.
In October 1998, we acquired ProNet GmbH, a German company that is a supplier
of industrial automation device server technology. In connection with this
acquisition, we acquired exclusive marketing rights to CoBox technology in the
United States and Canada from Dr. Peter Weisser, Sr. We also acquired non-
exclusive marketing rights to this technology world-wide, excluding Germany and
Switzerland. Under this agreement, we are required to make royalty payments to
Dr. Weisser. As a result, we recognized approximately $363,000 of royalty
expense and amortization relating to the marketing rights agreement during the
quarter ended September 30, 2000. We will incur similar expenses during the
quarter ended December 31, 2000, after which time, we expect to have no further
charges relating to these acquisitions.
We recognize revenues upon product shipment. We have granted several customers
limited return privileges, as well as limited price protection for inventories
held at the time of published price reductions. Estimated reserves have been
recorded to reflect these agreements, as well as potential warranty expenses,
based on our five-year warranty policy from the date of shipment. The allowance
for doubtful accounts is recorded based upon anticipated collection risk. This
reserve has increased during the quarter ended September 30, 2000 primarily due
to slower collections with some of our European accounts.
Amortization of stock-based compensation relates to deferred compensation
recorded in connection with the grant of stock options to employees where the
option exercise price is less than the estimated fair value of the underlying
shares of common stock as determined for financial reporting purposes. We have
recorded deferred compensation within stockholders' equity of approximately
$10.1 million, which is being amortized over the vesting period of the related
stock options, which is generally four years. At September 30, 2000, a balance
of $8.3 million remains and will be amortized as follows: $2.2 million in the
remainder of fiscal 2001, $2.8 million in fiscal 2002, $1.9 million in fiscal
2003, $1.2 million in fiscal 2004 and $0.2 million in fiscal 2005. The amount of
stock-based compensation amortized in future periods could decrease if options
for which accrued, but unvested compensation has been recorded, are forfeited.
8
Results of Operations for the Three Months Ended September 30, 2000 compared to
the Three Months Ended September 30, 1999
The following table sets forth certain statement of operations data expressed
as a percentage of total revenue:
Three Months Ended
September 30,
------------------
2000 1999
----- -----
Net revenues 100.0% 100.0%
Cost of revenues 44.4 43.2
----- -----
Gross profit 55.6 56.8
Operating expenses:
Selling, general and administrative 44.5 33.1
Research and development 8.8 6.6
Amortization of deferred compensation 5.5 --
----- -----
Total operating expenses 58.8 39.7
Income (loss) from operations (3.2) 17.1
Interest and other income, net 3.5 -
Minority interest expense, net - (.1)
----- -----
Income before income taxes .3 17.0
Provision for income taxes .5 8.3
----- -----
Net income (loss) (.2)% 8.7%
===== =====
Net Revenues
Net revenues increased $1.2 million, or 10.7%, from $10.9 million in the
quarter ended September 30, 1999 to $12.0 million in the quarter ended September
30, 2000. The increase was primarily attributable to an increase in net revenues
of our Device Server products, offset by a decline in our Print Server and other
products. Device Server net revenues increased $2.8 million, or 53.0%, from $5.2
million or 48.3% of net revenues in the quarter ended September, 1999 to $8.0
million or 66.7% of net revenues in the quarter ended September 30, 2000. This
increase is attributable to the rapid adoption rates of Original Equipment
Manufacturers, or OEMs, as well as strong sales of our UDS-10 Device Server
product, which was introduced during the fourth quarter of fiscal 2000.
Multiport Device Server net revenues increased $84,000, or 3.5%, from $2.9
million or 26.9% of net revenues in the quarter ended September 30, 1999 to $3.0
million or 25.0% of net revenues in the quarter ended September 30, 2000. Print
Server and other revenues decreased $1.7 million, or 63.0%, from $2.7 million,
or 24.8% of net revenues in the quarter ended September 30, 1999 to $1.0
million, or 8.3% of net revenues in the quarter ended September 30, 2000, due to
a more rapid transition to device server products.
Net revenues generated from sales in the Americas increased $1.7 million, or
23.9%, from $7.1 million or 65.5% of net revenues in the quarter ended
September 30, 1999 to $8.8 million or 72.9% of net revenues in the quarter ended
September 30, 2000. Our net revenues derived from customers located in Europe
decreased $478,000, or 15.1%, from $3.2 million or 29.1% of net revenues in the
quarter ended September 30, 1999 to $2.7 million or 22.3% of net revenues in the
quarter ended September 30, 2000. Our net revenues derived from customers
located in other geographic areas decreased slightly from $590,000 or 5.4% of
net revenues in the quarter ended September 30, 1999 compared to $585,000 or
4.9% of net revenues in the quarter ended September 30, 2000.
9
Gross Profit
Gross profit represents net revenues less cost of revenues. Cost of revenues
consists primarily of the cost of raw material components, subcontract labor
assembly from outside manufacturers and associated overhead costs. As part of
our agreement with Gordian, Inc., an outside research and development firm, a
royalty charge is included in cost of revenues and is calculated based on the
related products sold. Gross profit increased by $514,000, or 8.3%, from $6.2
million or 56.8% of net revenues in the quarter ended September 30, 1999 to $6.7
million or 55.6% of net revenues in the quarter ended September 30, 2000. In the
quarter ended September 30, 2000, the Gordian royalties were $522,000 as
compared to $571,000 in the quarter ended September 30, 1999. The increase in
gross profit resulted from the higher sales levels described above. However, the
percentage decreased from the prior year due to higher overhead spending of
$132,000 which will generate future cost reductions, unfavorable warranty
reserve of $195,000 due to a favorable adjustment in the prior year, and pricing
pressure on the device server products of $1.8 million which was offset by
higher unit volume of $3.5 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 $1.8 million, or 49.0%,
from $3.6 million or 33.1% of net revenues in the quarter ended September 30,
1999 to $5.4 million or 44.5% of net revenues in the quarter ended September 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 will continue to increase in the foreseeable future
to support the global expansion of our operations.
Research and Development
Research and development expenses consist primarily of salaries and the
related costs of employees, as well as expenditures to third-party vendors for
research and development activities. Research and development expenses increased
$330,000, or 45.7%, from $722,000 or 6.6% of net revenues for the quarter ended
September 30, 1999 to $1.1 million or 8.7% of net revenues for the quarter ended
September 30, 2000. This increase resulted primarily from increased headcount
and expenses related to new product development.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest earned on cash
and cash equivalents, less interest on our bank lines of credit and capital
lease obligations, the effects of exchange gains and losses from foreign
currency transactions, and gains and losses from disposals of fixed assets.
Interest and other income (expense), net was $423,000 and 62,000 for the
quarters ended September 30, 2000 and 1999, respectively. The increase is
primarily due to interest income of $445,000 on the proceeds from our initial
public offering in August 2000 and unfavorable currency fluctuation of $71,000.
10
Provision for Income Taxes
The effective tax rate for the quarter ended September 30, 1999 was 48%. The
effective tax rate for the quarter ended September 30, 2000, though higher, is
not meaningful primarily to the comparatively low earnings before taxes in the
quarter and the recognition of a current tax expense without the corresponding
recognition of the related deferred tax benefit. The Company utilizes the
liability method of accounting for income taxes as set forth in Financial
Accounting Standards Board ("FASB") Statement No. 109, Accounting for Income
Taxes.
There is no valuation allowance provided for deferred tax assets since we
believe that it is more likely than not that these assets will be realized.
These assets are expected to be realized through the reversal of timing
differences and through future taxable income.
Liquidity and Capital Resources
Since inception, we have financed our operations through the issuance of
common stock and through net cash generated from operations. Our cash
equivalents consist of short-term investments with original maturities of 90
days or less. As of September 30, 2000, we had cash and cash equivalents of
$52.6 million. We have a secured bank line of credit which provides for
borrowings of up to $5.0 million, at the bank's prime interest rate, which was
9.5% at September 30, 2000. The line of credit expires on December 2, 2000 and
requires us to maintain compliance with customary covenants and conditions. We
had no outstanding balance under our bank line of credit as of September 30,
2000.
Our operating activities used cash of $2.5 million during the quarter ended
September 30, 2000. We incurred a net loss of $23,000, which includes
amortization and depreciation of $1.0 million, which was reduced by increased
inventory of $2.0 million, increased accounts receivable of $1.0 million,
reduced current liabilities by $563,000, and an increase in bad debt reserve of
$76,000. The increase in accounts receivable was due to slow collections from
some of our European customers. We increased our inventory to support our
increasing sales activity and to provide better service levels to our customers.
Our operating activities provided cash of $291,000 in the quarter ended
September 30, 1999.
Our investing activities used $1.2 million of cash during the quarter ended
September 30, 2000. The cash used in this period related mainly to the purchase
of property and equipment, primarily computer hardware and software of $856,000
pertaining to Oracle software enhancements to support our international
operations and a customer resource management (CRM) software package to support
our sales force. In addition, we invested $156,000 in furniture and leasehold
improvements for an office expansion project. Our investing activities used
cash of $30,000 during the quarter ended September 30, 1999 related to the
purchase of property and equipment of $97,000, offset by a change in minority
interest of $67,000 related to a ProNet GmbH subsidiary.
Cash provided by financing activities was $54.3 million for the quarter ended
September 30, 2000, primarily related to the net proceeds from our initial
public offering on August 4, 2000. Cash used for financing activities was
$728,000 during the quarter ended September 30, 1999, primarily for the
repayment on our bank line of credit related to our acquisition of ProNet GmbH.
11
We intend to use a portion of the proceeds from our recent public offering to
substantially increase our research and development activities. Over the next
two years, we expect our research and development expenses to increase to
approximately 10% of our net revenues. Specific amounts allocated to future
research and development and sales and marketing expenditures will be budgeted
based upon market conditions existing at that time. An Investment Policy which
sets forth objectives for investing the Company's excess cash was approved by
the Board of Directors in September 2000 and is expected to be put into place in
the second quarter of fiscal 2001.
We believe that the net proceeds from our public offering, our existing cash
and cash generated from operations will be adequate to meet our anticipated cash
needs through at least the next 12 months. Our future capital requirements will
depend on many factors, including the timing and amount of our net revenues and
research and development and infrastructure investments which will affect our
ability to generate additional cash. If cash generated from operations and
financing activities is insufficient to satisfy our working capital
requirements, we may need to borrow funds under our bank lines of credit, or
seek additional funding through additional bank 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
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. We
have not yet determined the effect of SFAS No. 133 on our operations and
financial position. We implemented SFAS No. 133 at the beginning of fiscal year
2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We believe that our current revenue recognition policies comply with
SAB 101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion No.
25 (FIN 44). This Interpretation clarifies the definition of employee for
purposes of applying APB Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. We believe that the impact of FIN 44 will not have a
material effect on the consolidated financial position or results of our
operations.
Factors That May Affect Future Results of Operation
12
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Our business operations may be impaired by
additional risks and uncertainties that we do not know of or that we currently
consider immaterial.
Our business, results of operations or cash flows may be adversely affected
if any of the following risks actually occur. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
Variations in quarterly operating results, due to factors including changes in
demand for our products and changes in our mix of net revenues, could cause our
stock price to decline.
Our quarterly net revenues, expenses and operating results have varied in
the past and might vary significantly from quarter to quarter in the future. We
therefore believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance, and you should not rely on
them to predict our future performance or the future performance of our stock
price. Our short-term expense levels are relatively fixed and are based on our
expectations of future net revenues. If we were to experience a reduction in net
revenues in a quarter, we would likely be unable to adjust our short-term
expenditures. If this were to occur, our operating results for that quarter
would be harmed. If our operating results in future quarters fall below the
expectations of market analysts and investors, the price of our common stock
could fall. Other factors that might cause our operating results to fluctuate on
a quarterly basis include:
. changes in the mix of net revenues attributable to higher-margin and
lower-margin products;
. customers' decisions to defer or accelerate orders;
. varying size or timing of orders for our products;
. short-term fluctuations in the cost or availability of our critical
components, such as flash memory;
. changes in demand for our products generally;
. loss of significant customers;
. announcements or introductions of new products by our competitors;
. defects and other product quality problems;
. changes in demand for devices that incorporate our connectivity
products; and
. foreign currency fluctuation.
Revenues from our Print Server line of products have decreased significantly and
we expect that revenues from our Print Server line of products will continue to
decline in the future as we focus our efforts on the development of other
product lines.
Since 1993, revenues from our Print Server line have accounted for a
significant portion of our net revenues but have declined significantly
recently. For example, revenues from our Print Server line
13
accounted for approximately 8.3% of our total net revenues for the quarter ended
September 30, 2000 compared to approximately 18.0% for the quarter ended
September 30, 1999. Revenues from our Print Server line also decreased
significantly in the quarter ended September 30, 2000 to approximately $998,000
from approximately $2.0 million for the quarter ended September 30, 1999. We
anticipate that revenues from our Print Server line will continue to decline in
the future as we plan to turn our focus to the development of our current Device
Server product line which we introduced in mid 1998. We do not know if this
transition in product development will be successful. We do not know whether our
new product line will be accepted by our current and future target markets to
the extent we anticipate. If the expected decline in net revenues attributable
to our Print Server line of products is not offset by increases in net revenues
from our Device Server line of products, our business could be harmed.
We intend to substantially increase our research and development efforts which,
if not successful, could cause a decline in our revenues and could harm our
business.
We intend to increase substantially our expenditures on research and
development in the next two years to enhance and develop additional products.
For the quarter ended September 30, 2000, research and development expenses
comprised 8.8% of our net revenues. Over the next two years, we expect our
research and development expenses to increase to approximately 10% of our net
revenues. If we are unable to develop new products as a result of this effort,
or if the products we develop are not successful, our business could be harmed.
Even if we do develop new products that are accepted by our target markets, we
cannot assure you that the revenue from these products will be sufficient to
justify our investment in research and development.
There is a risk that our OEM customers will develop their own internal expertise
in network-enabling products which could result in reduced sales of our
products.
Since our inception, we primarily sold our products to VARs, system
integrators and OEMs. Although we intend to continue to use these sales
channels, we intend to focus more heavily on selling our products to OEMs.
Selling products to OEMs involves unique risks, including the risk that the OEM
will develop internal expertise in network-enabling products or will otherwise
provide network functionality to their products without using our Device Server
technology. If this were to occur, our stock price could decline in value and
you could lose part or all of your investment.
We might be unable to manage our growth, and if we cannot do so, it could harm
our business.
Our business has grown rapidly in the last year. At September 30, 1999, we had
107 employees. As of September 30, 2000, we had 158 employees. In addition, we
have experienced expansion in our manufacturing and shipping requirements, our
product lines and our customer base. This rapid expansion has placed significant
strain on our administrative, operational and financial resources. These changes
have increased the complexity of managing our company. Our current systems,
management and other resources will need to grow rapidly in order to meet the
demands of our anticipated future growth. If we are unable to successfully
expand and improve our systems as required, or if we are otherwise unable to
manage our growth, our business will be harmed.
14
New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products and could reduce our market
share or result in pressure to reduce the price of our products.
The market for our products is intensely competitive, subject to rapid change
and is significantly affected by new product introductions and pricing
strategies of our competitors. We face competition primarily from companies that
network-enable devices, companies in the automation industry, companies with
significant networking expertise and research and development resources, and
companies that produce semiconductors. Our competitors might offer new products
with features or functionality that are equal to or better than our products. We
might not have sufficient engineering staff or other required resources to
modify our products to match our competitors. Similarly, competitive pressure
could force us to reduce the price of our products. In each case, we could lose
new and existing customers to our competition. If this were to occur, our
revenues could decline and our business could be harmed.
We depend on two third-party manufacturing facilities to manufacture all of our
products, which reduces our control over the manufacturing process. We will also
need to secure an additional manufacturer in order to meet our expected future
commitments.
We currently outsource all of our manufacturing to two third-party
manufacturers, RTG Elektronik and Express Manufacturing. Our reliance on these
third-party manufacturers exposes us to a number of significant risks,
including:
. reduced control over delivery schedules, quality assurance, manufacturing
yields and production costs;
. lack of guaranteed production capacity or product supply; and
. reliance on third-party manufacturers to maintain competitive manufacturing
technologies.
We do not have supply agreements with our manufacturers, and instead obtain
manufacturing services on a purchase-order basis. Our manufacturers have no
obligation to supply products to us in any specific quantity or at any specific
price. If our manufacturers were to become unable or unwilling to continue to
manufacture our products in required volumes, at acceptable quality, quantity,
yields and costs, or in a timely manner, our business would be seriously harmed.
As a result, we would have to attempt to identify and qualify substitute
manufacturers for our current manufacturers, which could be time consuming and
difficult, and might result in unforeseen manufacturing and operations problems.
In addition, a natural disaster could disrupt our manufacturers' facilities and
could inhibit our manufacturers' ability to provide us with manufacturing
capacity on a timely basis, or at all. If this were to occur, we likely would be
unable to fill customers' existing orders or accept new orders for our products.
The resulting decline in revenue would harm our business.
Inability or delays in deliveries from our component suppliers could damage our
reputation and could cause our net revenues to decline and harm our results of
operations.
Although we outsource our manufacturing, we are responsible for procuring raw
materials for our products. Our products incorporate components or technologies
that are only available from limited sources
15
of supply. In particular, some of our integrated circuits are available from a
single source. In the past, from time to time, integrated circuits we used in
our products were 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. For example,
recently our supplier of gate array chips ended production of that component,
which caused an interruption in our ability to supply one of our multiport
products. If we are unable to meet existing orders or to enter into new orders
because of a shortage in components, we will likely lose net revenues and risk
losing customers and harming our reputation in the marketplace.
If a major customer cancels, reduces, or delays purchases, our net revenues
might decline and our business could be adversely affected.
For the quarter ended September 30, 2000, our two largest customers, each of
whom are distributors, accounted for 27% of our net revenues. Ingram Micro, a
domestic distributor, accounted for 12% of our net revenues for the quarter
ended September 30, 2000 and Tech Data, a domestic distributor, accounted for
15% of our net revenues for the quarter ended September 30, 2000. Our top five
customers accounted for 41% of our net revenues during this period and our top
ten customers accounted for 51% of our net revenues. Transtec AG, a major
international customer, accounted for 7% of our net revenues as well as a
significant portion of our accounts receivable for the quarter ended September
30, 2000. Bernhard Bruscha, our Chairman of the Board, is the majority
stockholder and Chief Executive Officer of transtec AG. We have in the past, and
might in the future, lose one or more major customers. If we fail to continue to
sell to our major customers in the quantities we anticipate, or if any of these
customers terminate our relationship, our reputation, the perception of our
products and technology in the marketplace and the growth of our business could
be harmed. The demand for our products from our OEM, 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.
16
Our future success also depends on our ability to attract new customers, which
often involves an extended process. The sale of our products often involves a
significant technical evaluation, and we often face delays because of our
customers' internal procedures used to evaluate and deploy new technologies. For
these and other reasons, the sales cycle associated with our products is
typically lengthy, often lasting six to nine months and sometimes longer.
Therefore, if we were to lose a major customer, we might not be able to replace
the customer on a timely basis or at all. This would cause our net revenues to
decrease and could cause the price of our stock to decline.
The average selling prices of our products might decrease, which could reduce
our gross margins.
We cannot assure you that we will be able to maintain our average selling
prices and gross margins at current levels. In the past, we have experienced
some reduction in the average sale prices of products, particularly with respect
to our Print Server line of products. For example, Print Server average selling
prices have decreased approximately 8.2% for the quarter ended September 30,
2000 over the quarter ended September 30, 1999. In the future, we expect
competition to increase, and we anticipate this could result in additional
pressure on our pricing. In addition, our average selling prices for our
products might decline as a result of other reasons, including promotional
programs and customers who negotiate price reductions in exchange for longer-
term purchase commitments. Average selling prices and gross margins for our
products also might decline as the products mature in their life cycles. In
addition, we might not be able to increase the price of our products in the
event that the price of components or our overhead costs increase. If this were
to occur, our gross margins would decline.
Because we are dependent on international sales for a substantial amount of our
net revenues, we face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results.
Net revenues from international sales represented 27% of net revenues for
the quarter ended September 30, 2000 and 35% of net revenues for the quarter
ended September 30, 1999. Net revenues from Europe represented 22% of our net
revenues for the quarter ended September 30, 2000 and 29% for the quarter ended
September 30, 1999. We expect that international revenues will continue to
represent a significant portion of our net revenues in the foreseeable future.
Doing business internationally involves greater expense and many additional
risks. For example, because the products we sell abroad and the products and
services we buy abroad are priced in foreign currencies, we are affected by
fluctuating exchange rates. In the past, we have from time to time lost money
because of these fluctuations. We might not successfully protect ourselves
against currency rate fluctuations, and our financial performance could be
harmed as a result. In addition, we face other risks of doing business
internationally, including:
. unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
. reduced protection for intellectual property rights in some countries;
. differing labor regulations;
. compliance with a wide variety of complex regulatory requirements;
. changes in a country's or region's political or economic conditions;
. greater difficulty in staffing and managing foreign operations; and
. increased financial accounting and reporting burdens and complexities.
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.
17
Our executive officers and technical personnel are critical to our business, and
without them we might not be able to execute our business strategy.
Our financial performance depends substantially on the performance of our
executive officers and key employees. We are dependent in particular on our
Chief Executive Officer, Frederick G. Thiel, as well as our technical personnel,
due to the specialized technical nature of our business. If we lose the services
of Mr. Thiel or any of our key personnel and are not able to find replacements
in a timely manner, our business could be disrupted, other key personnel might
decide to leave, and we might incur increased operating expenses associated with
finding and compensating replacements.
We might be unable to hire and retain the skilled personnel necessary to develop
our operations, sales, technical and support capabilities in order to continue
to grow, which could harm our business.
Our business cannot continue to grow if we do not hire and retain qualified
technical personnel. Competition for these individuals is intense, and we might
not be able to attract, assimilate or retain highly qualified technical
personnel in the future. In addition, we need to hire and retain operations,
sales and support personnel in the near future. We expect to face greater
difficulty attracting qualified personnel with equity incentives as a public
company than we did as a privately held company. Our failure to attract and
retain highly trained personnel in these areas might limit the rate at which we
can develop, which would harm our business.
If we make unprofitable acquisitions or are unable to successfully integrate any
future acquisitions, our business could suffer.
We have in the past and from time to time in the future might acquire
businesses, client lists, products or technologies that we believe complement or
expand our existing business. For example, in October 1998, we acquired ProNet
GmbH, a German supplier of industrial application device server technology.
Acquisitions of this type involve a number of risks, including the possibility
that the operations of the acquired company will be unprofitable or that our
management's attention will be diverted from the day-to-day operation of our
business. An unsuccessful acquisition could reduce our margins or otherwise harm
our financial condition. Any acquisition could result in a dilutive issuance of
equity securities, the incurrence of debt and the loss of key employees. We
cannot assure you that any acquisitions will be successfully completed or that,
if one or more acquisitions are completed, the acquired businesses, client
lists, products or technologies will generate sufficient revenue to offset the
associated costs of other acquisitions or other adverse effects.
The market for our products is new and rapidly evolving. If we are not able to
develop or enhance our products to respond to changing market conditions, our
net revenues will suffer.
Our future success depends in large part on our ability to continue to enhance
existing products, lower product cost and develop new products that maintain
technological competitiveness. The demand for network-enabled products is
relatively new and can change as a result of innovations or changes within our
target markets, which include industrial automation, healthcare, security/access
control, retail/point of sale, commercial/information technology and
telecommunications. For example, industry segments might adopt new or different
standards, giving rise to new customer requirements. Any failure by us to
develop and
18
introduce new products or enhancements directed at new industry standards could
harm our business, financial condition and results of operations. These customer
requirements might or might not be compatible with our current or future product
offerings. We might not be successful in modifying our products and services to
address these requirements and standards. For example, our competitors might
develop competing technologies based on Internet Protocols, Ethernet Protocols
or other protocols that might have advantages over our products. If this were to
happen, our revenue might not grow at the rate we anticipate, or could decline.
Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.
We currently offer a five year warranty on all of our products. Our products
could contain undetected errors or defects. If there is a product failure, we
might have to replace all affected products without being able to book revenue
for replacement units, or we may have to refund the purchase price for the
units. Because of our recent introduction of our line of Device Servers, we do
not have a long history with which to assess the risks of unexpected product
failures or defects for this product line. Regardless of the amount of testing
we undertake, some errors might be discovered only after a product has been
installed and used by customers. Any errors discovered after commercial release
could result in loss of net revenues and claims against us. Significant product
warranty claims against us could harm our business, reputation and financial
results and cause the price of our stock to decline.
Our intellectual property protection might be limited.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws, such as copyright, trademark and trade secret laws, and
contractual restrictions, such as confidentiality agreements and licenses, to
establish and protect our proprietary rights. Despite any precautions that we
have taken:
. laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies;
. other companies might claim common law trademark rights based upon use of
marks that precede the registration of our marks;
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we might be unable to determine the
extent of this unauthorized use; and
. current federal laws that prohibit software copying provide only limited
protection from software "pirates."
Also, the laws of other countries in which we market our products might offer
little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which could significantly harm our business.
19
If our agreement with Gordian, Inc. is terminated, we could lose the rights to
valuable intellectual property.
Pursuant to an agreement dated February 29, 1989 between us and Gordian, Inc.
Gordian developed intellectual property used in our Micro Serial Server, or MSS,
Print Servers and ETS and LRS lines of Multiport Device Server products. These
products represent a substantial portion of our revenue. Our total Print Server
and Multiport Device Server products alone, without including MSS products,
represented approximately 33.3% and 44.9% of our net revenues in the quarters
ended September 30, 2000 and 1999, respectively. Under the terms of this
agreement Gordian owns the rights to the intellectual property developed by it
but has agreed that for the term of the agreement it will not develop products
for any other party which will directly compete with a product Gordian developed
for us. The agreement with Gordian currently provides that we are required to
pay royalties with respect to sales of products covered by the agreement. In the
quarters ended September 30, 2000 and 1999, we paid Gordian approximately
$522,000 and $571,000 in royalties, respectively. In the event that the Gordian
agreement is terminated, we could lose our rights to the intellectual property
developed under the Gordian agreement and this might prevent us from marketing
some or all of our MSS line of products in the future. Although we believe that
other products developed by us using alternative technology can be substituted
in the future for the products sold by us using the technology developed by
Gordian, there is no guarantee that we will not lose customers and revenues
which would harm our business.
We might become involved in litigation over proprietary rights, which could be
costly and time consuming.
Substantial litigation regarding intellectual property rights exists in our
industry. There is a risk that third parties, including current and potential
competitors and current developers of our intellectual property or our
manufacturing partners, will claim that our products, or our customers'
products, infringe on their intellectual property rights. In addition, software,
business processes and other property rights in our industry might be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Other parties might currently have, or might eventually be
issued, patents that the proprietary rights we use infringe upon. Any of these
third parties might make a claim of infringement against us. Any litigation,
brought by us or others could result in the expenditure of significant financial
resources and the diversion of management's time and efforts. In addition, from
time to time we could encounter disputes over rights and obligations concerning
intellectual property. We cannot assume that we will prevail in intellectual
property disputes regarding infringement, misappropriation or other disputes.
Litigation in which we are accused of infringement or misappropriation might
cause a delay in the introduction of new products, require us to develop non-
infringing technology or require us to enter into royalty or license agreements,
which might not be available on acceptable terms, or at all. In addition, we
have obligations to indemnify certain of our customers under some circumstances
for infringement of third party intellectual property rights. If any claims from
third parties required us to indemnify customers under our agreements, the costs
could be substantial, and our business could be harmed. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and cost-
effective basis, our business could be significantly harmed.
The amortization of deferred stock compensation will negatively affect our
operating results.
20
We have recorded deferred stock compensation in connection with the grant of
stock options to employees where the option exercise price is less than the
estimated fair value of the underlying shares of common stock as determined for
financial reporting purposes. We have recorded deferred compensation within
stockholders' equity of approximately $10.1 million during the fiscal year ended
June 30, 2000, which is being amortized over the vesting period of the related
stock options, which is generally four years. A balance of $8.3 million remains
at September 30, 2000 and will be amortized as follows: $2.2 million in the
remainder of fiscal 2001, $2.8 million in fiscal 2002, $1.9 million in fiscal
2003, $1.2 million in fiscal 2004, and $0.2 million in fiscal 2005.
The amount of stock based compensation in future periods will increase if we
continue to grant stock options where the exercise price is less than the
estimated fair value of the underlying shares. The amount of stock based
compensation amortization in future periods could decrease if options for which
accrued, but unvested compensation has been recorded are forfeited.
The amortization of marketing rights and related payments of sales commissions
will negatively affect our operating results.
In September 1998, we purchased marketing rights from an individual, which
allow us to sell products in various geographical regions. Additionally, we pay
a sales commission to the same individual for sales of certain products made to
various customers through December 31, 2000. We entered into these transactions
to enhance the value of our October 1998 acquisition of ProNet GmbH, a German
company that is a supplier of industrial application device server technology.
We paid $1.7 million for the marketing rights, which are being amortized over
27 months. As a result, we will recognize approximately $188,000 of amortization
relating to the marketing rights agreement for the period from October 1, 2000
through December 31, 2000. Commissions paid and amortization of marketing rights
during the quarters ended September 30, 2000 and 1999 were $363,000 and
$563,000, respectively. After December 31, 2000, we expect to have no further
charges relating to these transactions.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There has not been any material change in our exposure to interest rate and
foreign currency risks since the date of our Annual Report on Form 10-K for the
year ended June 30, 2000.
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 September 30, 2000, we had cash
and cash equivalents of $52.6 million, which includes our initial public
offering proceeds. This 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.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended September 30, 2000, we received net proceeds of
$54.3 million. During the quarter, we used $4.0 million of the proceeds for
working capital, primarily related to increased inventory levels to support our
projected sales increase and higher accounts receivable balances related to slow
payment in Europe, as well as for property and equipment purchases.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
3.2* Certificate of Incorporation
3.4* Bylaws
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.
___________
* 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 Annual Report on Form 10-K, originally filed September 28, 2000.
+ Confidential treatment granted as to portions of this exhibit.
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
Lantronix has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 15th day of November, 2000.
LANTRONIX, INC.
By: /s/ Steven V. Cotton
--------------------------------------
Steven V. Cotton
Chief Financial Officer and Chief
Operating Officer
24