Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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: 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 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 |_|
Indicate by check mark whether registrant is an accelerated filer (as
defined in rule 12b-2 of the exchange act). Yes |_| No |X|
As of April 30, 2003, 55,669,910 shares of the Registrant's common stock
were outstanding.
================================================================================
LANTRONIX, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION..................................................................... 3
Item 1. Financial Statements...................................................................... 3
Unaudited Condensed Consolidated Balance Sheets at March 31, 2003 and June 30, 2002....... 3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2003 and 2002................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2003 and 2002................................................................ 5
Notes to Unaudited Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 14
Risk Factors.............................................................................. 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 31
Item 4. Controls and Procedures................................................................... 31
PART II. OTHER INFORMATION......................................................................... 32
Item 1. Legal Proceedings......................................................................... 32
Item 2. Changes in Securities and Use of Proceeds................................................. 33
Item 3. Defaults Upon Senior Securities........................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders....................................... 33
Item 5. Other Information......................................................................... 33
Item 6. Exhibits and Reports on Form 8-K.......................................................... 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, JUNE 30,
2003 2002
---------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents ....................... $ 5,287 $ 26,491
Marketable securities ........................... 9,250 6,963
Accounts receivable, net ........................ 4,540 6,172
Inventories ..................................... 6,553 10,743
Deferred income taxes ........................... 5,205 5,205
Prepaid expenses and other current assets ....... 5,009 5,299
---------- ----------
Total current assets ........................ 35,844 60,873
Property and equipment, net .......................... 3,034 5,039
Goodwill ............................................. 16,081 13,811
Purchased intangible assets, net ..................... 12,604 14,681
Long-term investments ................................ 5,664 6,761
Officer loans ........................................ 104 104
Other assets ......................................... 2,004 2,543
---------- ----------
Total assets ................................ $ 75,335 $ 103,812
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ................................ $ 2,951 $ 4,607
Due to related party ............................ -- 246
Accrued payroll and related expenses ............ 1,851 1,530
Due to Gordian .................................. 1,000 2,000
Accrued Lightwave settlement .................... -- 2,004
Restructuring reserve ........................... 2,841 407
Other current liabilities ....................... 3,476 4,656
---------- ----------
Total current liabilities ................... 12,119 15,450
Deferred income taxes ................................ 5,805 5,205
Due to Gordian ....................................... -- 1,000
Convertible note payable ............................. 867 --
Stockholders' equity:
Common stock .................................... 6 5
Additional paid-in capital ...................... 178,774 179,547
Employee notes receivable ....................... (28) (28)
Deferred compensation ........................... (1,056) (4,546)
Accumulated deficit ............................. (121,320) (92,875)
Accumulated other comprehensive income .......... 168 54
---------- ----------
Total stockholders' equity .................. 56,544 82,157
---------- ----------
Total liabilities and stockholders' equity .. $ 75,335 $ 103,812
========== ==========
See accompanying notes.
3
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net revenues (A) ........................................... $ 12,362 $ 14,580 $ 37,701 $ 46,137
Cost of revenues (B) ....................................... 9,370 10,374 25,253 25,451
--------- --------- --------- ---------
Gross profit ............................................... 2,992 4,206 12,448 20,686
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative (C) ............... 7,771 9,206 23,850 24,478
Research and development (C) .......................... 2,536 2,225 8,083 6,273
Stock-based compensation (B) (C) ...................... 1,564 707 2,344 2,660
Amortization of purchased intangible assets ........... 401 579 857 1,388
Restructuring charges ................................. 120 2,810 5,049 2,810
--------- --------- --------- ---------
Total operating expenses ................................... 12,392 15,527 40,183 37,609
--------- --------- --------- ---------
Loss from operations ....................................... (9,400) (11,321) (27,735) (16,923)
Interest income (expense), net ............................. 20 289 287 1,304
Other income (expense), net ................................ (527) (185) (935) (989)
--------- --------- --------- ---------
Loss before income taxes ................................... (9,907) (11,217) (28,383) (16,608)
Provision (benefit) for income taxes ....................... 14 (2,487) 62 (3,683)
--------- --------- --------- ---------
Net loss ................................................... $ (9,921) $ (8,730) $(28,445) $(12,925)
========= ========= ========= =========
Basic and diluted net loss per share ....................... $ (0.18) $ (0.16) $ (0.53) $ (0.25)
========= ========= ========= =========
Weighted average shares (basic and diluted) ................ 54,919 53,305 54,178 50,700
========= ========= ========= =========
(A) Includes net revenues from a related party ............ $ 435 $ 587 $ 1,392 $ 1,683
========= ========= ========= =========
(B) Cost of revenues includes the following:
Amortization of purchased intangible assets ........ $ 1,205 $ 612 $ 3,261 $ 1,510
Stock-based compensation ........................... 23 21 60 97
--------- --------- --------- ---------
$ 1,228 $ 633 $ 3,321 $ 1,607
========= ========= ========= =========
(C) Stock-based compensation is excluded from the following:
Selling, general and administrative expenses ....... $ 1,422 $ 579 $ 2,033 $ 2,088
Research and development expenses .................. 142 128 311 572
--------- --------- --------- ---------
$ 1,564 $ 707 $ 2,344 $ 2,660
========= ========= ========= =========
See accompanying notes.
4
LANTRONIX, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ...................................................................... $(28,445) $(12,925)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................... 1,934 1,884
Amortization of purchased intangible assets ................................ 4,118 2,898
Stock-based compensation ................................................... 2,404 2,757
Allowance for doubtful accounts ............................................ (464) 970
Provision for inventory reserves ........................................... 2,907 1,333
Deferred income taxes ...................................................... -- (1,707)
Revaluation of strategic investment ........................................ -- 500
Write-off of intellectual property ......................................... -- 665
Equity losses from unconsolidated businesses ............................... 1,097 713
Restructuring charges ...................................................... 2,699 2,810
Changes in operating assets and liabilities, net of effect from acquisition:
Accounts receivable ...................................................... 2,096 1,730
Inventories .............................................................. 1,324 (1,725)
Prepaid expenses and other current assets ................................ 253 (3,027)
Other assets ............................................................. 120 (998)
Accounts payable ......................................................... (1,656) (4,054)
Due to related party ..................................................... (246) --
Due to Gordian ........................................................... (2,000) --
Accrued Lightwave settlement ............................................. (2,004) --
Other current liabilities ................................................ (1,089) (644)
--------- ---------
Net cash used in operating activities ......................................... (16,952) (8,820)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net .................................... (317) (2,936)
Purchase of minority investments, net ...................................... -- (7,243)
Purchases of marketable securities ......................................... (9,250) (12,237)
Acquisition of business, net of cash acquired .............................. (2,114) (4,801)
Proceeds from sale of marketable securities ................................ 7,000 1,975
--------- ---------
Net cash used in investing activities ......................................... (4,681) (25,242)
--------- ---------
Cash flows from financing activities:
Net proceeds from underwritten offerings of common stock ................... -- 47,085
Net proceeds from other issuances of common stock .......................... 315 2,520
--------- ---------
Net cash provided by financing activities ..................................... 315 49,605
Effect of foreign exchange rates on cash ...................................... 114 27
--------- ---------
Increase (decrease) in cash and cash equivalents .............................. (21,204) 15,570
Cash and cash equivalents at beginning of period .............................. 26,491 15,367
--------- ---------
Cash and cash equivalents at end of period .................................... $ 5,287 $ 30,937
========= =========
See accompanying notes.
5
LANTRONIX, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited. 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 March 31, 2003, and the consolidated results of its operations for
the three and nine months ended March 31, 2003 and 2002 and its cash flows for
the nine months ended March 31, 2003 and 2002. 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 and nine months ended
March 31, 2003 are not necessarily indicative of the results to be expected for
the full year or any future interim periods.
These financial statements do not include certain footnotes and
financial presentations normally required under generally accepted accounting
principles. Therefore, they should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June 30,
2002, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("SEC") on October 8, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), which
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF
94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"), which
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 148 amends the disclosure requirements in SFAS No. 123 for stock-based
compensation for annual periods ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The disclosure requirements apply to
all companies, including those that continue to recognize stock-based
compensation under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Effective for
financial statements for fiscal years ending after December 15, 2002, SFAS No.
148 also provides three alternative transition methods for companies that choose
to adopt the fair value measurement provisions of SFAS No. 123.
In November 2002, the FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). This statement requires
that a liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued. The disclosure provision of FIN No. 45 were effective
for financial statements of interim and annual periods ending December 15, 2002.
In the third quarter of fiscal year 2003, the Company adopted the provisions of
this statement, which did not have an impact on the condensed consolidated
financial statements.
3. BUSINESS COMBINATIONS
On August 1, 2002, the Company completed the acquisition of Stallion
Technologies PTY, LTD ("Stallion"). The acquisition of Stallion complements the
Company's existing multiport and terminal server product lines. This acquisition
has been accounted for under the purchase method of accounting. The condensed
consolidated financial statements include the results of operations of the
acquisition of Stallion after the date of acquisition.
6
The Company paid $1.2 million in cash consideration and established a
cash escrow account in the amount of $867,000 at the acquisition date to be used
in lieu of the Company's common stock in the event that the Company was unable
to issue registered shares by October 31, 2002. In accordance with the terms of
the acquisition agreement, the Company was not able to issue registered shares
by October 31, 2002; accordingly, the cash escrow amount of $867,000 was
released on November 1, 2002. In addition, the Company issued a two-year note in
the principal amount of $867,000 accruing interest at a rate of 2.5% per annum.
The note is convertible into the Company's common stock at any time, at the
election of the holders, at a $5.00 conversion price. The Company relied on the
exemption in Section 4 (2) of the Securities Act of 1933 in that the offering of
the convertible note was not a public offering.
ALLOCATION OF PURCHASE CONSIDERATION
The Company obtained an independent appraisal of the fair value of the
tangible and intangible assets acquired related to the acquisition of Stallion
in order to allocate the purchase price in accordance with SFAS No. 141
"Business Combinations." Based upon the appraisal, the purchase price was
allocated as follows (in thousands):
NET TANGIBLE PURCHASED
LIABILITIES INTANGIBLE DEFERRED TAX TOTAL
ACQUIRED GOODWILL ASSETS LIABILITIES CONSIDERATION
------------ -------- ---------- ------------ -------------
$ (93) $ 2,270 $ 1,500 $ (600) $ 3,077
============ ======== ========== ============ =============
Net tangible assets acquired in connection with the purchase
transaction include the acquisition costs incurred by the Company.
PRO FORMA DATA
The unaudited pro forma statements of operations data of the Company
set forth below give effect to the acquisition of Stallion as if it had occurred
at the beginning of fiscal 2002 and includes the amortization of purchased
intangible assets. 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
acquisition taken place at the beginning of fiscal 2002 (in thousands, except
per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net revenues ........................... $ 12,362 $ 15,639 $ 38,024 $ 48,231
========= ========= ========= =========
Net loss ............................... $ (9,921) $ (9,117) $(28,439) $(13,676)
========= ========= ========= =========
Basic and diluted net loss per share ... $ (0.18) $ (0.17) $ (0.52) $ (0.27)
========= ========= ========= =========
4. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is calculated by adjusting outstanding shares assuming any
dilutive effects of options. However, for periods in which the Company incurred
a net loss, these shares are excluded because their effect would be to reduce
recorded net loss per share. The following table sets forth the computation of
net loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator: Net loss ................................ $ (9,921) $ (8,730) $(28,445) $(12,925)
========= ========= ========= =========
Denominator:
Weighted-average shares outstanding ............. 55,251 53,836 54,510 51,231
Less: non-vested common shares outstanding ...... (332) (531) (332) (531)
--------- --------- --------- ---------
Denominator for basic and diluted loss per share ... 54,919 53,305 54,178 50,700
========= ========= ========= =========
Basic and diluted net loss per share ............... $ (0.18) $ (0.16) $ (0.53) $ (0.25)
========= ========= ========= =========
7
5. MARKETABLE SECURITIES
The Company defines marketable securities as income yielding
securities, which can be readily converted to cash. Marketable securities
consist of obligations of U.S. Government agencies, state, municipal and county
governments notes and bonds. These securities are carried at cost, which
approximates fair value.
6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
MARCH 31, JUNE 30,
2003 2002
--------- ---------
Raw materials .............................. $ 6,054 $ 6,389
Finished goods ............................. 8,417 9,079
Inventory at distributors .................. 1,055 1,031
--------- ---------
15,526 16,499
Reserve for excess and obsolete inventory... (8,973) (5,756)
--------- ---------
$ 6,553 $ 10,743
========= =========
7. PURCHASED INTANGIBLE ASSETS
The composition of purchased intangible assets is as follows (in
thousands):
MARCH 31, 2003 JUNE 30, 2002
--------------------------------- ----------------------------------
USEFUL ACCUMULATED ACCUMULATED
LIVES GROSS AMORTIZATION NET GROSS AMORTIZATION NET
--------- --------- --------- --------- --------- --------- ---------
Existing technology......... 1-5 years $ 13,460 $ (3,783) $ 9,677 $ 12,720 $ (522) $ 12,198
Customer agreements......... 5 1,130 (315) 815 1,130 (143) 987
Patent/core technology...... 5 1,760 (459) 1,301 459 (212) 247
Tradename/trademark......... 5 532 (128) 404 532 (34) 498
Non-compete agreements...... 2-3 940 (533) 407 940 (189) 751
--------- --------- --------- --------- --------- ---------
Total $ 17,822 $ (5,218) $ 12,604 $ 15,781 $ (1,100) $ 14,681
========= ========= ========= ========= ========= =========
The amortization expense for purchased intangible assets for the nine
months ended March 31, 2003 was $4.1 million, of which $3.3 million was
amortized to cost of revenues and $857,000 was amortized to operating expenses.
The amortization expense for purchased intangible assets for the nine months
ended March 31, 2002 was $2.9 million, of which $1.5 million was amortized to
cost of revenues and $1.4 million was amortized to operating expenses. The
estimated amortization expense for the remainder of fiscal 2003 and the next
four years are as follows (in thousands):
COST OF OPERATING
Fiscal year ending June 30: REVENUES EXPENSES TOTAL
-------- --------- ---------
2003......................... $ 1,062 $ 293 $ 1,355
2004......................... 3,527 956 4,483
2005......................... 2,870 672 3,542
2006......................... 1,915 640 2,555
2007......................... 303 366 669
-------- --------- ---------
Total $ 9,677 $ 2,927 $ 12,604
======== ========= =========
8. LONG-TERM INVESTMENTS
Long-term investments consist of a 15.8% ownership interest in Xanboo,
Inc. ("Xanboo") at March 31, 2003. The Company is accounting for this long-term
investment under the equity method based upon the Company's ability through
representation on Xanboo's board of directors to exercise significant influence
over its operations. The Company's interest in the losses of Xanboo aggregating
$1.1 million for the nine months ended March 31, 2003 have been recognized as
other expense in the condensed consolidated statements of operations. The
Company recorded no similar loss for the same period last year.
8
9. RESTRUCTURING RESERVE
On September 12, 2002, the Company announced a restructuring plan to
prioritize its initiatives around the growth areas of its business, focus on
profit contribution, reduce expenses, and improve operating efficiency. This
restructuring plan includes a worldwide workforce reduction, consolidation of
excess facilities and other charges. During the nine months ended March 31,
2003, the Company recorded restructuring costs totaling $5.0 million, which are
classified as operating expenses in the Company's unaudited condensed
consolidated statements of operations. Included in this restructuring plan was
approximately $3.7 million for the consolidation of excess facilities, relating
primarily to lease terminations, non-cancelable lease costs, write-off of
leasehold improvements and termination of a contractual obligation. The
restructuring costs will be substantially paid in cash and the plan will be
completed within one year of its announcement.
Through March 31, 2003, the restructuring actions had resulted in the
reduction of approximately 50 regular employees worldwide. The Company recorded
actual workforce reduction charges of approximately $1.2 million related to
severance and fringe benefits for the terminated employees.
On March 14, 2003, the Company announced a restructuring plan to
further consolidate its engineering and marketing operations. This restructuring
plan includes a workforce reduction, consolidation of excess facilities and
other charges at the Company's Hillsboro, Oregon, Naperville, Illinois and
German engineering facilities. The Company has recorded $120,000 of
restructuring charges, which are classified as operating expenses in its
unaudited condensed consolidated statements of operations as of March 31, 2003
related to severance and fringe benefits for terminated employees. Through March
31, 2003, the restructuring plan has resulted in the reduction of approximately
8 regular employees. The Company expects to incur $570,000 in connection with
this restructuring of which $120,000 was incurred as of March 31, 2003. The
remaining $450,000 primarily relates to lease termination costs and
consolidation of excess facilities.
A summary of the activity in the restructuring reserve account is as
follows (in thousands):
CHARGES AGAINST RESERVE
-----------------------
RESTRUCTURING RESTRUCTURING
RESERVE AT ADDITIONAL RESERVE AT
JUNE 30, RESTRUCTURING MARCH 31,
2002 COSTS NON-CASH CASH 2003
-------- -------- -------- -------- --------
Workforce reductions ................. $ 281 $ 1,307 $ -- $(1,188) $ 400
Contractual obligations .............. -- 2,000 -- -- 2,000
Consolidation of excess facilities ... 126 1,742 (265) (1,162) 441
-------- -------- -------- -------- --------
Total ................................ $ 407 $ 5,049 $ (265) $(2,350) $ 2,841
======== ======== ======== ======== ========
10. 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 ninety days to five years from the date of
shipment. The following table is a reconciliation of the changes to the product
warranty liability for the periods presented:
MARCH 31, JUNE 30,
2003 2002
-------- --------
Balance beginning of period ........................ $ 479 $ 562
Charged to costs and expenses ...................... 464 220
Deductions ......................................... 153 303
-------- --------
Balance end of period .............................. $ 790 $ 479
======== ========
9
11. PROVISION FOR INCOME TAXES AND EFFECTIVE TAX RATE
The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, "Accounting for Income Taxes." The Company's
effective tax rate was 0% for the nine months ended March 31, 2003, and 22% for
the nine months ended March 31, 2002. The federal statutory rate was 34% for
both periods. The effective tax rate associated with the income tax expense for
the nine months ended March 31, 2003, was lower than the federal statutory rate
primarily due to the increase in valuation allowance, as well as the
amortization of stock-based compensation for which no current year tax benefit
was provided. The Company's effective tax rate associated with the income tax
benefit for the nine months ended March 31, 2002, was lower than the statutory
rate primarily due to foreign losses and amortization of stock-based
compensation for which no benefit was provided. The Company is currently
undergoing an Internal Revenue Service audit of its fiscal 1999, 2000 and 2001
tax returns. The Company believes the outcome of the audits will not have a
material impact on its financial condition or results of operations however;
there is a risk that underpayment penalties and interest may be assessed
resulting in a reduction of its cash balance.
12. BANK LINE OF CREDIT
In January 2002, the Company entered into a two-year line of credit
with a bank in an amount not to exceed $20.0 million. Borrowings under the line
of credit bear interest at either (i) the prime rate or (ii) the LIBOR rate plus
2.0%. The Company is required to pay a $100,000 facility fee of which $50,000
was paid upon the closing and $50,000 will be paid. The Company is also required
to pay a quarterly unused line fee of 0.125% of the unused line of credit
balance. The line of credit contains customary affirmative and negative
covenants. Effective June 30, 2002, the Company amended its existing line of
credit reducing the revolving line to $12.0 million, removing the LIBOR rate
option and adjusting the customary affirmative and negative covenants. To date,
the Company has not borrowed against this line of credit. The Company is not in
compliance with the revised financial covenants of the amended line of credit at
March 31, 2003.
13. COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income (Loss)," establishes
standards for reporting and displaying comprehensive income (loss) and its
components in the unaudited condensed consolidated financial statements. The
components of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss ........................................... $ (9,921) $ (8,730) $(28,445) $(12,925)
Other comprehensive loss:
Change in net unrealized loss on investment ..... -- -- -- 134
Change in accumulated translation adjustments ... 73 (8) 114 17
--------- --------- --------- ---------
Total comprehensive loss ........................... $ (9,848) $ (8,738) $(28,331) $(12,774)
========= ========= ========= =========
The components of accumulated other comprehensive loss at March 31,
2002 and June 30, 2002 of $168,000 and $54,000, respectively, consists of
accumulated translation adjustments.
14. STOCK OPTION EXCHANGE OFFER
On January 24, 2003, the Company completed an offering to employees
whereby employees holding options to purchase the Company's common stock with
exercises prices at or above $3.01 per share were given the opportunity to
cancel certain of their existing options in exchange for the opportunity to
receive new options to purchase the Company's common stock. Each new option
shall represent 0.75 of the underlying shares of the options cancelled.
Approximately 1.4 million options with a weighted average exercise price of
$9.01 were tendered. On January 27, 2003, those options were cancelled by the
Company. The new options will not be granted until at least six months and one
day after acceptance of the old options for exchange and cancellation and will
only be granted to those exchange participants who remain employees at the time
of the new grant. The exercise price of the new options will be the last
reported trading price of the Company's common stock on the grant date.
10
Certain of the Company's employees hold options that were assumed by
the Company in connection with its acquisitions of the businesses that
previously employed those individuals; in the business combinations that have
been accounted for as purchases, the Company has recorded deferred compensation
with respect to those options. Additionally, the Company granted stock options
to employees where the option exercise price is less that 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. To
the extent these employees tendered, and the Company accepted for exchange and
cancellation, such assumed eligible options in exchange for new options, the
Company is required to immediately accelerate the amortization of the related
deferred compensation previously recorded. The Company recorded approximately
$239,000 of accelerated deferred compensation expense related to these cancelled
options for the three and nine months ended March 31, 2003.
15. STOCK-BASED COMPENSATION
The Company has in effect several stock-based plans under which
non-qualified and incentive stock options have been granted to employees,
non-employee board members and other non-employees. The Company also has an
employee stock purchase plan for all eligible employees. The Company accounts
for stock-based awards to employees in accordance with APB No. 25, and has
adopted the disclosure-only alternative of SFAS No. 123. Options granted to
non-employees, as defined, have been accounted for at fair market value in
accordance with SFAS No. 123.
In accordance with the disclosure requirements of SFAS No. 123, set
forth below are the assumptions used and pro forma statement of operations data
of the Company giving effect to valuing stock-based awards to employees using
the Black-Scholes option pricing model instead of the guidelines provided by APB
No. 25. Among other factors, the Black-Scholes model considers the expected life
of the option and the expected volatility of the Company's stock price in
arriving at an option valuation.
The results of applying the requirements of the disclosure-only
alternative of SFAS No. 123 to the Company's stock-based awards to employees
would approximate the following:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss - as reported ............................................. $ (9,921) $ (8,730) $(28,445) $(12,925)
Add: Stock-based compensation expense included in net
loss - as reported .............................................. 513 728 1,330 669
Deduct: Stock-based compensation expense determined under
fair value method ............................................... (4,043) (2,306) (7,735) (5,409)
--------- --------- --------- ---------
Net loss - pro forma ............................................... $(13,451) $(10,308) $(34,850) $(17,665)
========= ========= ========= =========
Net loss per share (basic and diluted) - as reported ............... $ (0.18) $ (0.16) $ (0.53) $ (0.25)
========= ========= ========= =========
Net loss per share (basic and diluted) - pro forma ................. $ (0.17) $ (0.19) $ (0.57) $ (0.35)
========= ========= ========= =========
16. PREMISE SETTLEMENT
On January 20, 2003, the Company entered into a Compromise Settlement
and Mutual Release Agreement with Premise Systems, Inc. ("Premise"). In exchange
for a complete release of all claims relating to the acquisition of Premise and
the termination of certain of the Company's obligations under an Investor Rights
Agreement, the Company agreed to issue to the former shareholders of Premise
("Premise Holders") an aggregate of 1,063,372 unregistersted shares of its
Common Stock. These shares were issued pursuant to Rule 4(2) of the Securities
Act of 1933, as amended. In addition to these shares, the Company accelerated
the vesting of options held by certain Premise Holders and released to the
Premise Holders all shares of the Company's Common Stock being held in escrow.
This settlement aggregating $1.1 million for the three and nine months ended
March 31, 2003, has been recognized as stock-based compensation in the condensed
consolidated statement of operations.
11
17. LITIGATION
SEC INVESTIGATION
The Securities and Exchange Commission ("SEC") is conducting a formal
investigation of the events leading up to the Company's restatement of its
financial statements on June 25, 2002.
CLASS ACTION LAWSUITS
On May 15, 2002, Stephen Bachman filed a class action complaint
entitled BACHMAN V. LANTRONIX, INC., ET AL., No. 02-3899, in the U.S. District
Court for the Central District of California against the Company and certain of
its current and former officers and directors alleging violations of the
Securities Exchange Act of 1934 and seeking unspecified damages. Subsequently,
six similar actions were filed in the same court. Each of the complaints
purports to be a class action lawsuit brought on behalf of persons who purchased
or otherwise acquired the Company's common stock during the period of April 25,
2001 through May 30, 2002, inclusive. The complaints allege that the defendants
caused the Company to improperly recognize revenue and make false and misleading
statements about the Company's business. Plaintiffs further allege that the
Company materially overstated its reported financial results, thereby inflating
the Company's stock price during its securities offering in July 2001, as well
as facilitating the use of the Company's stock as consideration in acquisitions.
The complaints have subsequently been consolidated into a single action and the
court has appointed a lead plaintiff. The lead plaintiff filed a consolidated
amended complaint on January 17, 2003. The amended complaint continues to assert
that the Company and the individual officer and director defendants violated the
1934 Act, and also includes alleged claims that the Company and these officers
and directors violated the Securities Act of 1933 arising out of the Company's
Initial Public Offering in August 2000. The Company filed a motion to dismiss
the additional allegations on March 3, 2003. The Court has taken the Company's
motion under submission. The Company has not yet answered, discovery has not
commenced, and no trial date has been established.
DERIVATIVE LAWSUIT
On July 26, 2002, Samuel Ivy filed a shareholder derivative complaint
entitled IVY V. BERNHARD BRUSCHA, ET AL., No. 02CC00209, in the Superior Court
of the State of California, County of Orange, against certain of the Company's
current and former officers and directors. On January 7, 2003, plaintiff filed
an amended complaint. The amended complaint alleges causes of action for breach
of fiduciary duty, abuse of control, gross mismanagement, unjust enrichment, and
improper insider stock sales. The complaint seeks unspecified damages against
the individual defendants on behalf of the Company, equitable relief, and
attorneys' fees.
The Company filed a demurrer/motion to dismiss to the amended complaint
on February 13, 2003. The basis of the demurrer is that the plaintiff does not
have standing to bring this lawsuit since plaintiff has never served a demand on
the Company's Board that the Board take certain actions on behalf of the
Company. On April 17, 2003, the Court overruled the Company's demurrer.
Discovery has not yet commenced and no trial date has been established.
SECURITIES CLAIMS AND EMPLOYMENT CLAIMS BROUGHT BY THE CO-FOUNDERS OF
UNITED STATES SOFTWARE CORPORATION
On August 23, 2002, a complaint entitled DUNSTAN V. LANTRONIX, INC., ET
AL., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against the Company and certain of its current and former officers and directors
by the co-founders of United States Software Corporation. The complaint alleges
Oregon state law claims for securities violations, fraud, and negligence. The
complaint seeks not less than $3.6 million in damages, interest, attorneys'
fees, costs, expenses, and an unspecified amount of punitive damages. The
Company moved to compel arbitration in November 2002, and in a ruling dated
February 9, 2003, the court ordered the matter stayed pending arbitration of all
claims. A panel of arbitrators has been selected, but discovery is still in its
earliest stages and no arbitration hearing has been scheduled.
EMPLOYMENT SUIT BROUGHT BY FORMER CHIEF FINANCIAL OFFICER AND CHIEF
OPERATING OFFICER STEVE COTTON
On September 6, 2002, Steve Cotton, the Company's former CFO and COO,
filed a complaint entitled COTTON V. LANTRONIX, INC., ET AL., No. 02CC14308, in
the Superior Court of the State of California, County of Orange. The complaint
alleges claims for breach of contract, breach of the covenant of good faith and
fair dealing, wrongful termination, misrepresentation, and defamation. The
complaint seeks unspecified damages, declaratory relief, attorneys' fees and
costs. Discovery has not commenced and no trial date has been established.
12
The Company filed a motion to dismiss on October 16, 2002, on the
grounds that Mr. Cotton's complaints are subject to the binding arbitration
provisions in Mr. Cotton's employment agreement. On January 13, 2003, the Court
ruled that five of the six counts in Mr. Cotton's complaint are subject to
binding arbitration. The court is staying the sixth count, for declaratory
relief, until the underlying facts are resolved in arbitration.
SECURITIES CLAIMS BROUGHT BY FORMER SHAREHOLDERS OF SYNERGETIC MICRO
SYSTEMS, INC. ("SYNERGETIC")
On October 17, 2002, Richard Goldstein and several other former
shareholders of Synergetic filed a complaint entitled GOLDSTEIN, ET AL V.
LANTRONIX, INC., ET AL in the Superior Court of the State of California, County
of Orange. Plaintiffs filed an amended complaint on January 7, 2003. The amended
complaint alleges fraud, negligent misrepresentation, breach of warranties and
covenants, breach of contract and negligence, all stemming from the Company's
acquisition of Synergetic. The complaint seeks an unspecified amount of damages,
interest, attorneys' fees, costs, expenses, and an unspecified amount of
punitive damages. On May 5, 2003, the Company answered the complaint, and
generally denied the allegations in the complaint. Discovery has not yet
commenced and no trial date has been established.
SUIT FILED BY LANTRONIX AGAINST LOGICAL SOLUTIONS, INC. ("LOGICAL")
On March 25, 2003, the Company filed in Connecticut state court
(Judicial District of New Haven) a complaint entitled LANTRONIX, INC. AND
LIGHTWAVE COMMUNICATIONS, INC. V LOGICAL SOLUTIONS, INC., DAVID B. CHEEVER,
KEVIN F. KEEFE, ROSS D. CAPEN, MICHAEL L. CANESTRI, MARK CROSBY, DAWN MICHAUD,
CHRISTIN CAMPBELL AND DANIEL KACZMARCZYK. This is an action for breach of
non-competition and non-solicitation agreements, breach of confidentiality
agreements, breach of separation agreements, unfair and deceptive trade
practices, unfair competition, unjust enrichment, conversion, misappropriation
of trade secrets and tortuous interference with contractual rights and business
expectancies. Plaintiffs seek preliminary and permanent injunctive relief and
damages. The individual defendants are all former employees of Lightwave
Communications, Inc,, a company that the Company acquired in June 2001. The
court has scheduled a trial beginning May 21, 2003 on the Company's demand for a
permanent injunction against the defendants.
OTHER
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.
Although the Company believes that claims or any litigation arising
therefrom will have no material impact on its business, all of the above matters
are in either the pleading stage or the discovery stage, and the Company cannot
predict their outcomes with certainty.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction
with the Unaudited Condensed Consolidated Financial Statements and related Notes
thereto contained elsewhere in this Report. The information in this Quarterly
Report on Form 10-Q 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 SEC, including our Annual Report on Form 10-K for
the fiscal year ended June 30, 2002 and our subsequent reports on Form 8-K that
discuss our business in greater detail.
The section entitled "Risk Factors" set forth below, and similar
discussions in our other SEC filings, discuss some of the important factors that
may affect our business, results of operations and financial condition. You
should carefully consider those factors, 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 net revenues, expenses, gross
profit and income (loss), the need for additional capital, 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 and our production
capacity. These forward-looking statements are based on our current
expectations, estimates and projections about our industry, our 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 products and software solutions
that make it possible to access, manage, control and configure almost any
electronic device over the Internet or other networks. We are a leader in
providing innovative networking solutions. We were initially formed as
"Lantronix," a California corporation, in June 1989. We reincorporated as
"Lantronix, Inc.," a Delaware corporation in May 2000.
We have a history of providing devices that enable information
technology (IT) equipment to networks using standard protocols for connectivity,
including fiber optic, Ethernet and wireless. Our first product was a terminal
server that allowed "dumb" terminals to connect to a network. Building on the
success of our terminal servers, we introduced a complete line of print servers
in 1991 that enabled users to inexpensively share printers over a network. Over
the years, we have continually refined our core technology and have developed
additional innovative networking solutions that expand upon the business of
providing our customers network connectivity. We provide three broad categories
of products: "device servers," that enable almost any electronic device to be
connected to a network; "multiport device solutions," that enable multiple
devices-usually network computing devices such as servers, routers, switches,
and similar equipment to be managed over a network; and software-software that
is either embedded in the hardware devices that are mentioned above, or
stand-alone application software.
Today, our solutions include fully integrated hardware and software
products, as well as software tools to develop related customer applications.
Because we deal with network connectivity, we have provided products to
extremely broad market segments, including industrial, medical, commercial,
financial, governmental, retail, building and home automation, and many more.
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, point of sale terminals, time
clocks, and virtually any device that has some form of standard data control
capability. Our current product offerings include a wide range of hardware
devices of varying size and, where appropriate, software solutions that allow
our customers to network-enable virtually any electronic device.
Our products are sold to original equipment manufacturers (OEMs), value
added resellers (VARs), systems integrators and distributors, as well as
directly to end-users. One customer accounted for approximately 10.8% and 12.5%
of our net revenues for the nine months ended March 31, 2003 and 2002,
respectively. Accounts receivable attributable to this domestic customer
accounted for approximately 11.0% and 15.5% of total accounts receivable at
March 31, 2003 and June 30, 2002, respectively.
14
One international customer, transtec AG, which is a related party due
to common ownership by our largest stockholder and former Chairman of our Board
of Directors, Bernhard Bruscha, accounted for approximately 3.7% and 4.6% of our
net revenues for the nine months ended March 31, 2003 and 2002, respectively.
Included in the accompanying condensed consolidated balance sheets is
approximately $246,000 due to this related party at June 30, 2002. No amount was
due to or from this related party at March 31, 2003.
In August 2002, we completed the acquisition of Stallion Technologies,
PTY, LTD ("Stallion"), a provider of multiport and terminal server products. The
acquisition of Stallion complements our existing multiport and terminal server
product lines. In connection with the acquisition, we paid $1.2 million in cash
consideration and established a cash escrow account in the amount of $867,000 at
the acquisition date to be used in lieu of our common stock in the event we are
unable to issue registered shares by October 31, 2002. We were not able to issue
registered shares by October 31, 2002; accordingly, the cash escrow amount of
$867,000 was released on November 1, 2002. In addition, we issued a two-year
note in the principal amount of $867,000 accruing interest at a rate of 2.5% per
annum. The note is convertible into our common stock at any time, at the
election of the holders at a $5.00 conversion price. We relied on the exemption
in Section 4 (2) of the Securities Act of 1933 in that the offering of the
convertible note was not a public offering.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of net revenues
and expenses during the reporting period. We regularly evaluate our estimates
and assumptions related to net revenues, allowances for doubtful accounts, sales
returns and allowances, inventory reserves, goodwill and purchased intangible
asset valuations, warranty reserves, restructuring costs, litigation and other
contingencies. We base our estimates and assumptions on historical experience
and on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. To the extent there are material differences between our
estimates and the actual results, our future results of operations will be
affected.
We believe the following critical accounting policies require us to
make significant judgments and estimates in the preparation of our condensed
consolidated financial statements:
REVENUE RECOGNITION
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. Commencing July 1, 2000, recognition
of revenue and related gross profit from sales to distributors are deferred
until the distributor resells the product to provide assurance that all revenue
recognition criteria are met at or prior to the point at which revenue is
recognized. Net revenue from certain smaller distributors for which
point-of-sale information is not available, is recognized one month after the
shipment date. This estimate approximates the timing of the sale of the product
by the distributor to the end user. 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. Should actual product returns or pricing adjustments exceed our
estimates, additional reductions to revenues would result. 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 collectibility is probable. Revenue from post-contract
customer support and any other future deliverables is deferred and recognized
over the support period or as contract elements are delivered. Our products
typically carry a ninety day to five year warranty. Although we engage in
extensive product quality programs and processes, our warranty obligation is
affected by product failure rates, use of materials or service delivery costs
that differ from our estimates. As a result, additional warranty reserves could
be required, which could reduce gross margins.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. Our
allowance for doubtful accounts is based on our assessment of the collectibility
of specific customer accounts, the aging of accounts receivable, our history of
bad debts and the general condition of the industry. If a major customer's
credit worthiness deteriorates, or our customers' actual defaults exceed our
historical experience, our estimates could change and impact our reported
results. We also maintain a reserve for uncertainties relative to the collection
of officer notes receivable. Factors considered in determining the level of this
reserve include the value of the collateral securing the notes, our ability to
effectively enforce collection rights and the ability of the former officers to
honor their obligations.
15
INVENTORY VALUATION
Our policy is to value inventories at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventories, including an assessment of excess and obsolete
inventories. We determine excess and obsolete inventories based on an estimate
of the future sales demand for our products within a specified time horizon,
generally twelve months. The estimates we use for demand are also used for
near-term capacity planning and inventory purchasing and are consistent with our
revenue forecasts. In addition, specific reserves are recorded to cover risks in
the area of end of life products, inventory located at our contract
manufacturer, deferred inventory in our sales channel and warranty replacement
stock.
If our sales forecast is less than the inventory we have on hand at the
end of an accounting period, we may be required to take excess and obsolete
inventory charges which will decrease gross profits and net operating results
for that period.
VALUATION OF DEFERRED INCOME TAXES
We have recorded a valuation allowance to reduce our net deferred tax
assets to zero, primarily due to our inability to estimate future taxable
income. We consider estimated future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If we determine that it is more likely than not that we will realize
a deferred tax asset, which currently has a valuation allowance, we would be
required to reverse the valuation allowance which would be reflected as an
income tax benefit at that time.
GOODWILL AND PURCHASED INTANGIBLE ASSETS
The purchase method of accounting for acquisitions requires extensive
use of accounting estimates and judgments to allocate the purchase price to the
fair value of the net tangible and intangible assets acquired, including
in-process research and development ("IPR&D"). Goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests. The amounts and useful lives assigned to intangible
assets impact future amortization and the amount assigned to IPR&D is expensed
immediately. If the assumptions and estimates used to allocate the purchase
price are not correct, purchase price adjustments or future asset impairment
charges could be required.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate long-lived assets used in operations when indicators of
impairment, such as reductions in demand or significant economic slowdowns, are
present. Reviews are performed to determine whether the carrying values of
assets are impaired based on a comparison to the undiscounted expected future
cash flows. If the comparison indicates that there is impairment, the expected
future cash flows using a discount rate based upon our weighted average cost of
capital is used to estimate the fair value of the assets. Impairment is based on
the excess of the carrying amount over the fair value of those assets.
Significant management judgment is required in the forecast of future operating
results that is used in the preparation of expected discounted cash flows. It is
reasonably possible that the estimates of anticipated future net revenue, the
remaining estimated economic lives of the products and technologies, or both,
could differ from those used to assess the recoverability of these assets. In
that event, additional impairment charges or shortened useful lives of certain
long-lived assets could be required.
STRATEGIC INVESTMENTS
We have made strategic investments in privately held companies for the
promotion of business and strategic investments. Strategic investments with less
than a 20% voting interest are generally carried at cost. We will use the equity
method to account for strategic investments in which we have a voting interest
of 20% to 50% or in which we otherwise have the ability to exercise significant
influence. Under the equity method, the investment is originally recorded at
cost and adjusted to recognize our share of net earnings or losses of the
investee, limited to the extent of our investment in, advances to and adjusted
to recognize our share of net earnings or losses of the investee. From time to
time we are required to estimate the amount of our losses of the investee. Our
estimates are based on historical experience. The value of non-publicly traded
securities is difficult to determine. We periodically review these investments
for other-than-temporary declines in fair value based on the specific
identification method and write down investments to their fair value when an
other-than-temporary decline has occurred. We generally believe an
other-than-temporary decline has occurred when the fair value of the investment
is below the carrying value for two consecutive quarters, absent evidence to the
contrary. Fair values for investments in privately held companies are estimated
based upon the values of recent rounds of financing. Although we believe our
estimates reasonably reflect the fair value of the non-publicly traded
securities held by us, had there been an active market for the equity
securities, the carrying values might have been materially different than the
amounts reported. Future adverse changes in market conditions or poor operating
results of companies in which we have such investments could result in losses or
an inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value and which could require a
future impairment charge.
16
RESTRUCTURING CHARGES.
Over the last several quarters we have undertaken, and we may continue
to undertake, significant restructuring initiatives, which have required us to
develop formalized plans for exiting certain business activities. We have had to
record estimated expenses for lease cancellations, long-term asset write-downs,
severance and outplacement costs and other restructuring costs. Given the
significance of, and the timing of the execution of such activities, this
process is complex and involves periodic reassessments of estimates made at the
time the original decisions were made. Through 2002, the accounting rules for
restructuring costs and asset impairments required us to record provisions and
charges when we had a formal and committed plan. In calculating the cost to
dispose of our excess facilities, we had to estimate our future space
requirements and the timing of exiting excess facilities and then estimate for
each location the future lease and operating costs to be paid until the lease is
terminated and the amount, if any, of sublease income. This required us to
estimate the timing and costs of each lease to be terminated, including the
amount of operating costs and the rate at which we might be able to sublease the
site. To form our estimates for these costs, we performed an assessment of the
affected facilities and considered the current market conditions for each site.
Our assumptions on future space requirements, the operating costs until
termination or the offsetting sublease revenues may turn out to be incorrect,
and our actual costs may be materially different from our estimates, which could
result in the need to record additional costs or to reverse previously recorded
liabilities. Our policies require us to periodically evaluate the adequacy of
the remaining liabilities under our restructuring initiatives. As management
continues to evaluate the business, there may be additional charges for new
restructuring activities as well as changes in estimates to amounts previously
recorded.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net revenues represented by each item in our condensed
consolidated statements of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net revenues........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................... 75.8 71.1 67.0 55.2
------- ------- ------- -------
Gross profit........................................ 24.2 28.9 33.0 44.8
------- ------- ------- -------
Operating expenses:
Selling, general and administrative.............. 62.9 63.1 63.3 53.1
Research and development......................... 20.5 15.3 21.4 13.6
Stock based-compensation......................... 12.7 4.8 6.2 5.8
Amortization of purchased intangible assets...... 3.2 4.0 2.3 3.0
Restructuring charges............................ 1.0 19.3 13.4 6.1
------- ------- ------- -------
Total operating expenses............................ 100.2 106.5 106.6 81.5
------- ------- ------- -------
Loss from operations................................ (76.0) (77.6) (73.6) (36.7)
Interest income (expense), net...................... 0.2 2.0 0.8 2.8
Other income (expense), net......................... (4.3) (1.3) (2.5) (2.1)
------- ------- ------- -------
Loss before income taxes ........................... (80.1) (76.9) (75.3) (36.0)
Provision (benefit) for income taxes................ 0.1 (17.1) 0.2 (8.0)
------- ------- ------- -------
Net loss............................................ (80.3)% (59.8)% (75.4)% (28.0)%
======= ======= ======= =======
NET REVENUES
Net revenues decreased $2.2 million, or 15.2%, to $12.4 million for the
three months ended March 31, 2003 from $14.6 million for the three months ended
March 31, 2002. Net revenues decreased $8.4 million, or 18.3%, to $37.7 million
for the nine months ended March 31, 2003 from $46.1 million for the nine months
ended March 31, 2002. The decrease was primarily attributable to decreases in
net revenues of our Multiport Device Solutions and Device Server product lines.
Multiport Device Solutions net revenues decreased $1.6 million, or 25.9%, to
$4.4 million, or 35.8% of net revenues, for the three months ended March 31,
2003 from $6.0 million, or 41.0% of net revenues, for the three months ended
March 31, 2002. Multiport Device Solutions net revenues decreased $5.2 million,
or 26.4%, to $14.6 million, or 38.8% of net revenues, for the nine months ended
March 31, 2003 from $19.9 million, or 43.0% of net revenues, for the nine months
ended March 31, 2002. Multiport Device Solutions net revenues include $781,000
and $2.4 million of Stallion net revenues (from the acquisition date) for the
three and nine months ended March 31, 2003, respectively. No net revenues from
Stallion were recorded for the same periods last year. Device Server net
revenues decreased $270,000, or 3.6%, to $7.2 million, or 58.6% of net revenues,
for the three months ended March 31, 2003 from $7.5 million, or 51.6% of net
revenues, for the three months ended March 31, 2002. Device Server net revenues
decreased $3.1 million, or 12.7%, to $21.0 million, or 55.8% of net revenues,
for the nine months ended March 31, 2002 from $24.1 million, or 52.2% of net
revenues, for the nine months ended March 31, 2002. The decreases in our
Multiport Device Solution and Device Server product lines net revenues is
primarily attributable to logistical issues surrounding the restructuring of our
Milford, Connecticut operations, whereby we began to outsource our manufacturing
to three contract manufacturers and the overall decrease in industry technology
spending year to year. Print Server and other net revenues decreased $397,000,
or 36.7%, to $684,000, or 5.5% of net revenues, for the three months ended March
17
31, 2003 from $1.1 million, or 7.4% of net revenues, for the three months ended
March 31, 2002. Print Server and other net revenues decreased $130,000, or 6.0%,
to $2.1 million, or 5.4% of net revenues, for the nine months ended March 31,
2003 from $2.2 million, or 4.7% of net revenues, for the nine months ended March
31, 2002.
Net revenues generated from sales in the Americas decreased $3.2
million, or 25.0%, to $9.4 million, or 76.3% of net revenues, for the three
months ended March 31, 2003 from $12.6 million, or 86.3% of net revenues, for
the three months ended March 31, 2002. Net revenues generated from sales in the
Americas decreased $9.8 million, or 25.2%, to $29.0 million, or 77.0% of net
revenues, for the nine months ended March 31, 2003 from $38.8 million, or 84.1%
of net revenues, for the nine months ended March 31, 2002. Our net revenues
derived from customers located in the Americas in absolute dollars and as a
percentage of total net revenues decreased due to logistical issues surrounding
our restructuring of our Milford, Connecticut operations, whereby we began to
outsource our manufacturing to three contract manufacturers and competitive
pricing strategies. Our net revenues derived from customers located in Europe
increased $1.1 million, or 69.0%, to $2.7 million, or 21.8% of net revenues, for
the three months ended March 31, 2003 from $1.6 million, or 10.9% of net
revenues, for the three months ended March 31, 2002. Our net revenues derived
from customers located in Europe increased $1.7 million, or 28.6%, to $7.8
million, or 20.6% of net revenues, for the nine months ended March 31, 2003 from
$6.0 million, or 13.1% of net revenues, for the nine months ended March 31,
2002. Our net revenues derived from customers located in Europe in absolute
dollars and as a percentage of total net revenues increased due to a
concentrated effort to improve European sales through a new sales structure and
delayed product sales in the Americas. Our net revenues derived from customers
located in other geographic areas decreased to $241,000, or 1.9% of net
revenues, for the three months ended March 31, 2003 from $407,000, or 2.8% of
net revenues, for the three months ended March 31, 2002. Our net revenues
derived from customers located in other geographic areas decreased to $900,000,
or 2.4% of net revenues, for the nine months ended March 31, 2003 from $1.3
million, or 2.8% of net revenues, for the nine months ended March 31, 2002.
Due to the significant economic slowdown in the technology industry, we
experienced a significant slowdown in customer orders. We experienced
significant revenue declines in the second, third and fourth quarters of fiscal
2002. The first quarter of fiscal 2003 represented our first quarter of modest
sequential revenue growth and we were able to maintain that revenue in the
second quarter with a slight decrease in the third quarter despite the
logistical issues surrounding our restructuring of our Milford, Connecticut
operations, whereby, we began to outsource our manufacturing to three contract
manufacturers.
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, amortization of purchased intangible
assets and overhead costs. As part of an agreement with Gordian, an outside
research and development firm, a royalty charge was included in cost of revenues
and was calculated based on the related products sold. Gordian royalties were
$199,000 and $1.0 million for the three and nine months ended March 31, 2002,
respectively. No royalties were paid for the three and nine months ended March
31, 2003, respectively, as a result of a new Gordian agreement as described
below. Cost of revenues for the three months ended March 31, 2003 and 2002
includes $1.2 million and $612,000 of amortization of purchased intangible
assets, respectively. Cost of revenues for the nine months ended March 31, 2003
and 2002 includes $3.3 million and $1.5 million of amortization of purchased
intangible assets, respectively.
In May 2002, we signed a new agreement with Gordian to acquire a joint
interest in the intellectual property that is evident in products designed by
Gordian and to extinguish our obligation to pay royalties on future sales of our
products. We agreed to pay $6.0 million for this intellectual property and are
amortizing this asset to cost of revenues over the remaining life cycles of our
products designed by Gordian, or approximately three years. Effective May 30,
2002, upon the signing of the agreement, royalty expenses have been replaced by
an amortization of the prepaid royalties and entitlement to the intellectual
property that was part of the agreement. Amortization expense related to the
Gordian agreement, included in amortization of purchased intangible assets of
$1.2 million totaled $640,000 for the three months ended March 31, 2003.
Amortization expense related to the Gordian agreement, included in amortization
of purchased intangible assets of $3.3 million totaled $1.9 million for the nine
months ended March 31, 2003.
Gross profit decreased by $1.2 million, or 28.9%, to $3.0 million, or
24.2% of net revenues, for the three months ended March 31, 2003 from $4.2
million, or 28.8% of net revenues, for the three months ended March 31, 2002.
Gross profit decreased by $8.2 million, or 39.8%, to $12.4 million, or 33.0% of
net revenues, for the nine months ended March 31, 2003 from $20.7 million, or
44.8% of net revenues, for the nine months ended March 31, 2002. The decrease in
gross profit in absolute dollars and as a percentage of net revenues was mainly
attributable to a decrease in revenues, an increase in the amortization of
purchased intangible assets relating to technology acquired in our acquisitions,
an increase in production expenses related to the closing of our Milford,
Connecticut facility and a $2.9 million increase in our reserve for excess and
obsolete inventory.
18
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of
personnel-related expenses including salaries and commissions, facility
expenses, information technology, trade show expenses, advertising, and
professional fees. Selling, general and administrative expenses decreased $1.4
million, or 15.6%, to $7.8 million, or 62.9% of net revenues, for the three
months ended March 31, 2003 from $9.2 million, or 63.1% of net revenues, for the
three months ended March 31, 2002. Selling, general and administrative expenses
decreased $628,000, or 2.6%, to $23.8 million, or 63.3% of net revenues, for the
nine months ended March 31, 2003 from $24.5 million, or 53.1% of net revenues,
for the nine months ended March 31, 2002. The decrease in selling, general and
administrative expense is primarily due to the decrease in headcount as a result
of our restructurings in the second quarter of fiscal 2002 and the first quarter
of fiscal 2003 as well as a favorable settlement of a contractual service
obligation and a reduction in our allowance for doubtful accounts. These
decreases are offset by increases in legal and other professional fees. The
legal fees primarily relate to our defense of the shareholder lawsuits, the
Securities and Exchange Commission ("SEC") investigation, and the defense of the
intellectual property lawsuit, which was settled during the second quarter of
fiscal 2003. Legal fees incurred in defense of the shareholder suits are
reimbursable to the extent provided in our directors and officers liability
insurance policies, and subject to the coverage limitations and exclusions
contained in such policies. During the nine months ended March 31, 2003, we have
been reimbursed $400,000 of these expenses.
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
$311,000, or 14.0%, to $2.5 million, or 20.5% of net revenues, for the three
months ended March 31, 2003 from $2.2 million, or 15.3% of net revenues, for the
three months ended March 31, 2002. Research and development expenses increased
$1.8 million, or 28.9%, to $8.1 million, or 21.4% of net revenues, for the nine
months ended March 31, 2003 from $6.3 million, or 13.6% of net revenues, for the
nine months ended March 31, 2002. This increase resulted primarily from
increased personnel-related costs due to the acquisitions of Synergetic, Premise
and Stallion and third-party expenses related to new product development.
STOCK-BASED COMPENSATION
Stock-based compensation generally represents the amortization of
deferred compensation. We recorded deferred compensation of $73,000 for the nine
months ended March 31, 2003 and recorded deferred compensation forfeitures of
$2.2 million for the nine months ended March 31, 2003. 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 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 our acquisitions calculated in accordance with current
accounting guidelines. Deferred compensation is presented as a reduction of
stockholders' equity and is amortized ratably over the respective vesting
periods of the applicable options, which is generally four years. Included in
cost of revenues is stock-based compensation of $23,000 and $21,000 for the
three months ended March 31, 2003 and 2002, respectively and $60,000 and $97,000
for the nine months ended March 31, 2003 and 2002, respectively. Stock-based
compensation increased $857,000, or 121.2%, to $1.6 million, or 12.7% of net
revenues, for the three months ended March 31, 2003 from $707,000, or 4.8% of
net revenues, for the three months ended March 31, 2002. Stock-based
compensation decreased $316,000, or 11.9%, to $2.3 million, or 6.2% of net
revenues, for the nine months ended March 31, 2003 from $2.7 million, or 5.8% of
net revenues, for the nine months ended March 31, 2002. The increase in
stock-based compensation for the three months ended March 31, 2003 is primarily
due to the $239,000 of accelerated stock-based compensation as a result of our
completing an offer whereby employees holding options to purchase our common
stock were given the opportunity to cancel certain of their existing options in
exchange for the opportunity to receive new options. Additionally, the increase
was due to the Premise settlement, whereby we issued employees an aggregate of
1,063,372 unregistered shares of our common stock which resulted in a net charge
of $1.1 million. The decrease in stock-based compensation for the nine months
ended March 31, 2003 is primarily attributable to the restructuring plans
whereby options for which deferred compensation has been recorded are forfeited
for terminated employees, offset by our option exchange program and Premise
settlement which occurred during the third quarter of fiscal 2003. At March 31,
2003, a balance of $1.1 million remains and will be amortized as follows:
$225,000 in the remainder of 2003, $651,000 in fiscal 2004, $149,000 in fiscal
2005 and $31,000 in fiscal 2006.
19
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
Purchased intangible assets primarily include existing technology and
customer agreements and are amortized on a straight-line basis over the
estimated useful lives of the respective assets, ranging from one to five years.
We obtained independent appraisals of the fair value of tangible and intangible
assets acquired in order to allocate the purchase price. The amortization of
purchased intangible assets decreased $178,000, or 30.7%, to $401,000, or 3.2%
of net revenues, for the three months ended March 31, 2003 from $579,000, or
4.0% of net revenues, for the three months ended March 31, 2002. The
amortization of purchased intangible assets decreased $531,000, or 38.3%, to
$857,000, or 2.3% of net revenues, for the nine months ended March 31, 2003 from
$1.4 million, or 3.0% of net revenues, for the nine months ended March 31, 2002.
In addition, approximately $1.2 million and $612,000 of amortization of
purchased intangible assets has been classified as cost of revenues for the
three months ended March 31, 2003 and 2002, respectively and $3.3 million and
$1.5 million for the nine months ended March 31, 2003 and 2002, respectively.
The decrease in amortization of purchased intangible assets is primarily due to
the impairment write-down of $4.4 million during the fourth quarter of fiscal
2002. At March 31, 2003, the unamortized balance of purchased intangible assets
that will be amortized to future operating expense was $12.6 million, of which
$1.4 million will be amortized in the remainder of fiscal 2003, $4.5 million in
fiscal 2004, $3.5 million is fiscal 2005, $2.6 million in fiscal 2006 and
$669,000 in fiscal 2007.
RESTRUCTURING CHARGES
On September 12, 2002, we announced a restructuring plan to prioritize
our initiatives around the growth areas of our business, focus on profit
contribution, reduce expenses, and improve operating efficiency. This
restructuring plan includes a worldwide workforce reduction, consolidation of
excess facilities and other charges. As of March 31, 2003, we recorded
restructuring costs totaling $5.0 million or 13.4% of net revenues, which are
classified as operating expenses in the condensed consolidated statements of
operations. Included in this restructuring plan was approximately $3.7 million
pertained to the consolidation of excess facilities, relating primarily to lease
terminations, non-cancelable lease costs, write-off of leasehold improvements
and termination of a contractual obligation.
Through March 31, 2003, the restructuring actions had resulted in the
reduction of approximately 50 regular employees worldwide. We recorded actual
workforce reduction charges of approximately $1.2 million related to severance
and fringe benefits for the terminated employees.
On March 14, 2003, we announced a restructuring plan to further
consolidate our engineering and marketing operations. This restructuring plan
includes a workforce reduction, consolidation of excess facilities and other
charges at our Hillsboro, Oregon, Naperville, Illinois and German engineering
facilities. We have recorded $120,000 of restructuring charges, which are
classified as operating expenses in our unaudited condensed consolidated
statements of operations as of March 31, 2003 related to severance and fringe
benefits for terminated employees. Through March 31, 2003, the restructuring
plan has resulted in the reduction of approximately 8 regular employees. We
expect to incur $570,000 in connection with this restructuring of which $120,000
was incurred as of March 31, 2003. The remaining $450,000 primarily relates to
lease termination costs and consolidation of excess facilities.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists primarily of interest earned on
cash, cash equivalents and marketable securities. Interest income (expense), net
was $20,000 and $289,000 for the three months ended March 31, 2003 and 2002,
respectively. Interest income (expense), net was $287,000 and $1.3 million for
the nine months ended March 31, 2003 and 2002, respectively. The decrease is
primarily due to lower average investment balances and interest rates.
Additionally, the decrease in the average investment balance is due to increased
expenditures for legal and other professional fees resulting from our financial
statement restatements in fiscal 2002 and defense of our lawsuits. Also, the
decrease is due to the settlement of the Milford lease obligation included in
our restructuring charge, the purchase of a joint interest in intellectual
property from Gordian and our acquisition of Stallion.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $(527,000) and $(185,000) for the three
months ended March 31, 2003 and 2002, respectively. Other income (expense), net
was $(935,000) and $(989,000) for the nine months ended March 31, 2003 and 2002,
respectively. The increase for the three months ended March 31, 2003 is
primarily attributable to our share of the losses from our investment in Xanboo.
20
PROVISION FOR INCOME TAXES AND EFFECTIVE TAX RATE
We utilize the liability method of accounting for income taxes as set
forth in SFAS No. 109, "Accounting for Income Taxes." Our effective tax rate was
0% for the nine months ended March 31, 2003, and 22% for the nine months ended
March 31, 2002. The federal statutory rate was 34% for both periods. Our
effective tax rate associated with the income tax expense for the nine months
ended March 31, 2003, was lower than the federal statutory rate primarily due to
the increase in valuation allowance, 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 benefit for the nine months ended March
31, 2002, was lower than the statutory rate primarily due to foreign losses and
amortization of stock-based compensation for which no benefit was provided. We
are currently undergoing an Internal Revenue Service audit of our fiscal 1999,
2000 and 2001 tax returns. We believe the outcome of the audits will not have a
material impact on our financial condition or results of operations however;
there is a risk that underpayment penalties and interest may be assessed
resulting in a reduction of our cash balance.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF 94-3 had
recognized the liability at the commitment date to an exit plan. We are required
to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002.
In December 2002 the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"), which
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 148 amends the disclosure requirements in SFAS No. 123 for stock-based
compensation for annual periods ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The disclosure requirements apply to
all companies, including those that continue to recognize stock-based
compensation under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Effective for
financial statements for fiscal years ending after December 15, 2002, SFAS No.
148 also provides three alternative transition methods for companies that choose
to adopt the fair value measurement provisions of SFAS No. 123.
In November 2002, the FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). This statement requires
that a liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued. The disclosure provision of FIN No. 45 were effective
for financial statements of interim and annual periods ending December 15, 2002.
In the third quarter of fiscal year 2003, we adopted the provisions of this
statement, which did not have an impact on our condensed consolidated financial
statements.
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 $5.3 million at March 31, 2003. Marketable
securities are income yielding securities which can be readily converted to
cash. Marketable securities consist of obligations of U.S. Government agencies,
state, municipal and county government notes and bonds and totaled $9.3 million
at March 31, 2003. Long-term investments primarily consist of an equity security
of a privately held company, Xanboo, and totaled $5.6 million at March 31, 2003.
Our operating activities used cash of $17.0 million for the nine months
ended March 31, 2003. We incurred a net loss of $28.4 million, which includes
the following adjustments: depreciation of $1.9 million, amortization of
purchased intangible assets of $4.1 million, stock-based compensation of $2.4
million, a restructuring charge of $2.7 million, equity losses from
unconsolidated businesses of $1.1 million, provision for inventory reserve of
$2.9 million offset by a recovery from allowance for doubtful accounts
receivable of $464,000. The changes in our operating assets consist of a
decrease in accounts receivable of $2.1 million, decrease in inventory of $1.3
million and a decrease in prepaid expenses and other assets of $373,000 which
was reduced by a decrease in our liability to Gordian of $2.0 million, decrease
in accrued Lightwave settlement of $2.0 million, decrease in other current
liabilities of $1.1 million and a decrease in accounts payable of $1.7 million.
The decrease in the due to Gordian account is due to payments in accordance with
the agreement. The decrease in the accrued Lightwave settlement is due to the
settlement payment. The decrease in prepaid expenses and other current assets is
primarily due to the decrease in contract manufacturer receivables and the
completion of the Stallion acquisition. The reduction in accounts receivable is
21
primarily due to improved collections from our distributors and European
customers. The decrease in inventory is primarily due to an increase in our
reserve for excess and obsolete inventory, competitive pricing strategies of our
on hand inventory and improved forecasting. The decrease in accounts payable is
primarily due to our timing of payment obligations.
Our investing activities used cash of $4.7 million for the nine months
ended March 31, 2003 compared with a $25.2 million use of cash for the nine
months ended March 31, 2002. We used $2.1 million, net of cash acquired, to
acquire Stallion in August 2002. We used $9.3 million to purchase marketable
securities. We received $7.0 million in proceeds from the sales of marketable
securities. We also used $317,000 to purchase property and equipment.
Cash provided by financing activities was $315,000 for the nine months
ended March 31, 2003. Cash provided by financing activities was $49.6 million
for the nine months ended March 31, 2002, primarily related to the net proceeds
from our secondary public offering in July 2001.
In January 2002, we entered into a two-year line of credit with a bank
in an amount not to exceed $20.0 million. Borrowings under the line of credit
bear interest at either (i) the prime rate or (ii) the LIBOR rate plus 2.0%. We
are required to pay a $100,000 facility fee of which $50,000 was paid upon the
closing and $50,000 was to be paid in January 2003. We are also required to pay
a quarterly unused line fee of 0.125% of the unused line of credit balance. The
line of credit contains customary affirmative and negative covenants. Effective
June 30, 2002, we amended the existing line of credit reducing the revolving
line to $12.0 million, removing the LIBOR rate option and adjusting the
customary affirmative and negative covenants. To date, we have not borrowed
against this line of credit. We are not in compliance with the revised financial
covenants of the amended line of credit at March 31, 2003 and are in the process
of negotiating a new credit facility.
The following table summarizes our contractual payment obligations and
commitments:
REMAINDER OF FISCAL FISCAL YEARS
----------------------------------
2003 2004 2005 2006 2007 TOTAL
------- ------- ------- ------- ------- -------
Convertible note payable $ -- $ -- $ 867 $ -- $ -- $ 867
Operating leases 600 1,986 1,667 648 308 5,209
Other contractual obligations 15 51 -- -- -- 66
------- ------- ------- ------- ------- -------
Total $ 765 $2,037 $2,534 $ 648 $ 308 $6,142
======= ======= ======= ======= ======= =======
We believe that our existing cash, cash equivalents and marketable
securities and any available borrowings under our line of credit facility will
be adequate to meet our anticipated cash needs through at least the next twelve
months. At March 31, 2003, we are not in compliance with the revised financial
covenants of the amended line of credit. Our future capital requirements will
depend on many factors, including the timing and amount of our net revenues,
research and development and infrastructure investments, and expenses related to
an on-going Securities and Exchange Commission ("SEC") investigation and pending
litigation, 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.
RISK FACTORS
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 of which we are unaware 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.
22
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:
o changes in the mix of net revenues attributable to higher-margin and
lower-margin products;
o customers' decisions to defer or accelerate orders;
o variations in the size or timing of orders for our products;
o short-term fluctuations in the cost or availability of our critical
components;
o changes in demand for our products generally;
o loss or gain of significant customers;
o announcements or introductions of new products by our competitors;
o defects and other product quality problems; and
o changes in demand for devices that incorporate our products.
OUR COMMON STOCK MAY BE DELISTED, WHICH COULD SIGNIFICANTLY HARM OUR
BUSINESS
Our common stock is currently listed on The Nasdaq SmallCap Market
under the symbol "LTRX." We currently are not in compliance with the $1.00
minimum bid price requirement for inclusion in The Nasdaq SmallCap Market,
however, we have until October 13, 2003, to regain compliance. In the event we
failed to timely file our periodic reports, we would be subject to delisting
prior to October 13, 2003.
If our common stock were to be delisted from The Nasdaq SmallCap Market
it could become subject to the Securities and Exchange Commission ("SEC") "Penny
Stock" rules. "Penny stocks" generally are equity securities with a price of
less than $5.00 per share that are not registered on certain national securities
exchanges or quoted on the Nasdaq system. Broker-dealers dealing in our common
stock would then be subject to the disclosure rules for transactions involving
penny stocks, which require the broker-dealer to determine if purchasing our
common stock is suitable for a particular investor. The broker-dealer must also
obtain the written consent of purchasers to purchase our common stock. The
broker-dealer must also disclose the best bid and offer prices available for our
stock and the price at which the broker-dealer last purchased or sold our common
stock. These additional burdens imposed upon broker-dealers may discourage them
from effecting transactions in our common stock, which could make it difficult
for investors to sell their shares and, hence, limit the liquidity of our common
stock.
In addition, if our common stock was delisted from The Nasdaq SmallCap
Market, some or all of the following could be reduced, harming our investors:
o the liquidity of our common stock;
o the market price of our common stock;
o the number of institutional investors that will consider investing in
our common stock;
o the number of investors in general that will consider investing in our
common stock;
o the number of market makers in our common stock;
o the availability of information concerning the trading prices and
volume of our common stock;
o the number of broker-dealers willing to execute trades in shares of our
common stock; and
o our ability to obtain financing for the continuation of our operations.
23
WE ARE CURRENTLY ENGAGED IN MULTIPLE SECURITIES CLASS ACTION LAWSUITS,
A STATE DERIVATIVE SUIT, A LAWSUIT BY THE FORMER OWNERS OF OUR USSC SUBSIDIARY,
A LAWSUIT BY OUR FORMER CFO AND COO STEVEN V. COTTON, AND A LAWSUIT BY FORMER
SHAREHOLDERS OF OUR SYNERGETIC SUBSIDIARY, ANY OF WHICH, IF IT RESULTS IN AN
UNFAVORABLE RESOLUTION, COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF
OPERATIONS OR FINANCIAL CONDITION.
CLASS ACTION LAWSUITS
On May 15, 2002, Stephen Bachman filed a class action complaint
entitled BACHMAN V. LANTRONIX, INC., ET AL., No. 02-3899, in the U.S. District
Court for the Central District of California against us and certain of our
current and former officers and directors alleging violations of the Securities
Exchange Act of 1934 and seeking unspecified damages. Subsequently, six similar
actions were filed in the same court. Each of the complaints purports to be a
class action lawsuit brought on behalf of persons who purchased or otherwise
acquired our common stock during the period of April 25, 2001 through May 30,
2002, inclusive. The complaints allege that the defendants caused us to
improperly recognize revenue and make false and misleading statements about our
business. Plaintiffs further allege that we materially overstated our reported
financial results, thereby inflating our stock price during our securities
offering in July 2001, as well as facilitating the use of our stock as
consideration in acquisitions. The complaints have subsequently been
consolidated into a single action and the court has appointed a lead plaintiff.
The lead plaintiff filed a consolidated amended complaint on January 17, 2003.
The amended complaint continues to assert that we and the individual officer and
director defendants violated the 1934 Act, and also includes alleged claims that
we and these officers and directors violated the Securities Act of 1933 arising
out of our Initial Public Offering in August 2000. We filed a motion to dismiss
the additional allegations on March 3, 2003. The Court has taken our motion
under submission. We have not yet answered, discovery has not commenced, and no
trial date has been established.
DERIVATIVE LAWSUIT
On July 26, 2002, Samuel Ivy filed a shareholder derivative complaint
entitled IVY V. BERNHARD BRUSCHA, ET AL., No. 02CC00209, in the Superior Court
of the State of California, County of Orange, against certain of our current and
former officers and directors. On January 7, 2003, plaintiff filed an amended
complaint. The amended complaint alleges causes of action for breach of
fiduciary duty, abuse of control, gross mismanagement, unjust enrichment, and
improper insider stock sales. The complaint seeks unspecified damages against
the individual defendants on our behalf, equitable relief, and attorneys' fees.
We filed a demurrer/motion to dismiss to the amended complaint on
February 13, 2003. The basis of the demurrer is that the plaintiff does not have
standing to bring this lawsuit since plaintiff has never served a demand on our
Board that the Board take certain actions on our behalf. On April 17, 2003, the
Court overruled our demurrer. Discovery has not commenced and no trial date has
been established.
SECURITIES CLAIMS AND EMPLOYMENT CLAIMS BROUGHT BY THE CO-FOUNDERS OF
UNITED STATES SOFTWARE CORPORATION
On August 23, 2002, a complaint entitled DUNSTAN V. LANTRONIX, INC., ET
AL., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against us and certain of our current and former officers and directors by the
co-founders of United States Software Corporation. The complaint alleges Oregon
state law claims for securities violations, fraud, and negligence. The complaint
seeks not less than $3.6 million in damages, interest, attorneys' fees, costs,
expenses, and an unspecified amount of punitive damages. We moved to compel
arbitration in November 2002, and in a ruling dated February 9, 2003, the court
ordered the matter stayed pending arbitration of all claims. A panel of
arbitrators has been selected, but discovery is still in its earliest stages and
no arbitration hearing has been scheduled.
EMPLOYMENT SUIT BROUGHT BY FORMER CHIEF FINANCIAL OFFICER AND CHIEF
OPERATING OFFICER STEVE COTTON
On September 6, 2002, Steve Cotton, our former CFO and COO, filed a
complaint entitled COTTON V. LANTRONIX, INC., ET AL., No. 02CC14308, in the
Superior Court of the State of California, County of Orange. The complaint
alleges claims for breach of contract, breach of the covenant of good faith and
fair dealing, wrongful termination, misrepresentation, and defamation. The
complaint seeks unspecified damages, declaratory relief, attorneys' fees and
costs. Discovery has not commenced and no trial date has been established.
We filed a motion to dismiss on October 16, 2002, on the grounds that
Mr. Cotton's complaints are subject to the binding arbitration provisions in Mr.
24
Cotton's employment agreement. On January 13, 2003, the Court ruled that five of
the six counts in Mr. Cotton's complaint are subject to binding arbitration. The
court is staying the sixth count, for declaratory relief, until the underlying
facts are resolved in arbitration.
SECURITIES CLAIMS BROUGHT BY FORMER SHAREHOLDERS OF SYNERGETIC MICRO
SYSTEMS, INC. ("SYNERGETIC")
On October 17, 2002, Richard Goldstein and several other former
shareholders of Synergetic filed a complaint entitled GOLDSTEIN, ET AL V.
LANTRONIX, INC., ET AL in the Superior Court of the State of California, County
of Orange. Plaintiffs filed an amended complaint on January 7, 2003. The amended
complaint alleges fraud, negligent misrepresentation, breach of warranties and
covenants, breach of contract and negligence, all stemming from our acquisition
of Synergetic. The complaint seeks an unspecified amount of damages, interest,
attorneys' fees, costs, expenses, and an unspecified amount of punitive damages.
On May 5, 2003, we answered the complaint and generally denied the allegations
in the complaint. Discovery has not yet commenced and no trial date has been
established.
SUIT FILED BY LANTRONIX AGAINST LOGICAL SOLUTIONS, INC. ("LOGICAL")
On March 25, 2003, we filed in Connecticut state court (Judicial
District of New Haven) a complaint entitled LANTRONIX, INC. AND LIGHTWAVE
COMMUNICATIONS, INC. V LOGICAL SOLUTIONS, INC., DAVID B. CHEEVER, KEVIN F.
KEEFE, ROSS D. CAPEN, MICHAEL L. CANESTRI, MARK CROSBY, DAWN MICHAUD, CHRISTIN
CAMPBELL AND DANIEL KACZMARCZYK. This is an action for breach of non-competition
and non-solicitation agreements, breach of confidentiality agreements, breach of
separation agreements, unfair and deceptive trade practices, unfair competition,
unjust enrichment, conversion, misappropriation of trade secrets and tortuous
interference with contractual rights and business expectancies. Plaintiffs seek
preliminary and permanent injunctive relief and damages. The individual
defendants are all former employees of Lightwave Communications, a company that
we acquired in June 2001. The court has scheduled a trial for May 21, 22 and 23,
2003 on our demand for a permanent injunction against the defendants.
Each of these matters has required substantial time, effort and
expense. We do not know whether we will be successful in any or all of these
actions. If we were held liable in any of the actions in which Lantronix, its
employees or directors are defendants, we could be required to pay substantial
damages. If we are required to make any substantial payment as damages or to
otherwise resolve the actions, our business could be severely damaged.
Regardless of whether we are ultimately successful in defending any or all of
these actions, we are incurring substantial professional fees, primarily legal
fees, in defending these actions. Litigation, especially shareholder litigation,
is often protracted, and we may be required to continue to incur substantial
professional fees associated with this litigation for the foreseeable future.
THERE IS A RISK THAT THE SEC COULD LEVY FINES AGAINST US, OR DECLARE US
TO BE OUT OF COMPLIANCE WITH THE RULES REGARDING OFFERING SECURITIES TO THE
PUBLIC.
The SEC is investigating the events surrounding our recent restatement
of our financial statements. The SEC could conclude that we violated the rules
of the Securities Act of 1933 or the Securities and Exchange Act of 1934. In
either event, the SEC might levy civil fines against us, or might conclude that
we lack sufficient internal controls to warrant our being allowed to continue
offering our shares to the public. This investigation involves substantial cost
and could significantly divert the attention of management. In addition to
sanctions imposed by the SEC, an adverse determination could significantly
damage our reputation with customers and vendors, and harm our employees'
morale.
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, 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.
25
For example, in July 2001, Digi International, Inc., filed a complaint
alleging that we directly and/or indirectly infringed upon a Digi Patent.
Following extensive and costly pre-trial preparation, we settled the matter with
Digi on November 2002. From time to time in the future 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 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.
IF WE MAKE UNPROFITABLE ACQUISITIONS OR ARE UNABLE TO SUCCESSFULLY
INTEGRATE OUR ACQUISITIONS, OUR BUSINESS COULD SUFFER.
We have in the past and may continue in the future to acquire
businesses, client lists, products or technologies that we believe complement or
expand our existing business. 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 October 2001, we acquired Synergetic, a provider of embedded
network communication solutions. In January 2002, we acquired Premise Systems,
Inc. ("Premise"), a developer of client-side software applications. In August
2002, we acquired Stallion, an Australian based provider of solutions that
enable Internet access, remote access and serial connectivity. Acquisitions of
this type involve a number of risks, including:
o difficulties in assimilating the operations and employees of acquired
companies;
o diversion of our management's attention from ongoing business concerns;
o our potential inability to maximize our financial and strategic
position through the successful incorporation of acquired technology
and rights into our products and services;
o additional expense associated with amortization of acquired assets;
o maintenance of uniform standards, controls, procedures and policies;
and
o 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, Lightwave,
Synergetic and Premise. 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 may invest in businesses that we
believe present attractive investment opportunities, or provide other synergetic
benefits. In September and October 2001, we paid an aggregate of $3.0 million to
Xanboo for convertible promissory notes, which have converted, in accordance
with their terms, into Xanboo preferred stock. In addition, we purchased an
additional $4.0 million of preferred stock in Xanboo. As of March 31, 2003, we
hold a 15.8% ownership interest with a net book value of $5.6 million, in
Xanboo. This investment is speculative in nature, and there is risk that we
could lose part or all of our investment.
26
FOUR OF THE FORMER STOCKHOLDERS OF LIGHTWAVE COMMUNICATIONS ARE
OPERATING A BUSINESS THAT COMPETES WITH US. IF WE ARE UNSUCCESSFUL IN OUR
PENDING LITIGATION AGAINST THIS COMPANY, AND THESE FORMER LIGHTWAVE
STOCKHOLDERS, OUR MULTIPORT AND OTHER CERTAIN OTHER PRODUCT LINES AND LANTRONIX
GENERALLY MAY BE HARMED.
In June 2001, we acquired Lightwave Communications. Since that time,
four of the founding stockholders and executive officers of Lightwave, as well
as several other former employees of Lightwave, have begun operating a business
that completes with us. Because these individuals held senior positions at
Lightwave, and were exposed to confidential information about Lightwave, as well
as Lantronix, if we are not successful in our litigation against them, we may
suffer substantial harm.
We filed this suit to protect the value of the assets we bought in the
Lightwave acquisition. If the court refuses to enforce the above agreements,
Logical Solutions will be able to compete against us in our markets for console
servers and video display extenders. This would substantially reduce margins for
these products, it could result in impairment of our intangible assets if the
future projections for these products diminish, and it could open the door to
other competitors or employees to compete against us.
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 recorded deferred compensation of $73,000 for
the nine months ended March 31, 2003. Additionally, we recorded deferred
compensation forfeitures of $2.2 million for the nine months ended March 31,
2003. At March 31, 2003, a balance of $1.1 million remains and will be amortized
as follows: $225,000 in the remainder of fiscal 2003, $651,000 in fiscal 2004,
$149,000 in fiscal 2005 and $31,000 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. Additionally, as
a result of our completing an offer whereby employees holding options to
purchase our common stock were given the opportunity to cancel certain of their
existing options in exchange for the opportunity to receive new options, we
recognized approximately $239,000 of accelerated stock-based compensation for
the three and nine months ended March 31, 2003. As a result, this will reduce
the amount of stock-based compensation in future periods.
WE HAVE EXCESS INVENTORIES AND THERE IS A RISK WE MAY BE UNABLE TO
DISPOSE OF THEM.
Our products and therefore our inventories are subject to technological
risk at any time either new products may enter the market or prices of
competitive products may be introduced with more attractive features or at lower
prices than ours. There is a risk that we may be unable to sell our inventory in
a timely manner to avoid their becoming obsolete. As of March 31, 2003, our
inventories including raw materials, finished goods and inventory at
distributors were valued at $15.5 million and we had reserved $9.0 million
against these inventories. As of June 30, 2002, our inventories, including raw
materials, finished goods and inventory at distributors were valued at $16.5
million and we had reserved $5.8 million against these inventories. In the event
we are required to substantially discount our inventory or are unable to sell
our inventory in a timely manner, our operating results could be substantially
harmed.
WE PRIMARILY DEPEND ON FOUR THIRD-PARTY MANUFACTURERS TO MANUFACTURE
SUBSTANTIALLY 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, QUANTITY AND PRICE WE REQUEST, OUR
BUSINESS COULD BE HARMED AND OUR STOCK PRICE COULD DECLINE.
We outsource substantially all of our manufacturing to four third-party
manufacturers, APW, Inc., Irvine Electronics, Technical Manufacturing Corp. and
Uniprecision. Our reliance on these third-party manufacturers exposes us to a
number of significant risks, including:
27
o reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
o lack of guaranteed production capacity or product supply; and
o 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 have and may continue to experience unforeseen problems as
we attempt to transition a significant portion of our manufacturing requirements
to our contract manufacturers.. We do not have a significant operating history
with 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.
Moreover, as we continue to move to third-party manufacturers, or shift products
among third-party manufacturers, we may incur substantial expenses, risk
material delays, or encounter other unexpected issues. For example, in the third
quarter of this year we encountered product shortages related to the transition
to third-party manufacturers. These product shortages contributed to our net
revenues falling below our publicly announced estimates.
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 revenues or we
may be unable to fulfill customer orders thus reducing net revenues and
therefore earnings.
WE HAVE ELECTED TO USE A CONTRACT MANUFACTURER IN CHINA, WHICH INVOLVES
SIGNIFICANT RISKS.
One of our contract manufacturers is based in China. The outbreak of
severe acute respiratory syndrome, or SARS, which is particularly severe in
China, may have a negative impact on our ability to conduct business in China.
In addition, there are other significant risks of doing business in China,
including:
o Delivery times are extended due to the distances involved, requiring
more lead-time in ordering and increasing the risk of excess
inventories.
o We could incur ocean freight delays because of labor problems, weather
delays or expediting and customs problems. China does not afford the
same level of protection to intellectual property as domestic or many
other foreign
o countries. If our products were reverse-engineered or our intellectual
property were otherwise pirated-reproduced and duplicated without our
knowledge or approval, our revenues would be reduced.
o China and U.S foreign relations have, historically, been subject to
change. Political considerations and actions could interrupt our
expected supply of products from China.
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. 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
28
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.
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 Marc
Nussbaum, who serves as our President and Chief Executive Officer, and James
Kerrigan, who serves as our Chief Financial Officer. We have no employment
contracts with those executives who are at-will employees. We are also dependent
upon our technical personnel, due to the specialized technical nature of our
business. If we lose the services of Mr. Nussbaum, Mr. Kerrigan 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.
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.
OUR ENTRY INTO, AND INVESTMENT IN, THE HOME NETWORK MARKET HAS RISKS
INHERENT IN RELYING ON ANY EMERGING MARKET FOR FUTURE GROWTH.
The success of our Premise SYS software and our investment in Xanboo
are dependent on the development of a market for home networking and automation.
It is possible this market may develop slowly, or not at all, or that others
could enter this market with superior product offerings that would impair our
own success. We could lose some or all of our investment, or be unsuccessful in
achieving significant revenues and therefore profitability, in these
initiatives. If this were to occur, our operating results would be harmed, and
our stock price could decline.
IF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE NOT SUCCESSFUL OUR NET
REVENUES COULD DECLINE AND BUSINESS COULD BE HARMED.
For the nine months ended March 31, 2003, we incurred $8.1 million in
research and development expenses, which comprised 21.4% 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 do not know
whether the net revenue from these products will be sufficient to justify our
investment in research and development.
IF A MAJOR CUSTOMER CANCELS, REDUCES, OR DELAYS PURCHASES, OUR NET
REVENUES MIGHT DECLINE AND OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our top five customers are distributors and accounted for 33.0% of our
net revenues for the nine months ended March 31, 2003. One customer accounted
for approximately 10.8% and 12.5% of our net revenues for the nine months ended
March 31, 2003 and 2002, respectively. Accounts receivable attributable to this
domestic customer accounted for approximately 11.0% and 13.4% of total accounts
receivable at March 31, 2003 and June 30, 2002, respectively. The number and
timing of sales to our distributors have been difficult for us to predict. 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 from our OEM, VAR and systems integrator customers depends
primarily on their ability to successfully sell their products that incorporate
29
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.
WE HAVE ESTABLISHED CONTRACTS AND OBLIGATIONS THAT WERE IMPLEMENTED
WHEN WE ANTICIPATED HIGHER REVENUES AND ACTIVITIES.
We have several agreements that obligate us to facilities or services
that are in excess of our current requirements and are at higher rates than
could be obtained today. It may be necessary that we sublease or otherwise
negotiate settlement of our obligations rather than perform on them as we
originally expected. If we are unable to negotiate a favorable resolution to
these contracts, we may be required to pay the entire cost of our obligations
under the agreement, which could harm our business.
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 and gross margins of products and we expect that this will continue for
our products as they mature. 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. In addition,
we might not be able to increase the price of our products in the event that the
prices of components or our overhead costs increase. If this were to occur, our
gross margins would decline. In addition, we may not be able to reduce the cost
to manufacture our products to keep up with the decline in prices.
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 work with open
standards, 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.
OUR INTELLECTUAL PROPERTY PROTECTION MIGHT BE LIMITED.
We have not historically relied on patents to protect our proprietary
rights, although we have recently begun to build a patent portfolio. We rely
primarily 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:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o other companies might claim common law trademark rights based upon use
that precedes the registration of our marks;
o 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;
30
o current federal laws that prohibit software copying provide only
limited protection from software pirates; and
o 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 and manufacture
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.
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 ninety 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
the Xport product, we do not have a long history with which to assess the risks
of unexpected product failures or defects for this product line. In addition, as
we transition our production of VDE, matrix hubs and some console servers to our
contract manufacturers, we have found some of the documentation to be
incomplete. 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.
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 23.0% and 15.9% of
net revenues for the nine months ended March 31, 2003 and 2002, respectively.
Net revenues from Europe represented 20.6% and 13.1% of our net revenues for the
nine months ended March 31, 2003 and 2002, respectively.
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:
o unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
o reduced protection for intellectual property rights in some countries;
o differing labor regulations;
o compliance with a wide variety of complex regulatory requirements;
o changes in a country's or region's political or economic conditions;
o greater difficulty in staffing and managing foreign operations; and
o increased financial accounting and reporting burdens and complexities.
The recent outbreak of SARS that is currently having significant impact
in China, Hong Kong, and Singapore may have a negative impact on our operations.
Our operations may be impacted by a number of SARS-related factors, including,
but not limited to, disruptions at our third-party manufacturer that is located
in China, reduced sales in our international retail channels and increased
supply chain costs. If the number of cases continues to rise or spread to other
areas, our international sales and operations could be harmed.
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.
31
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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, cash equivalents and marketable securities and our credit
facilities, which is tied to market interest rates. As of March 31, 2003, we had
cash and cash equivalents of $5.3 million, which consisted of cash and
short-term investments with original maturities of ninety days or less, both
domestically and internationally. As of March 31, 2003 we had marketable
securities of $9.3 million consisting of obligations of U.S. Government
agencies, state, municipal and county government notes and bonds. We believe our
marketable securities 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 March 31, 2003, we have a net investment of $5.6 million in
Xanboo, a privately held company which can still be considered in the start-up
or development stages. This investment is inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. There is a risk that we could lose part or all
of our investment.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in Securities
Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and 15-d-14(c)) as of
a date (the "Evaluation Date") within 90 days before the filing date of this
Quarterly Report on Form 10-Q, have concluded that as of the Evaluation Date,
our disclosure controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
32
(b) Changes in internal controls.
Prior to the Evaluation Date, we had identified material weaknesses in
our disclosure controls and procedures and have taken corrective actions. In
certain cases, we have identified disclosure controls and procedural
improvements that have been implemented, and will continue to be implemented
after the Evaluation Date. For example, we have revised our process controls
that will facilitate timely Securities and Exchange Commission filings, and have
implemented additional training. We continue to study, plan, and implement
process changes in anticipation of new requirements related to Sarbanes-Oxley
legislation and SEC and Nasdaq rules.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SEC INVESTIGATION
The Securities and Exchange Commission ("SEC") is conducting a formal
investigation of the events leading up to our restatement of our financial
statements on June 25, 2002.
CLASS ACTION LAWSUITS
On May 15, 2002, Stephen Bachman filed a class action complaint
entitled BACHMAN V. LANTRONIX, INC., ET AL., No. 02-3899, in the U.S. District
Court for the Central District of California against us and certain of our
current and former officers and directors alleging violations of the Securities
Exchange Act of 1934 and seeking unspecified damages. Subsequently, six similar
actions were filed in the same court. Each of the complaints purports to be a
class action lawsuit brought on behalf of persons who purchased or otherwise
acquired our common stock during the period of April 25, 2001 through May 30,
2002, inclusive. The complaints allege that the defendants caused us to
improperly recognize revenue and make false and misleading statements about our
business. Plaintiffs further allege that we materially overstated our reported
financial results, thereby inflating our stock price during our securities
offering in July 2001, as well as facilitating the use of our common stock as
consideration in acquisitions. The complaints have subsequently been
consolidated into a single action and the court has appointed a lead plaintiff.
The lead plaintiff filed a consolidated amended complaint on January 17, 2003.
The amended complaint continues to assert that we and the individual officer and
director defendants violated the 1934 Act, and also includes alleged claims that
we and these officers and directors violated the Securities Act of 1933 arising
out of our Initial Public Offering in August 2000. We filed a motion to dismiss
the additional allegations on March 3, 2003. The Court has taken our motion
under submission. We have not yet answered, discovery has not commenced, and no
trial date has been established.
DERIVATIVE LAWSUIT
On July 26, 2002, Samuel Ivy filed a shareholder derivative complaint
entitled IVY V. BERNHARD BRUSCHA, ET AL., No. 02CC00209, in the Superior Court
of the State of California, County of Orange, against certain of our current and
former officers and directors. On January 7, 2003, plaintiff filed an amended
complaint. The amended complaint alleges causes of action for breach of
fiduciary duty, abuse of control, gross mismanagement, unjust enrichment, and
improper insider stock sales. The complaint seeks unspecified damages against
the individual defendants on our behalf, equitable relief, and attorneys' fees.
We filed a demurrer/motion to dismiss to the amended complaint on
February 13, 2003. The basis of the demurrer is that the plaintiff does not have
standing to bring this lawsuit since plaintiff has never served a demand on our
Board that the Board take certain actions on behalf of the corporation. On April
17, 2003, the Court overruled our demurrer. Discovery has not yet commenced and
no trial date has been established.
SECURITIES CLAIMS AND EMPLOYMENT CLAIMS BROUGHT BY THE CO-FOUNDERS OF
UNITED STATES SOFTWARE CORPORATION
On August 23, 2002, a complaint entitled DUNSTAN V. LANTRONIX, INC., ET
AL., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against us and certain of our current and former officers and directors by the
co-founders of United States Software Corporation. The complaint alleges Oregon
state law claims for securities violations, fraud, and negligence. The complaint
seeks not less than $3.6 million in damages, interest, attorneys' fees, costs,
expenses, and an unspecified amount of punitive damages. We moved to compel
arbitration in November 2002, and in a ruling dated February 9, 2003, the court
ordered the matter stayed pending arbitration of all claims.
33
EMPLOYMENT SUIT BROUGHT BY FORMER CHIEF FINANCIAL OFFICER AND CHIEF
OPERATING OFFICER STEVE COTTON
On September 6, 2002, Steve Cotton, our former CFO and COO, filed a
complaint entitled COTTON V. LANTRONIX, INC., ET AL., No. 02CC14308, in the
Superior Court of the State of California, County of Orange. The complaint
alleges claims for breach of contract, breach of the covenant of good faith and
fair dealing, wrongful termination, misrepresentation, and defamation. The
complaint seeks unspecified damages, declaratory relief, attorneys' fees and
costs. Discovery has not commenced and no trial date has been established.
We filed a motion to dismiss on October 16, 2002, on the grounds that
Mr. Cotton's complaints are subject to the binding arbitration provisions in Mr.
Cotton's employment agreement. On January 13, 2003, the Court ruled that five of
the six counts in Mr. Cotton's complaint are subject to binding arbitration. The
court is staying the sixth count, for declaratory relief, until the underlying
facts are resolved in arbitration.
SECURITES CLAIMS BROUGHT BY FORMER SHAREHOLDERS OF SYNERGETIC MICRO
SYSTEMS, INC. ("SYNERGETIC")
On October 17, 2002, Richard Goldstein and several other former
shareholders of Synergetic filed a complaint entitled GOLDSTEIN, ET AL V.
LANTRONIX, INC., ET AL in the Superior Court of the State of California, County
of Orange. Plaintiffs filed an amended complaint on January 7, 2003. The amended
complaint alleges fraud, negligent misrepresentation, breach of warranties and
covenants, breach of contract and negligence, all stemming from our acquisition
of Synergetic. The complaint seeks an unspecified amount of damages, interest,
attorneys' fees, costs, expenses, and an unspecified amount of punitive damages.
On May 5, 2003, we answered the complaint and generally denied the allegations
in the complaint. Discovery has not yet commenced and no trial date has been
established.
SUIT FILED BY LANTRONIX AGAINST LOGICAL SOLUTIONS, INC. ("LOGICAL")
On March 25, 2003, we filed in Connecticut state court (Judicial
District of New Haven) a complaint entitled LANTRONIX, INC. AND LIGHTWAVE
COMMUNICATIONS, INC. V LOGICAL SOLUTIONS, INC., DAVID B. CHEEVER, KEVIN F.
KEEFE, ROSS D. CAPEN, MICHAEL L. CANESTRI, MARK CROSBY, DAWN MICHAUD, CHRISTIN
CAMPBELL AND DANIEL KACZMARCZYK. This is an action for breach of non-competition
and non-solicitation agreements, breach of confidentiality agreements, breach of
separation agreements, unfair and deceptive trade practices, unfair competition,
unjust enrichment, conversion, misappropriation of trade secrets and tortuous
interference with contractual rights and business expectancies. Plaintiffs seek
preliminary and permanent injunctive relief and damages. The individual
defendants are all former employees of Lightwave Communications, a company that
we acquired in June 2001. The court has scheduled a trial for May 21, 22 and 23,
2003 on our demand for a permanent injunction against the defendants.
OTHER
From time to time, we are subject to other legal proceedings and claims
in the ordinary course of business. We are currently not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, prospects, financial
position, operating results or cash flows.
Although we believe that claims or any litigation arising therefrom
will have no material impact on our business, all of the above matters are in
either the pleading stage or the discovery stage, and we cannot predict their
outcomes with certainty.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
34
ITEM 5. OTHER INFORMATION
In accord with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are
responsible for listing the non-audit services approved by our Audit Committee
to be performed by our external auditor. Non-audit services are defined in the
law as services other than those provided in connection with an audit or a
review of our financial statements. The Audit Committee did not engage the
outside auditors in any non-audit related services for the nine months ended
March 31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Form 8-K, filed on February 24, 2003, submitting a press release dated
February 24, 2003 which announced that the Company's Board of Directors
appointed Marc Nussbaum as the President and Chief Executive Officer of
Lantronix, Inc. and James Kerrigan as the Chief Financial Officer of Lantronix,
Inc. Each had served in an interim capacity in his respective office since May
2002.
Form 8-K filed on April 21, 2003, submitting a press release dated
April 18, 2003 which announced that the Company reduced its guidance on net
revenues for the fiscal third quarter ended March 31, 2003 and increased its
cash usage during the same quarter.
Form 8-K, filed on January 31, 2003, which includes the Compromise
Settlement and Mutual Release Agreement dated January 20, 2003 with the former
shareholders of Premise Systems, Inc.
35
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 13th day of May, 2003.
LANTRONIX, INC.
By: /s/ James Kerrigan
----------------------------------
JAMES KERRIGAN
CHIEF FINANCIAL OFFICER