Lantronix, Inc. DEF 14A
SCHEDULE
14A
(Rule 14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
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LANTRONIX,
INC.
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD ON NOVEMBER 15, 2005
9:00
A.M. PACIFIC TIME
Dear
Stockholder:
We
will
hold our 2005 Annual Meeting of Stockholders at our headquarters at 15353
Barranca Parkway, Irvine, California 92618, on Tuesday,
November 15, 2005,
at 9:00
a.m. local time for the following purposes:
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1. |
To
elect four directors to serve until the 2006 Annual Meeting of
Stockholders and until their successors are duly elected and
qualified;
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2.
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To
ratify the appointment of McGladrey & Pullen, LLP as our independent
registered public accountants for the fiscal year ending June 30,
2006;
and
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3.
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To
transact such other business as may properly come before the Annual
Meeting.
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Any
action on the items described above may be considered at the Annual Meeting
at
the time and on the date specified above or at any time and date to which the
Annual Meeting may be properly adjourned or postponed.
The
foregoing business items are more fully described in the following pages, which
are made part of this Notice. Stockholders of record at the close of business
on
Tuesday, September 20, 2005, may attend and vote at the Annual Meeting. Whether
or not you plan to attend the meeting, you are urged to vote your shares by
completing, signing, dating and returning the accompanying proxy card or voting
instruction card in the pre-addressed return envelope provided. Please see
the
accompanying instructions for more details on voting. Returning your proxy
card
or voting instruction card promptly will assist us in reducing the expenses
of
additional proxy solicitation. Submitting your proxy card or voting instruction
card does not affect your right to vote in person should you decide to attend
the Annual Meeting (and, if you are not a stockholder of record, you have
obtained a legal proxy from the broker, trustee or other nominee that holds
your
shares giving you the right to vote the shares in person at the Annual
Meeting).
H.K.
Desai
Chairman
Board
of
Directors
Irvine,
California
October
17, 2005
IMPORTANT:
Whether or not you plan to attend the Annual Meeting, you are requested to
promptly complete, sign, date and return the enclosed Proxy Card in the envelope
provided.
LANTRONIX,
INC.
Corporate
Headquarters
15353
Barranca Parkway
Irvine,
California 92618
(949)
453-3990
www.lantronix.com
_____________________
PROXY
STATEMENT FOR 2005 ANNUAL MEETING OF STOCKHOLDERS
_____________________
Our
Board
of Directors solicits your Proxy Card (the “Proxy”) on behalf of Lantronix, Inc.
for use at our 2005 Annual Meeting of Stockholders (the “Annual Meeting”) to be
held on Tuesday, November 15, 2005, at 9:00 a.m. local time, and at any
adjournment(s) thereof, for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at our corporate offices located at 15353 Barranca Parkway, Irvine,
California 92618.
These
proxy solicitation materials, which include the Proxy Statement, Proxy, and
Form
10-K, were first mailed on or about October 17, 2005, to all stockholders
entitled to vote at the Annual Meeting.
INFORMATION
CONCERNING SOLICITATION AND VOTING
Record
Date
Stockholders
of record at the close of business on September 20, 2005 (the “Record Date”) are
entitled to notice of the Annual Meeting and to vote at the Annual Meeting.
Presence in person or by proxy of a majority of the shares of common stock
outstanding on the Record Date is required for a quorum. As of the close of
business on the Record Date, 58,925,433 shares of our common stock were
outstanding and were the only class of voting securities outstanding. Each
share
is entitled to one vote on any matter that may be presented for consideration
and action by the stockholders at the Annual Meeting.
Street
Name Holdings
Most
stockholders hold their shares through a broker, trustee or other nominee rather
than directly in their own name. If you do hold shares directly in your name
with our transfer agent, Mellon Investor Services LLC, you are considered the
stockholder of record with respect to those shares and we are sending these
proxy materials directly to you. As a stockholder of record, you have the right
to grant your voting proxy directly to the named proxy holder or to vote in
person at the Annual Meeting. We have enclosed a Proxy for you to use. If your
shares are held in a brokerage account or by a trustee or other nominee, you
are
considered the beneficial owner of these shares held in “street name,” and these
proxy materials are being forwarded to you together with a voting instruction
card. As the beneficial owner, you have the right to direct your broker, trustee
or nominee how to vote and are also entitled to attend the Annual Meeting;
however, you may not vote these shares in person at the Annual Meeting unless
you obtain a “legal proxy” from the broker, trustee or nominee that holds your
shares giving you the right to vote the shares in person at the Annual
Meeting.
Revocability
of Proxies
Any
stockholder has the power to revoke his or her Proxy or voting instructions
at
any time before the Annual Meeting. If you are a stockholder of record, you
may
revoke your Proxy by submitting a written notice of revocation to our Secretary
at our corporate offices, by submitting a duly executed written Proxy bearing
a
later date to change your vote, or by providing new voting instructions to
your
broker, trustee or nominee. A Proxy will not be voted if the stockholder of
record who executed it is present at the Annual Meeting and votes the shares
represented by the Proxy in person at the Annual Meeting. For shares you hold
beneficially in street name, you may change your vote by submitting new voting
instructions to your broker, trustee or nominee, or, if you have obtained a
legal proxy from your broker, trustee or nominee giving you the right to vote
your shares, by attending the Annual Meeting and voting in person.
Our
Voting Recommendations
The
Board
of Directors recommends that you vote:
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·
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“FOR”
the nominees named herein to serve as directors until the 2006 Annual
Meeting of Stockholders; and
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·
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“FOR”
the ratification of the appointment of McGladrey & Pullen, LLP as our
independent registered public accountants for the fiscal year ending
June
30, 2006.
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Voting
and Solicitation
Each
share of common stock outstanding on the Record Date will be entitled to one
vote on all matters presented at the Annual Meeting. Stockholders do not have
the right to cumulate their votes in the election of directors.
By
signing and returning the Proxy or voting instruction card according to the
enclosed instructions, you are enabling Marc Nussbaum, our Chief Executive
Officer, and James Kerrigan, our Chief Financial Officer and Secretary, who
are
named on the Proxy as “proxy holders,” to vote your shares at the meeting in the
manner you indicate. We encourage you to sign and return the Proxy even if
you
plan to attend the meeting. In this way, your shares will be voted even if
you
are unable to attend the meeting.
Each
valid Proxy will be voted: (i) “FOR” the election of each of the nominees
for director named herein; and (ii) “FOR”the
ratification of the appointment of McGladrey & Pullen, LLP as our
independent registered public accountants for the fiscal year ending June 30,
2006, except that if a stockholder has submitted a Proxy or voting instruction
card with different voting instructions, the shares will be voted according
to
the stockholder’s direction.
No
business other than that set forth in the accompanying Notice of Annual Meeting
of Stockholders is expected to come before the Annual Meeting. Should any other
matter requiring a vote of stockholders properly arise, the persons named on
the
Proxy will have discretionary authority to vote all proxies received with
respect to such matters in accordance with their judgment.
We
will
pay the costs of soliciting proxies from stockholders, including the
preparation, assembly, printing and mailing of proxy solicitation materials.
We
will provide copies of solicitation materials to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of common stock
beneficially owned by others with instructions to forward these materials to
the
beneficial owners of common stock. We may reimburse brokerage firms and other
such persons representing beneficial owners of common stock for their expenses
in forwarding solicitation materials to such beneficial owners. Proxies may
be
solicited by certain of our directors, officers and employees, without
additional compensation, personally or by telephone, telegram, letter or
facsimile.
Householding
In
an
effort to reduce printing costs and postage fees, we have adopted a practice
approved by the Securities and Exchange Commission (“SEC”) called
“householding.” Under this practice, stockholders who have the same address and
last name and do not participate in electronic delivery of proxy materials
will
receive only one copy of these proxy materials unless one or more of these
stockholders notifies us that they wish to continue receiving individual copies.
Stockholders who participate in householding will continue to receive separate
proxy cards.
If
you
share an address with another stockholder and received only one set of proxy
materials and would like to request a separate copy of these materials and/or
future proxy materials, please send your request to: Lantronix, Inc., 15353
Barranca Parkway, Irvine, California 92618, Attention: Investor Relations,
or
visit our website at www.lantronix.com.
You may
also contact us if you received multiple copies of the proxy materials and
would
prefer to receive a single copy in the future.
Quorum;
Abstentions; Broker Non-Votes
The
holders of a majority of the shares of common stock outstanding on the record
date and entitled to vote at the Annual Meeting, present in person or
represented by proxy, will constitute a quorum for the transaction of business
at the Annual Meeting and any adjournments or postponements thereof. If you
submit a properly executed Proxy or voting instruction card, even if you abstain
from voting, your shares will be counted for purposes of determining the
presence or absence of a quorum. If a broker, trustee or other nominee indicates
on a proxy that it lacks discretionary authority to vote your shares on a
particular matter, commonly referred to as “broker non-votes,” those shares will
still be counted for purposes of determining the presence of a quorum at the
Annual Meeting.
For
purposes of Proposal 1, the four (4) nominees receiving the greatest
number
of valid votes will be elected. Because directors are elected by plurality,
abstentions and broker non-votes will be entirely excluded from the vote and
will have no effect on the election of directors. Proposal 2 requires the
affirmative approval of a majority of the shares present in person or
represented by proxy and entitled to vote at the Annual Meeting. For these
purposes, abstentions are treated as shares present or represented and entitled
to vote at the Annual Meeting, so abstaining has the same effect as a negative
vote.
Under
the
rules that govern brokers who have record ownership of shares that are held
in
“street name” for their clients, who are the beneficial owners of the shares,
brokers have discretion to vote these shares on routine matters but not on
non-routine matters. Thus, if you do not otherwise instruct your broker, the
broker may turn in a Proxy voting your shares “FOR” routine matters but
expressly instructing that the broker is NOT voting on non-routine matters.
All
of the proposals discussed in these proxy solicitation materials are considered
routine matters. A “broker non-vote” occurs when a broker expressly instructs on
a Proxy that it is not voting on a matter, whether routine or
non-routine.
Nomination
of Director Candidates
The
Corporate Governance and Nominating Committee considers candidates for board
membership that our Board of Directors, management or stockholders suggest.
It
is the policy of the Corporate Governance and Nominating Committee to consider
recommendations for candidates to our Board of Directors from stockholders.
The
Corporate Governance and Nominating Committee will consider persons recommended
by our stockholders in the same manner as nominees recommended by our Board
of
Directors, individual board members or management. The Corporate Governance
and
Nominating Committee assesses the appropriate skills and characteristics of
a
nominee based on the composition of the board as a whole and in such other
areas
as a nominee’s qualification as independence, diversity, skills, age and
experience in such areas as operations, finance, marketing and
sales.
In
addition, a stockholder may nominate a person directly for election to our
Board
of Directors at an annual meeting of our stockholders, provided the person
meets
the requirements set forth in our bylaws and the rules and regulations of the
Securities and Exchange Commission related to stockholder proposals. The process
for properly submitting a stockholder proposal, including a proposal to nominate
a person for election to our Board of Directors at an annual meeting, is
described below in the section entitled “Stockholder Proposals for
2006.”
You
may
communicate with any director, the entire Board of Directors, or any committee
of the Board by sending a letter to the director, the Board or the committee,
addressed to our Secretary at Lantronix, Inc., 15353 Barranca Parkway,
Irvine, California 92618. Unless the letter is marked “confidential,” our
Secretary will review the letter, categorize it, and forward it to the
appropriate person. Any stockholder communication marked “confidential” will be
logged as “received” and forwarded to the appropriate person without
review.
Certain
Financial Information and Certifications
Our
financial statements and related information, as well as the required
certifications required by the Sarbanes-Oxley Act of 2002, are set forth in
our
Annual Report on Form 10-K filed with the Securities and Exchange Commission
on
September 28, 2005, and are incorporated herein by this reference. A copy of
the
Annual Report on Form 10-K is enclosed with this Proxy Statement.
Where
You Can Find More Information
We
have
from time-to-time received calls from stockholders inquiring about the available
means of communication with us. We thought that it would be helpful to describe
these arrangements which are available for your use.
If
you
would like to receive information about us, you may use one of these convenient
methods:
1. For
information such as our latest Annual Report on Form 10-K or Quarterly Report
on
Form 10-Q, please call our Investor Relations Department at (949) 453-3990.
2. Our
main
Internet address is www.lantronix.com.
There
you will find product, marketing and financial data, and an on-line version
of
this Proxy Statement, our Annual Report on Form 10-K, and other filings with
the
SEC.
If
you
would like to write to us, please send your correspondence to the following
address:
Lantronix,
Inc..
Attention:
Investor Relations
15353
Barranca Parkway
Irvine,
CA 92618
If
you
would like to inquire about stock transfer requirements, lost certificates
and
change of stockholder address, please call our transfer agent, Mellon Investor
Services LLC at (800) 522-6645. You may also visit their web site at
www.melloninvestor.com
for
step-by-step transfer instructions.
PROPOSAL
ONE
ELECTION
OF DIRECTORS
Nominees
Our
Board
of Directors is currently composed of four members. As a result of a change
in
our Certificate of Incorporation approved by our stockholders in 2004, the
terms
of all four directors will expire at the 2005 Annual Meeting of Stockholders.
The four incumbent directors, H. K. Desai, Thomas W. Burton, Kathryn Braun
Lewis
and Howard T. Slayen, are nominated for reelection. There are no family
relationships among any directors or executive officers, including the
nominees.
If
elected at the Annual Meeting, each nominee will serve until the 2006 annual
meeting and until his or her successor is elected and has qualified, or until
his or her earlier death, resignation or removal. A director elected to fill
a
vacancy (including a vacancy created by an increase in the size of the Board
of
Directors) will serve until the next annual meeting of stockholders and until
his or her successor is elected and qualified.
Unless
otherwise instructed, the holders of proxies solicited by this Proxy Statement
will vote the proxies received by them for the nominees. Directors are elected
by a plurality (excess of votes cast over opposing nominees) of the votes
present in person or represented by proxy and entitled to vote at the meeting.
Shares represented by signed proxies will be voted, if authority to do so is
not
withheld, for the election of the nominees named below. In the event that any
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the Proxy holders will vote for a nominee designated by the present
Board of Directors to fill the vacancy. We are not aware of any reason that
the
nominees will be unable or will decline to serve as directors. The Board of
Directors recommends a vote “FOR” the election of the nominees.
The
names
of the members of our Board of Directors, their ages as of September 20, 2005,
and certain other information about them are set forth below.
Name
|
Age
|
Position
|
H.
K. Desai
|
59
|
Chairman
of the Board of Directors
|
Thomas
W. Burton
|
59
|
Director
|
Kathryn
Braun Lewis
|
54
|
Director
|
Howard
T. Slayen
|
58
|
Director
|
H.
K.
Desai was elected Chairman of the Board of Directors on May 29, 2002. He has
served as a member of our Board of Directors since October 2000. Mr. Desai
is
currently the Chief Executive Officer of QLogic Corporation, a company that
provides end-to-end connectivity for storage area networks. From 1995 to 1996,
Mr. Desai was the President and Chief Technical Officer of QLogic. From
2000
to 2003, Mr. Desai served on the board of Microsemi Corporation,
a
supplier of analog integrated circuits and power and signal discrete
semiconductors.
Thomas
W.
Burton has been a member of our Board of Directors since our inception in 1989.
Mr. Burton is an attorney and has operated his own law office, Thomas
W.
Burton, PLC since June 1999. From January 1994 to June 1999, Mr. Burton
served with the law firm of Cummins & White, LLP.
Kathryn
Braun Lewis was elected to the Board of Directors in October 2002. She currently
serves on the Board of Directors of Share Our Selves and THINK Together, both
Orange County charities. She has also served as a director of two other public
companies since 1994. Ms. Lewis retired from Western Digital in 1998. During
her
18 year tenure at Western Digital, she was promoted from various management
and
executive positions to President and
Chief
Operating Officer of the Personal Storage Division (PSD)
and
was responsible for the worldwide operations including research and development,
manufacturing, and marketing of the world’s second largest supplier of hard
drives for personal computers.
Howard T.
Slayen was elected to the Board of Directors in August 2000. From June
2001 to present, Mr. Slayen has been providing independent financial consulting
services to various organizations and clients. From September 1999 to May 2001,
Mr. Slayen was Executive Vice President and Chief Financial Officer
of
Quaartz Inc., a web-hosted communications business. From 1971 to September
1999,
Mr. Slayen held various positions with PricewaterhouseCoopers/Coopers
&
Lybrand, including his last position as Corporate Finance Partner.
Board
Meetings and Committees
Our
Board of Directors consists of four directors, all of whom the Board has
determined are independent under the requirements of The NASDAQ Stock Market
listing standards. The
Board
of Directors held a total of seven meetings during the 2005 fiscal year, and
during the year it regularly met without the presence of management, but in
any
event at least twice a year. During the year certain matters were approved
by
the Board of Directors, or a Committee of the Board of Directors, by unanimous
written consent. The Board of Directors has three standing committees, the
Audit
Committee, the Compensation Committee and the Corporate Governance and
Nominating Committee, and, as all of the directors are independent under the
requirements of The NASDAQ Stock Market listing standards, each member of each
committee also meets such requirements. Each Committee has a written charter
approved by the Board of Directors.
Name
of Committee
and
Members
|
Functions
of the Committee
|
Number
of Meetings in the Fiscal
Year
Ending June 30, 2005
|
AUDIT
COMMITTEE
Howard
Slayen, Chairperson
Thomas
Burton
Kathryn
Braun Lewis
|
· selects
independent registered public accountants
· reviews
scope and results of year-end audit with management and
independent registered public accountants
· reviews
our accounting principals and system of internal
accounting controls
· determines
investment policy and oversees its
implementation
|
6
|
COMPENSATION
COMMITTEE
Thomas
Burton, Chairperson
H.K.
Desai
Kathryn
Braun Lewis
Howard
Slayen
|
· reviews
and approves salaries, bonuses, and other benefits
payable to our executive officers
· oversees
our equity incentive plans
· reviews
and recommends general policies relating to compensation
and benefits
|
5
|
CORPORATE
GOVERNANCE
AND
NOMINATING
COMMITTEE
Kathryn
Braun Lewis, Chairperson
Thomas
Burton
H.K.
Desai
Howard
Slayen
|
· oversees
Chief Executive Officer and senior
management
· ensures
directors take a proactive, focused
approach to their positions
· sets
the highest standards of responsibility and ethics
· recommends
nomination of board members
· assists
with succession planning for executive management
positions
· oversees
and evaluates board evaluation process
· evaluates
composition, organization and governance of
board and its committees
|
2
|
Each
director attended 75% or more of the total number of meetings of the Board
and
the meetings of the committees of the Board on which he or she served during
the
2005 fiscal year.
Primary
Functions of the Board of Directors
The
Board
of Directors oversees the conduct of our business by management and reviews
our
financial objectives, major corporate plans, strategies, actions and major
capital expenditures. Our directors are expected to promote the best interests
of our stockholders in terms of corporate governance, fiduciary
responsibilities, compliance with laws and regulations, and maintenance of
accounting and financial controls. Our directors participate in the selection,
evaluation and, where appropriate, replacement of our chief executive officer.
Directors also provide input to our chief executive officer for the evaluation
and recruitment of our principal senior executives.
Audit
Committee
The
Audit
Committee assists the Board in fulfilling its responsibilities for general
oversight of the integrity of our financial statements, its compliance with
legal and regulatory requirements, the qualifications and independence of the
independent registered public accounting firm, the performance of its internal
audit function and the independent registered public accounting firm, risk
assessment and risk management, and finance and investment functions. Among
other things, the Audit Committee prepares the Audit Committee report for
inclusion in the annual proxy statement; annually reviews its charter and
performance; appoints, evaluates and determines the compensation of the
independent registered public accounting firm; reviews and approves the scope
of
the annual audit, the audit fee and the financial statements; reviews our
disclosure controls and procedures, internal controls, information security
policies, internal audit function, and corporate policies with respect to
financial information and earnings guidance; oversees investigations into
complaints concerning financial matters; and reviews other risks that may have
a
significant impact on our financial statements. The Audit Committee has the
authority to obtain advice and assistance from, and receive appropriate funding
for, outside legal, accounting or other advisors as the Audit Committee deems
necessary to carry out its duties. Each member of the Audit Committee meets
the
NASDAQ requirements as to independence and financial knowledge. The
Board
has determined that Mr. Howard Slayen, Chairman of the Audit Committee,
is
an “audit committee financial expert” as defined by rules of the Securities and
Exchange Commission. The
report of the Audit Committee is included herein on page 19. The Audit
Committee’s charter is available on our website at www.lantronix.com.
Compensation
Committee
The
Compensation Committee reviews and determines salaries, performance-based
incentives and other matters relating to executive compensation and administers
our stock option plans, including reviewing and granting stock options to our
executive officers. The Compensation Committee also reviews and determines
various other compensation policies and matters. The report of the Compensation
Committee is included herein on page 17.
The
Compensation Committee’s Charter is available on our website at www.lantronix.com.
Corporate
Governance and Nominating Committee
We
have
adopted a Code of Conduct and Business Ethics Policy (the “Code of Ethics”) that
applies to all of our directors, officers, and employees. The Code of Ethics
operates as a tool to help our directors, officers, and employees understand
and
adhere to the high ethical standards we expect. The Code of Ethics is available
on our website at www.lantronix.com.
Stockholders may also obtain copies at no cost by writing to our
Secretary.
Concerns
relating to accounting, internal controls or auditing matters are brought to
the
attention of a member of our senior management or the Audit Committee, as
appropriate, and handled in accordance with procedures established by the Audit
Committee with respect to such matters.
Director
Compensation
Each
director receives $24,000 cash compensation annually for his or her services
as
a director. The Chairman of the Board receives an additional $11,000, for a
total of $35,000. The Chairman of the Compensation Committee and Chairman of
the
Corporate Governance and Nominating Committee each receive an additional $2,000
for a total of $26,000. The Chairman of the Audit Committee receives an
additional $9,000, for a total of $33,000. The annual retainers are based on
four in-person meetings per year, one per quarter. Directors also receive $1,000
for each additional full-day in-person meeting in excess of 1 meeting per
quarter or $500 for a meeting that lasts less than four hours.
Members
of the Board of Directors who are not employees of ours, or any parent or
subsidiary of ours (“Non-Employee Directors”), are eligible to participate in
our 2000 Stock Plan. Under the 2000 Stock Plan, Non-Employee Directors receive
annual, automatic, non-discretionary grants of nonstatutory stock options.
Each
Non-Employee Director automatically receives an option to purchase 25,000 shares
of our common stock on the date he or she first becomes a Non-Employee Director.
Thereafter, each Non-Employee Director automatically receives an option to
purchase 25,000 shares of our common stock following each annual meeting of
our
stockholders if, immediately after such meeting, he or she will continue to
serve on the Board and has served on the Board for at least the preceding 6
months. The exercise price for these options is 100% of the fair market value
of
the Shares on the date of grant. These options have a term of ten years;
provided, however, that they will terminate earlier depending on different
circumstances. Twelve months after the date of grant, 50% of these options
vest.
The balance of 50% vests 1/24 per month each month thereafter, until vested
in
full; provided, however, the optionee continues to serve on the Board on such
dates. In addition, all directors are eligible to receive additional
discretionary grants of nonstatutory stock options under the 2000 Stock
Plan.
Except
as
described above, directors do not receive any other compensation for their
services as our directors or as members of committees of the Board of
Directors.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”
EACH
OF THE NOMINEES SET FORTH ABOVE
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth certain information with respect to beneficial
ownership of our common stock as of September 20, 2005, by: (i) each person
known by us to be the beneficial owner of more than 5% of our common stock
based
on filings pursuant to Section 13(d) or (g) under the Securities Exchange Act
of
1934, as amended (the “Exchange Act”); (ii) by each current director; (iii) by
each of our named executive officers; and (iv) all current directors and
executive officers as a group. Except as otherwise indicated, the address for
each person is 15353 Barranca Parkway, Irvine, California 92618. Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities. Except as otherwise
indicated in the footnotes to the table, and subject to community property
laws,
where applicable, the persons and entities identified in the table below have
sole voting and investment power with respect to all shares beneficially owned.
The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes shares of common stock underlying
options or warrants held by such person that are exercisable within 60 calendar
days of September 20, 2005, but excludes shares of common stock underlying
options or warrants held by any other person. Percentage of beneficial ownership
is based on 58,925,433 shares of common stock outstanding as of September 20,
2005.
|
|
Beneficial
Ownership
|
|
|
Number
of
|
|
Percentage
|
Beneficial
Owner Name
|
|
Shares
|
|
Ownership
|
Bernard
Bruscha, Waldhoernlestr. 18, 72072 Tuebingen, Germany
|
20,303,220
|
|
34.5%
|
Empire
Capital Management, LLC, 1 Gorham Island, Westport, CT 06880
(1)
|
7,621,000
|
|
12.9%
|
Heartland
Advisors, Inc./William J. Nasgovitz, 789 N Water St. Milwaukee, WI
53202
(2)
|
5,599,500
|
|
9.5%
|
|
|
|
|
|
Thomas
W. Burton, Director (3)
|
|
180,729
|
|
*
|
Howard
T Slayen. Director (4)
|
|
180,729
|
|
*
|
H.K.
Desai, Director (5)
|
|
105,729
|
|
*
|
Kathryn
Braun Lewis, Director (6)
|
|
82,729
|
|
*
|
Marc
Nussbaum, Chief Executive Officer and President (7)
|
|
802,756
|
|
1.4%
|
James
Kerrigan, Chief Financial Officer and Secretary (8)
|
|
511,820
|
|
*
|
David
Schafer, Senior Vice President, Sales (9)
|
|
178,209
|
|
*
|
John
Warwick, Senior Vice President, Operations (10)
|
|
140,546
|
|
*
|
Robert
Cross, Senior Vice President, Research & Development
(11)
|
111,530
|
|
*
|
All
executive officers and directors as a group (9 persons)
(12)
|
|
2,294,777
|
|
3.9%
|
|
|
|
|
|
Outstanding
shares as of September 20, 2005
|
|
58,925,433
|
|
|
*
Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
(1)
|
Based
upon information contained in a report on Form 4 that Empire Capital
Management, LLC filed with the Securities and Exchange Commission
on
September 1, 2005.
|
(2)
|
Based
upon information contained in a report on Schedule 13G/A that Heartland
Advisors, Inc. filed with the Securities Exchange Commission on
January
19, 2005.
|
(3)
|
Shares
beneficially owned by Mr. Burton include 80,729 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(4)
|
Shares
beneficially owned by Mr. Slayen include 105,729 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(5)
|
All
shares beneficially owned by Mr. Desai are shares of common stock
issuable
upon exercise of stock options exercisable within 60 days of September
20,
2005.
|
(6)
|
Shares
beneficially owned by Ms. Lewis include 80,729 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(7)
|
Shares
beneficially owned by Mr. Nussbaum include 342,500 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(8)
|
Shares
beneficially owned by Mr. Kerrigan include 167,431 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(9)
|
Shares
beneficially owned by Mr. Shafer include 141,271 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(10)
|
Shares
beneficially owned by Mr. Warwick include 128,750 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(11)
|
Shares
beneficially owned by Mr. Cross include 96,333 shares of common
stock
issuable upon exercise of stock options exercisable within 60 days
of
September 20, 2005.
|
(12)
|
Includes
an aggregate of 1,249,201 shares issuable upon exercise of stock
options
within 60 calendar days of September 20,
2005.
|
EXECUTIVE
COMPENSATION AND RELATED INFORMATION
Summary
Compensation Table
The
following table sets forth information regarding compensation earned during
the
last three fiscal years for our Chief Executive Officer and President and the
four other most highly compensated executive officers and employees (the “Named
Executive Officers”) during the 2005 fiscal year. All option grants during the
fiscal year were made under our 2000 Stock Plan.
|
|
|
|
|
|
|
|
Other
Annual
|
Securities
|
|
All
Other
|
|
|
Fiscal
|
|
|
|
|
|
Compensation
|
|
Underlying
|
|
Compensation
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
(1)
|
|
Options
(2)
|
|
(3)
|
Marc
Nussbaum (4)
|
|
2005
|
|
290,000
|
|
-
|
|
9,000
|
|
120,000
|
|
5,580
|
Chief
Executive Officer and
|
|
2004
|
|
290,000
|
|
-
|
|
9,000
|
|
180,000
|
|
5,175
|
President
|
|
2003
|
|
308,962
|
|
-
|
|
9,519
|
|
300,000
|
|
4,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Kerrigan (5)
|
|
2005
|
|
200,000
|
|
-
|
|
8,450
|
|
70,000
|
|
-
|
Chief
Financial Officer
|
|
2004
|
|
200,000
|
|
-
|
|
8,450
|
|
90,000
|
|
-
|
and
Secretary
|
|
2003
|
|
200,000
|
|
-
|
|
9,588
|
|
175,000
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Schafer (6)
|
|
2005
|
|
250,000
|
|
-
|
|
8,450
|
|
60,000
|
|
4,473
|
Senior
Vice President
|
|
2004
|
|
250,000
|
|
-
|
|
8,175
|
|
47,000
|
|
5,216
|
Sales
|
|
2003
|
|
190,385
|
|
-
|
|
5,940
|
|
150,000
|
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Warwick (7)
|
|
2005
|
|
225,000
|
|
-
|
|
8,450
|
|
50,000
|
|
4,669
|
Senior
Vice President
|
|
2004
|
|
225,000
|
|
-
|
|
8,450
|
|
60,000
|
|
5,069
|
Operations
|
|
2003
|
|
86,539
|
|
20,000
|
|
3,250
|
|
150,000
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Cross (8)
|
|
2005
|
|
200,000
|
|
-
|
|
-
|
|
80,000
|
|
3,485
|
Senior
Vice President
|
|
2004
|
|
194,615
|
|
-
|
|
-
|
|
48,000
|
|
5,977
|
Research
& Development
|
|
2003
|
|
61,538
|
|
-
|
|
-
|
|
110,000
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes
certain perquisites and other amounts that, for any executive officer,
in
the aggregate did not exceed the lesser of $50,000 or 10% of the
total
annual salary and bonus for such executive officer.
|
(2)
|
All
figures in this column reflect options to purchase common
stock.
|
(3)
|
Represents
amounts paid by us as a matching contribution to each employee’s 401(k)
account.
|
(4)
|
Marc
Nussbaum started with Lantronix on May 30, 2002 and received no
compensation as of the fiscal year ended June 30, 2002. Consequently,
his
compensation for the fiscal year ended June 30, 2003 includes payment
for
services rendered in fiscal year ended June 30, 2002.
|
(5)
|
James
Kerrigan’s annual salary was increased to $225,000 in May 2005 and will be
reflected in fiscal year 2006.
|
(6)
|
David
Schafer started with Lantronix on September 18, 2002 and thus compensation
for fiscal year ended June 30, 2003 is only for a partial
year.
|
(7)
|
John
Warwick started with Lantronix on January 31, 2003 and thus compensation
for fiscal year ended June 30, 2003 is only for a partial
year.
|
(8)
|
Robert
Cross started with Lantronix on March 3, 2003 and thus compensation
for
fiscal year ended June 30, 2003 is only for a partial
year.
|
Executive
Officers
Set
forth
below is certain information regarding our current executive officers. Officers
are appointed by and serve at the discretion of the Board of
Directors.
Marc
H. Nussbaum, 49, has served as our President and Chief Executive Officer since
May 2002 (on an interim basis until February 2003). From April 2000 to March
2002, Mr. Nussbaum served as Senior Vice President and Chief Technical Officer
for MTI Technology Corporation, a developer of enterprise storage solutions.
From April 1981 to November 1998, Mr. Nussbaum served in various positions
at
Western Digital Corporation, a manufacturer of PC components, communication
controllers, storage controllers and hard drives. Mr. Nussbaum led business
development, strategic planning and product development activities, serving
as
Western Digital’s Senior Vice President, Chief Technical Officer from 1995 to
1998 and Vice President, Storage Technology and Product Development from 1988
through 1995. Mr. Nussbaum holds BA in physics from the State University of
New
York.
James
W. Kerrigan, 69, has served as our Chief Financial Officer since May 2002 (on
an
interim basis until February 2003). From March 2000 to October 2000, he was
Chief Financial Officer of Motiva, a privately-owned company that developed,
marketed and sold collaboration software systems. From January 1998 to February
1999, he was Chief Financial Officer of Who?Vision Systems, Inc., an incubator
company that developed biometric fingerprint devices and software. Previously,
Mr. Kerrigan has served as Chief Financial Officer for several other larger,
public companies. He holds an engineering and MBA degree from Northwestern
University.
Employment
Agreements
All
of our executive officers are employed at will and do not have employment
agreements. Our executive officers are eligible for other employee benefits,
such as medical, dental, life and disability insurance and participation in
incentive programs and our 401(k) plan.
Option
Grants in Last Fiscal Year
The
following table shows all grants of stock options to the executive
officers and highly compensated employees listed in the Summary Compensation
Table
during the 2005 fiscal year. No stock appreciation rights were granted during
the 2005 fiscal year. These grants are options to purchase our common
stock.
|
|
|
|
|
|
|
|
|
|
Potential
Realizable Value at
|
|
|
Number
of
|
|
Percent
of
|
|
|
|
|
|
Assumed
Annual Rates of
|
|
|
Securities
|
|
Total
Options
|
|
|
|
|
|
Stock
Price Apreciation for
|
|
|
Underlying
|
|
Granted
to
|
|
Exercise
or
|
|
|
|
10
Year Option Term (3)
|
|
|
Options
|
|
Employees
in
|
|
Base
Price
|
|
Expiration
|
|
|
|
|
Name
|
|
Granted
|
|
Fiscal
Year (1)
|
|
(2)
|
|
Date
|
|
5%
|
|
10%
|
Marc
Nussbaum
|
|
120,000
|
|
9.8%
|
|
$
1.14
|
|
1/4/2015
|
|
$
86,142
|
|
$
218,362
|
James
Kerrigan
|
|
70,000
|
|
5.7%
|
|
$
1.14
|
|
1/4/2015
|
|
$
50,249
|
|
$
127,378
|
David
Schafer
|
|
60,000
|
|
4.9%
|
|
$
1.14
|
|
1/4/2015
|
|
$
43,071
|
|
$
109,181
|
John
Warwick
|
|
50,000
|
|
4.1%
|
|
$
1.14
|
|
1/4/2015
|
|
$
35,892
|
|
$
90,984
|
Robert
Cross
|
|
80,000
|
|
6.5%
|
|
$
1.14
|
|
1/4/2015
|
|
$
57,428
|
|
$
145,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Options
to purchase an aggregate of 1,225,690 shares of our common stock
were
granted by us in the 2005 fiscal year to our employees, directors
and
consultants, including the
Named Executive Officers listed in the Summary Compensation
Table.
|
(2)
|
Options
were granted at an exercise price equal to the fair market value
on the
date of grant as determined pursuant to the closing price of our
common
stock on the NASDAQ National Market on the trading day immediately
preceding the date of grant.
|
(3)
|
The
potential realizable value is calculated based on the term of the
ten-year
option and assumed rates of stock appreciation of 5% and 10%, compounded
annually. These assumed rates comply with the rules of the SEC and
do not
represent our estimate of future stock prices. Actual gains, if any,
on
stock option exercises will be dependent on the future performance
of our
common stock.
|
The
following
table provides information concerning option exercises during the 2005 fiscal
year and the exercisable and unexercisable options held as of June 30, 2005,
by
the Named Executive Officers listed in the Summary Compensation
Table:
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
|
|
Number
of
|
|
|
|
Number
of Securities
|
|
Value
of Unexercised
|
|
|
Shares
|
|
|
|
Underlying
Unexercised
|
|
In-the-Money
Options
|
|
|
Aquired
|
|
Value
|
|
Options
at 6/30/05
|
|
at
6/30/05 (1)
|
Name
|
|
on
Exercise
|
|
Realized
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
Marc
Nussbaum
|
|
-
|
|
-
|
|
292,500
|
|
307,500
|
|
$
185,625
|
|
$
86,775
|
James
Kerrigan
|
|
-
|
|
-
|
|
140,695
|
|
160,972
|
|
$
70,257
|
|
$
35,893
|
David
Schafer
|
|
-
|
|
-
|
|
120,750
|
|
136,250
|
|
$
85,444
|
|
$
50,106
|
John
Warwick
|
|
-
|
|
-
|
|
110,000
|
|
150,000
|
|
$
44,875
|
|
$
41,625
|
Robert
Cross
|
|
-
|
|
-
|
|
79,875
|
|
158,125
|
|
$
34,313
|
|
$
41,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This
number is calculated by subtracting the option price from the closing
price of common stock as reported by the NASDAQ number
of exercisable and unexercisable options. The amounts in this column
may
not represent amounts actually realized by the
Named Executive Officers listed in the Summary Compensation
Table.
|
Equity
Compensation Plan Information
The
following table summarizes our equity compensation plans as of June 30,
2005:
|
|
to
be Issued Upon
|
Exercise
Price of
|
for
Future Issuance
|
|
|
Exercise
of
|
|
Outstanding
|
|
Under
Compensation
|
Plan
|
|
Outstanding
Options
|
|
Options
|
|
Plan
|
|
|
|
|
|
|
|
Equity
compensation plans (1)
|
|
|
|
|
|
|
approved
by security holders
|
|
5,084,110
|
(2)
|
$
1.49
|
|
4,890,648
|
|
|
|
|
|
|
|
Equity
compensation plans not approved
by
security holders
|
-
|
|
$
-
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
5,084,110
|
|
|
|
4,890,648
|
|
(1)
|
Consists
of the 1993 Incentive Stock Option Plan, 1994 Non-statutory Stock
Option
Plan, 2000 Stock Plan and 2000 Employee Stock Purchase
Plan.
|
|
(2)
|
Under
the 2000 Employee Stock Purchase Plan, each eligible employee may
purchase
common stock at each semi-annual purchase date (the last business
day of
February and August each year), but not more than 15% of the participants
compensation as defined. The purchase payable per share will be equal
to
eighty-five percent (85%) of the lower of (i) the closing
selling
price per share of common stock on the employee’s entry date into the
two-year offering period in which that semi-annual purchase date
occurs
and (ii) the closing selling price per share of common stock
on the
semi-annual purchase date.
|
The
table
does not include information with respect to equity compensation plans or option
agreements that were assumed by us in connection with our acquisitions of the
companies that originally established those plans or agreements. As of June
30,
2005 a total of 104,227 shares of common stock were issuable upon exercise
of outstanding options under those assumed plans. The weighted average exercise
price of the outstanding options to acquire shares of common stock is
$2.87 per share. No additional options may be granted under any of those
assumed plans.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act, requires our executive officers, directors and
beneficial owners of more than 10% of our common stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Copies of these filings must be furnished to us. Based solely on our review
of
these reports and written representations from our executive officers and
directors, we believe that all Section 16(a) filing requirements were met during
fiscal year 2005.
Related
Party Transactions
One
international customer, transtec AG, which is a related party due to common
ownership by Bernhard Bruscha, our largest stockholder and former Chairman
of
our Board of Directors, accounted for approximately 2%, 3% and 4% of our net
revenues for the 2005, 2004 and 2003 fiscal years, respectively.
Howard
T. Slayen, a member of our Board of Directors also serves as our nominee to
the
Xanboo Board of Directors. As of June 30, 2005, we held a 14.4% ownership
interest in Xanboo, a privately-held company that develops technology that
allows users to control, command and view their home or business remotely over
the Internet. Marc Nussbaum our Chief Executive Officer also served as a nominee
to the Xanboo Board of Directors prior to his resignation from the Xanboo Board
in August 2003.
Thomas
W. Burton, a director on the Board of Directors and current Chair of the
Compensation Committee, currently has a non-recourse promissory note, dated
April 16, 2001, with a current aggregate principal amount owed to us of $94,000
and interest payable of $22,000 as of June 30, 2005. The note bears an interest
rate of 5.19% per annum, compounded annually. Mr. Burton executed the note
for a
loan from us for Mr. Burton to pay income tax liabilities he incurred as a
result of various exercises of stock options to purchase our common
stock.
No impairment has been recorded as it relates to the note receivable
from
Mr. Burton.
Our
Certificate of Incorporation and Bylaws provide that we shall indemnify our
directors and officers to the fullest extent permitted by Delaware law. We
have
also entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify
our
officers and directors against liabilities that may arise by virtue of their
status or service as directors or officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could
be
indemnified. We are currently involved in litigation under which indemnification
claims might be made.
PROPOSAL
TWO
RATIFICATION
OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS
We
are asking our stockholders to ratify the Audit Committee’s selection of
McGladrey & Pullen, LLP as our independent registered public accountants for
the fiscal year ending June 30, 2006. In January 2005, we notified Ernst &
Young LLP of our decision to dismiss Ernst & Young LLP as our independent
registered public accountants. The decision was made in order to reduce our
audit fees.
The
reports of Ernst & Young LLP on our financial statements for the years ended
June 30, 2003 and June 30, 2004 did not contain any adverse opinion or
disclaimer of opinion, and were not otherwise qualified as to uncertainty,
audit
scope or accounting principles. During our two most recent fiscal years and
through January 17, 2005, there have been no disagreements with Ernst &
Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not
resolved to the satisfaction of Ernst & Young LLP would have caused them to
make reference thereto in their reports on the financial statements for such
years.
During
our two most recent fiscal years and from July 1, 2004 through January 17,
2005,
there were no "reportable events" as such term is described in Item 304(a)(1)(v)
of Regulation S-K under the Exchange Act; however, we have been advised by
Ernst
& Young LLP that there were control deficiencies related to our financial
statement close process which contributed to the errors in the initial filing
of
our Annual Report on Form 10-K for the fiscal year ended June 30, 2004, which
errors had been corrected by us in Form 10-K/A amendments. These control
deficiencies included a lack of secondary review within Lantronix and the
failure to incorporate final changes prior to filing. Ernst & Young LLP
further advised us that our processes to document contract manufacturer
inventory and purchase order transactions contributed to significant errors
in
reconciling our records. These conditions were determined to be reportable
conditions under the standards established by the American Institute of
Certified Public Accountants.
Management
has reported to the Audit Committee that these matters are not believed to
be
material weaknesses in our internal controls. Management is addressing these
matters by instituting more formal closing procedures and revising the
delegation of closing and external reporting activities to provide more thorough
review. The processes and accounting for inventory at contract manufacturers
is
under review with the intent to simplify the processes to facilitate
reconciliation of balances and reduce the scope of audit
differences.
McGladrey
& Pullen, LLP was engaged in January 2005 to serve as our independent
registered public accountants for the remainder of the fiscal year ended June
30, 2005. If the stockholders fail to ratify the selection, the Audit Committee
will reconsider this selection. Even if the selection is ratified, the Audit
Committee, in its discretion, may direct the selection of a different
independent registered public accounting firm at any time during the year if
it
determines that such a change would be in our and our stockholder’s best
interests.
A
representative of McGladrey & Pullen, LLP will be present at the annual
meeting and will have the opportunity to make a statement if he or she desires
to do so and be available to answer any appropriate questions.
Audit
and Related Fees
The
following table is a summary of the fees billed for professional services
performed by Ernst & Young LLP, our independent registered public
accountants for the fiscal year ended June 30, 2004 and for the first quarter
of
the fiscal year ended June 30, 2005, and McGladrey & Pullen, LLP, our
independent registered public accountants for the remainder of the fiscal year
ended
June 30,
2005:
|
|
Fiscal
2005
|
|
Fiscal
2004
|
|
Fee
Category
|
|
McGladrey
& Pullen, LLP
|
|
Ernst
& Young LLP
|
|
Ernst
& Young LLP
|
|
Audit
fees
|
|
|
490,000
|
|
|
164,000
|
|
|
597,000
|
|
Audit-related
fees
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
Tax
fees
|
|
|
-
|
|
|
133,000
|
|
|
273,000
|
|
All
other fees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
fees
|
|
|
490,000
|
|
|
297,000
|
|
|
880,000
|
|
Audit
Fees.
Consists
of fees billed for professional services rendered for the audit of our
consolidated financial statements and review of our quarterly interim
consolidated financial statements, as well as services that are normally
provided by our independent registered public accountants in connection with
statutory and regulatory filings or engagements.
Audit-Related
Fees.
Consists
of fees billed for audits required by statute in certain locations outside
the
U.S. where we have operations and accounting consultations.
Tax
Fees.
Consists
of fees billed for professional services including tax advice and tax planning
and assistance regarding federal, state and international tax compliance and
related services. Tax fees include approximately $65,000 for international
tax
compliance and tax advice provided by Ernst & Young LLP subsequent to our
decision to dismiss them as our independent registered public
accountants.
All
Other Fees.
There
were no fees for this category during the fiscal year ending June 30,
2005.
Before
selecting McGladrey & Pullen, LLP, the Audit Committee carefully considered
McGladrey & Pullen, LLP’s qualifications as independent registered public
accountants. This included a review of the qualifications of the engagement
team, the quality control procedures the firm has established, as well as its
reputation for integrity and competence in the fields of accounting and
auditing. The Audit Committee’s review included inquiry concerning any
litigation involving McGladrey & Pullen, LLP and any proceeding by the SEC
against the firm. In this respect, the Audit Committee concluded that the
ability of McGladrey & Pullen, LLP to perform services for Lantronix is in
no way adversely affected by such litigation or investigation. The Audit
Committee’s review also included matters required to be considered under the
Securities and Exchange Commission’s rules on auditor independence, including
the nature and extent of non-audit services, to ensure that the auditors’
independence will not be impaired. The Audit Committee pre-approves all audit
and non-audit services provided by McGladrey & Pullen, LLP, or subsequently
approves non-audit services in those circumstances where a subsequent approval
is necessary and permissible. All of the services provided by McGladrey &
Pullen, LLP described under “Audit-Related Fees,”“Tax Fees” and “All Other Fees”
were pre-approved by the Audit Committee. The Audit Committee of our Board
of
Directors has determined that the provision of services by McGladrey &
Pullen, LLP other than for audit related services is compatible with maintaining
the independence of McGladrey & Pullen, LLP as our independent registered
public accountants.
Required
Vote; Recommendation of the Board of Directors
The
affirmative vote of a majority of the Votes Cast is necessary to approve this
proposal. Assuming a quorum is present, abstentions will have the effect of
a
vote “against” this proposal, and broker non-votes will have no effect on the
outcome of the vote.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF
MCGLADREY & PULLEN, LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR
FISCAL YEAR 2006
COMPENSATION
COMMITTEE REPORT
The
information contained in this report shall not be deemed to be “soliciting
material” or “filed” or incorporated by reference in future filings with the
SEC, or subject to the liabilities of Section 18 of the Securities Exchange
Act
of 1934, except to the extent that we specifically incorporate it by reference
into a document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The
Compensation Committee administers the Lantronix executive compensation program.
The Compensation Committee, which is composed of independent directors under
the
requirements set forth in The NASDAQ Stock Market listing standards, is
responsible for approving and reporting to the Board on all elements of
compensation for Lantronix executive officers. The
Compensation Committee has the authority to retain such outside counsel, experts
and other advisors as it determines appropriate to assist it in the performance
of its functions.
As
part of its duties, the Compensation Committee reviews compensation levels
of
the executive officers to confirm that compensation is in line with performance
and industry practices. The goal of the Compensation Committee is to ensure
the
Lantronix compensation practices are sufficient to: (i) enable it to attract,
retain and motivate the most qualified talent who contribute to its long-term
success; (ii) align compensation with business objectives and performance;
and
(iii) align incentives for executive officers with the interest of stockholders
in maximizing stockholder value. Lantronix emphasizes performance-based
compensation that is competitive with the marketplace, and the importance of
clearly communicating performance objectives. Lantronix reviews its compensation
practices, as needed, by comparing them to surveys of relevant competitors
and
set objective compensation parameters based on this review. Compensation
policies also reflect the competition for executive talent and the unique
challenges and opportunities facing Lantronix in the networking device
markets.
The
Lantronix compensation program for all employees includes both cash and
equity-based elements. Because it is directly linked to the interest of
stockholders, equity-based compensation is emphasized in the design of the
Lantronix compensation programs. Consistent with competitive practices,
Lantronix utilizes a cash bonus plan based on achievement of financial
performance objectives.
Cash
Compensation
Salary.
Lantronix sets a base salary range for each executive officer, including the
Chief
Executive Officer, by reviewing the base salary for comparable positions of
a
broad peer group, including companies similar in size and businesses that
compete with Lantronix in the recruitment and retention of senior personnel.
Individual salaries for each executive officer are set based on experience,
performance and contribution to Lantronix results, as well as its financial
performance.
Cash
Bonuses.
Selected
employees and executive officers are eligible to participate in the Lantronix
cash bonus plan, with executive employee bonuses determined by the Compensation
Committee of the Board of Directors. This plan provides cash awards for meeting
certain performance goals, based on a matrix in which 100% or more of target
may
be achieved only if the Lantronix results meet certain specified targets.
Individual bonus amounts are determined by Lantronix performance and the
employee’s direct responsibilities and their impact on the Lantronix results.
The corporate financial goals are based on the approved operating plan and
any
periodic updates thereto.
Equity-Based
Compensation
Initial
or “new-hire” options are granted to executive officers when they first join
Lantronix. In addition, restricted stock may be sold to certain executive
officers when they first join Lantronix. Thereafter, options may be granted
and
restricted stock may be sold to each executive officer annually and from time
to
time based on performance. To enhance retention, options granted and restricted
stock sold to executive officers are subject to vesting restrictions that
generally lapse over four years. The amount of actual options granted depends
on
the individual’s level of responsibility and a review of stock option grants of
positions at a broad peer group.
Compensation
of the Chief Executive Officer
In
May
2002, Lantronix hired Marc Nussbaum to serve as Interim Chief Executive Officer.
In February 2003, it eliminated the interim designation, and since then Mr.
Nussbaum has served as Chief Executive Officer. When
setting Mr. Nussbaum’s compensation, the Committee does so without his
attendance. His
salary,
bonus and equity grants follow the policies set forth above. In determining
Mr. Nussbaum’s compensation package, the Committee considers compensation
practices at other high tech companies with which Lantronix competes for talent.
The
Committee uses other industries for comparable measures, which have some of
the
same marketing, sales, research and development and operations challenges.
The
annual base salary for Mr. Nussbaum for the 2005 fiscal year was $290,000,
with a monthly automobile allowance of $750.
For the
2005 fiscal year, Mr. Nussbaum did not receive any bonus because Lantronix
did not meet its corporate financial goals
based on the approved operating plan, including any periodic updates thereto,
for the fiscal year.
Policy
Regarding Deductibility of Compensation
Section 162(m)
of the Internal Revenue Code of 1986, as amended, establishes a limit of $1
million on the deductibility of compensation payable in any tax year to each
of
the Chief Executive Officer and the four most highly compensated other executive
officers, unless such compensation is performance-based within the meaning
of
Section 162(m) and the regulations thereunder. We have not paid, and do not
foresee authorizing in fiscal 2006, any compensation that would be
non-deductible under Section 162(m).
However, the Committee believes that its primary responsibility is to provide
a
compensation program that will attract, retain and reward the executive talent
necessary to Lantronix success. Consequently, the Committee recognizes that
the
loss of a tax deduction may be necessary in some circumstances.
Submitted
by:
Compensation
Committee
Thomas
W. Burton, Chair
H.K.
Desai
Howard
T. Slayen
Kathryn
Braun Lewis
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION
DECISIONS
The
members of the Compensation Committee are set forth in the preceding section.
No
member of the Compensation Committee was an officer or employee of ours at
any
time during the 2005 fiscal year or at any other time. During the 2005 fiscal
year no current executive officer of ours served as a member of the board of
directors or compensation committee of any other entity whose executive
officer(s) served on our Board or Compensation Committee.
AUDIT
COMMITTEE REPORT
The
information contained in this report shall not be deemed to be “soliciting
material” or “filed” or incorporated by reference in future filings with the
SEC, or subject to the liabilities of Section 18 of the Securities Exchange
Act
of 1934, except to the extent that we specifically incorporate it by reference
into a document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The
Audit
Committee of our Board of Directors serves as the representative of our Board
of
Directors for the general oversight of our financial accounting and reporting
process, systems of internal control, audit process and the process for
monitoring compliance with laws and regulations and our Code
of Business Conduct and Ethics.
The
Audit Committee members are not professional auditors, and their functions
are
not intended to duplicate or to certify the activities of management and the
independent registered public accountants. The Audit Committee oversees the
Lantronix financial reporting process on behalf of the Board of Directors.
Our
management has primary responsibility for preparing our financial statements
and
our financial reporting process, including the Lantronix system of internal
controls. Our independent accountants, McGladrey & Pullen, LLP, are
responsible for expressing an opinion on the conformity of our audited financial
statements to generally accepted accounting principles. The Audit Committee
meets periodically with the independent registered public accountants, with
and
without management present, to discuss the results of the independent registered
public accountants’ examinations and evaluations of Lantronix internal controls
and the overall quality of Lantronix financial reporting.
For
the
fiscal year ended June 30, 2005, the Committee met in person six times and
met
via telephone conference calls an additional four times. The members of the
Audit Committee took the following actions in fulfilling its oversight
responsibilities:
|
(i)
|
reviewed
and discussed the annual audited financial statements and the quarterly
results of operation with management, including a discussion of the
quality and the acceptability of Lantronix financial reporting and
controls as well as the clarity of disclosures in the financial
statements;
|
|
(ii)
|
discussed
with the respective independent registered public accountants their
review
of the Lantronix quarterly financial statements for the quarters
ended
September 30, 2004 (Ernst & Young LLP), and December 31, 2004 and
March 31, 2005 (McGladrey & Pullen, LLP);
|
|
(iii)
|
discussed
with the independent registered public accountants the matters required
to
be discussed by Statement SAS 61 (Codification on Statements on Auditing
Standard, AU §380);
|
|
(iv)
|
received
from the independent registered public accountants written disclosures
and
the letter from the independent registered public accountants required
by
Independence Standards Board Standard No. 1 (Independence Standards
Board
Standard No. 1, Independence Discussions with Audit Committees) and
discussed with the independent registered public accountants their
independence; and
|
|
(v)
|
based
on the above, recommended to the Board of Directors that the audited
financials be included in the Lantronix Annual Report on Form 10-K
for the
fiscal year ended June 30, 2005, for filing with the
SEC.
|
In
addition, the Audit Committee considered the ongoing relationship, and related
matters of fee and service levels, with our prior independent registered public
accountants. In January 2005, after interviewing several firms, the Audit
Committee made a recommendation to the Board of Directors to replace Ernst
&
Young LLP with McGladrey & Pullen, LLP as our independent registered public
accountants, commencing with the review of our Form 10-Q for the quarter ended
December 31, 2005.
Following
the termination of our Chief Financial Officer on May 3, 2002, the Audit
Committee engaged counsel and independent accountants to conduct a special
investigation of certain matters. During the year ended June 30, 2005, one
or
more members of the Audit Committee continued to be engaged in supervision
of
and discussions with outside legal counsel regarding the ongoing SEC
investigation related to the Lantronix restatement of prior
earnings.
For
the
fiscal year ended June 30, 2005, the Audit Committee has consisted of Thomas
W.
Burton, Howard T. Slayen and Kathryn Braun Lewis. Each of the directors who
serves on the Audit Committee is “independent” within the meaning of the rules
of the NASDAQ Stock Market and meets the financial literacy and expertise
requirements of the NASDAQ Stock Market and regulations promulgated by the
SEC.
Submitted
by:
Audit
Committee
Howard T. Slayen, Chair
Thomas
W.
Burton
Kathryn
Braun Lewis
STOCK
PRICE PERFORMANCE GRAPH
The
graph
below compares the cumulative total return to stockholders on our common stock
with the cumulative total return on the NASDAQ Stock Market Index-U.S. (“NASDAQ
US Index”) and the Research Data Group (“RDG”) Technology Composite for the
period commencing on August 4, 2000, the date of the initial public offering
of
our common stock, and ended on June 30, 2005. The following graph assumes the
investment of $100 in our common stock and in the two other indices, and
reinvestment of all dividends.
The
comparisons shown in the graph below are based upon historical data. We caution
that the stock price performance shown in the graph below is not indicative
of,
nor intended to forecast, the potential future performance of our common stock.
Notwithstanding
anything to the contrary set forth in any of our previous or future filings
under the Securities Act of 1933 or the Exchange Act that might incorporate
this
Proxy Statement or future filings made by us under those statutes, the stock
performance graph shall not be deemed filed with the SEC and shall not be deemed
incorporated by reference into any of those prior filings or into any of our
future filings.
OTHER
MATTERS
Stockholder
Proposals for 2006
Requirements
for Stockholder Proposals to be Considered for Inclusion in our 2006 Proxy
Materials.
Stockholders may submit proposals appropriate for stockholder action at meetings
of our stockholders in accordance with Rule 14a-8 under the Exchange Act. For
such proposal to be included in our proxy materials relating to the 2006 Annual
Meeting of Stockholders, all applicable requirements of Rule 14a-8 must be
satisfied and such proposals must be received by us no later than June 20,
2006.
Such proposals should be delivered to the attention of our Secretary at
Lantronix, Inc., 15353 Barranca Parkway, Irvine, California 92618, and we
encourage you to send a copy via e-mail to [email protected].
The
submission of a stockholder proposal does not guarantee that it will be included
in our 2006 Proxy Statement.
Requirements
for Stockholder Proposals to be Brought Before the Annual
Meeting.
Our bylaws provide that, except in the case of proposals made in
accordance with Rule 14a-8, for stockholder nominations to the Board of
Directors or other proposals to be considered at an annual meeting, the
stockholder must have given timely notice thereof in writing to the Secretary
not less than 60 nor more than 120 days prior to the date of the 2006 Annual
Meeting. Note, however, that if we provide less than 70 days notice or prior
public disclosure to stockholders of the date of the 2006 Annual Meeting, any
stockholder proposal or nomination not submitted pursuant to Rule 14a-8 must
be
submitted to us not later than the close of business on the tenth day following
the day on which notice of the date of the meeting was mailed or public
disclosure was made. For example, if we provide notice on September 18, 2006,
for our 2006 Annual Meeting on November 17, 2006, any such proposal or
nomination will be considered untimely if submitted to us after September 28,
2006. As described in our Bylaws, the stockholder submission must include
certain specified information concerning the proposal or nominee, as the case
may be, and information as to the stockholder’s ownership of our common stock.
We will not entertain any proposals or nominations at the annual meeting that
do
not meet these requirements. If the stockholder does not also comply with the
requirements of Rule 14a-4(c)(2) under the Exchange Act, we may exercise
discretionary voting authority under proxies that we solicit to vote in
accordance with our best judgment on any such stockholder proposal or
nomination. To make a submission or to request a copy of our Bylaws,
stockholders should contact our Secretary via e-mail at [email protected],
or by
mail to Jim Kerrigan, Lantronix, Inc., 15353 Barranca Parkway, Irvine, CA 92618.
We strongly encourage stockholders to seek advice from knowledgeable counsel
before submitting a proposal or nomination.
The
Board
of Directors knows of no other matters to be presented for stockholder action
at
the meeting. However, if other matters do properly come before the meeting
or
any adjournments or postponements thereof, the Board of Directors intends that
the persons named in the proxies will vote upon such matters in accordance
with
their best judgment.
BY
ORDER
OF THE BOARD OF DIRECTORS
Irvine,
California
October
17, 2005
20