UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31,June 30, 2000
OR
( ) TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d)15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 0-24707
INET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2269056
(State or other jurisdiction of ( I.R.S.(I.R.S. employer
incorporation or organization) identification no.)
1500 North Greenville Avenue
Richardson, Texas 75081
(Address of principal executive offices, including zip code)
(469) 330-4000
(Registrant's telephone number, including area code)
1255 West 15th Street, Suite 600
Plano, Texas 75075
(Address of principal executive offices)
(Zip code)
(972) 578-6100
(Registrant's telephone number, including area code)(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)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/X/ No --- ----/ /
Number of shares of common stock of registrant outstanding at May 10,August 1, 2000:
46,088,65946,243,733
Page 1 of 2325
INET TECHNOLOGIES, INC.
INDEX
PAGE NO.Page No.
--------
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets ................................................... 3
Consolidated Statements of Income ............................................. 4
Consolidated Statement of Stockholders' Equity................................. 5
Consolidated Statements of Cash Flows.......................................... 6
Notes to Consolidated Financial Statements .................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 2122
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ..................................... 2223
Item 4. Submissions of Matters to Vote of Security Holders ............................ 23
Item 6. Exhibits and Reports on Form 8-K............................................... 2224
Signatures ............................................................................... 2224
Page 2 of 2325
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
ASSETS
MARCH 31,JUNE 30, DECEMBER 31,
2000 1999
------------ ------------------------
(In thousands,
except share data)thousands)
Current assets:
Cash and cash equivalents.............................................................equivalents......................................................... $ 140,477138,650 $ 127,903
Trade accounts receivable, net of allowance for doubtful accounts of $939$935 and
$938 at March 31,June 30, 2000 and December 31, 1999.......................................................... 19,6651999, respectively....................... 23,502 20,781
Unbilled receivables.................................................................. 4,091receivables.............................................................. 3,042 2,196
Inventories........................................................................... 6,113Inventories....................................................................... 6,960 5,893
Deferred income taxes.................................................................taxes............................................................. 2,023 2,318
Other current assets.................................................................. 1,337assets.............................................................. 3,095 1,312
------------ -----------
Total current assets.......................................................... 173,706assets...................................................... 177,272 160,403
Property and equipment, net............................................................. 9,489net......................................................... 10,169 9,324
Deferred income taxes...................................................................taxes............................................................... 35 6
Other assets............................................................................ 190assets........................................................................ 299 184
------------ -----------
Total assets..................................................................assets.............................................................. $ 183,420187,775 $ 169,917
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................payable.................................................................. $ 1,9472,794 $ 2,599
Accrued compensation and benefits..................................................... 3,586benefits................................................. 5,650 5,252
Deferred revenue...................................................................... 27,806revenue.................................................................. 21,612 26,432
Taxes payable......................................................................... 4,149payable..................................................................... -- 213
Other accrued liabilities............................................................. 1,933liabilities......................................................... 4,031 1,998
------------ -----------
Total current liabilities..................................................... 39,421liabilities................................................. 34,087 36,494
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 25,000,000
Issued shares -- None..............................................................None.......................................................... -- --
Common stock, $.001 par value:
Authorized shares -- 175,000,000
Issued shares -- 46,080,65946,097,009 at March 31,June 30, 2000 and
45,312,759 at December 31, 1999..................................................1999.............................................. 46 45
Additional paid-in capital............................................................ 59,521capital........................................................ 59,602 57,693
Unearned compensation................................................................. (176)compensation............................................................. (118) (233)
Retained earnings..................................................................... 84,608earnings................................................................. 94,158 75,918
------------ -----------
Total stockholders' equity.................................................... 143,999equity................................................ 153,688 133,423
------------ -----------
Total liabilities and stockholders' equity....................................equity................................ $ 183,420187,775 $ 169,917
============ ===========
See accompanying notes to consolidated financial statements.
Page 3 of 2325
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands, except per share data)
Revenues..........................................
Revenues:
Product and license fees........................ $ 32,96132,586 $ 23,23923,037 $ 62,483 $ 44,395
Services........................................ 4,242 2,739 7,306 4,620
---------- ---------- ---------- ----------
Total revenues............................. 36,828 25,776 69,789 49,015
Cost of revenues.................................. 7,759 7,125
--------- ---------revenues:
Product and license fees........................ 7,506 6,084 13,520 11,617
Services........................................ 2,126 1,555 3,871 3,147
---------- ---------- ---------- ----------
Total cost of revenues..................... 9,632 7,639 17,391 14,764
---------- ---------- ---------- ----------
Gross profit............................ 25,202 16,114profit........................... 27,196 18,137 52,398 34,251
Operating expenses:
Research and development........................ 7,103 4,8527,818 5,531 14,921 10,383
Sales and marketing............................. 4,231 2,9583,983 2,835 8,214 5,793
General and administrative...................... 2,459 2,030
--------3,032 2,123 5,491 4,153
---------- 13,793 9,840
------------------ ---------- ----------
14,833 10,489 28,626 20,329
---------- ---------- ---------- ----------
Income from operations.................. 11,409 6,27412,363 7,648 23,772 13,922
Other income (expense):
Interest income................................. 1,772 3422,113 685 3,885 1,027
Other expense................................... (14) (19)
---------(7) (11) (21) (30)
---------- 1,758 323
--------- ------------------- ---------- ----------
2,106 674 3,864 997
---------- ---------- ---------- ----------
Income before provision for income
taxes................................. 13,167 6,59714,469 8,322 27,636 14,919
Provision for income taxes........................ 4,477 2,2434,919 2,829 9,396 5,072
---------- ---------- ---------- ----------
Net income.............................. $ 8,6909,550 $ 4,3545,493 $ 18,240 $ 9,847
========== ========== ========== ==========
Earnings per common share:
Basic................................... $ 0.190.21 $ 0.110.13 $ 0.40 $ 0.24
========== ========== ========== ==========
Diluted................................. $ 0.190.20 $ 0.100.12 $ 0.39 $ 0.23
========== ========== ========== ==========
Weighted-average shares outstanding:
Basic................................... 45,895 40,89646,090 42,389 45,993 41,646
========== ========== ========== ==========
Diluted................................. 46,823 42,63846,833 44,126 46,832 43,401
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 2325
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
COMMON STOCK ADDITIONAL TOTAL
------------------------------------- PAID-IN UNEARNED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
--------- ----------------- ------ ---------- ------------ -------- ------------
(In thousands, except share data)
Balance at December 31, 1999...1999..... 45,312,759 $ 45 $57,693 $ (233) $75,918 $133,423
Issuance of common stock under
stock option and stock
767,900purchase plans............... 784,250 1 1,8281,909 -- -- 1,829
purchase plans.............1,910
Net income...................income..................... -- -- -- -- 8,690 8,69018,240 18,240
Stock option compensation....compensation...... -- -- -- 57115 -- 57
---------115
---------- ---- ------- ------ ------- ---------------
Balance at March 31, 2000...... 46,080,659June 30, 2000......... 46,097,009 $ 46 $59,521$59,602 $ (176) $84,608 $143,999(118) $94,158 $153,688
========== ==== ======= ====== ======= ========
See accompanying notes to consolidated financial statements.
Page 5 of 2325
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREESIX MONTHS ENDED
MARCH 31,
------------------JUNE 30,
----------------------
2000 1999
-------- ---------------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 8,69018,240 $ 4,3549,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 1,129 9642,352 1,941
Deferred income taxes............................. 266 671,508
Issuance of common stock and stock options
charged to expense....................................... 57 57expense............................... 115 114
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable.......... 1,116 7,278receivable................................... (2,721) 7,770
Increase in unbilled receivables............... (1,895) (382)(846) (745)
Increase in inventories........................ (220) (458)taxes receivable................... (714) (1,229)
Decrease (increase) in inventories............. (1,067) 217
Increase in other assets....................... (31) (208)(1,184) (318)
Increase (decrease) in accounts payable........ (652) 174
Increase195 (122)
Decrease in taxes payable...................... 3,936 2,217
Decrease(213) (878)
Increase in accrued compensation and benefits.. (1,666) (752)
Increase in deferred revenue................... 1,374 8,558398 556
Increase (decrease) in deferred revenue........ (4,820) 13,598
Increase in other accrued liabilities (65) 373liabilities.......... 2,033 131
---------- --------- -------
Net cash provided by operating activities........... 12,039 22,24212,034 32,390
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (1,294) (993)(3,197) (2,500)
----------- --------- -------
Net cash used in investing activities............... (1,294) (993)(3,197) (2,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in initial
public offering, net............................. -- 55,952
Proceeds from issuance of common stock upon
exercise of stock options and purchases under
employee stock purchase plan.............................. 1,829 --
-------- -------plan..................... 1,910 122
---------- ---------
Net cash provided by financing activities........... 1,829 --
-------- -------1,910 56,074
---------- ---------
Net increase in cash and cash equivalents........... 12,574 21,24910,747 85,964
Cash and cash equivalents at beginning of period.... 127,903 21,914
-------- ----------------- ---------
Cash and cash equivalents at end of period.......... $140,477 $43,163
======== =======$ 138,650 $ 107,878
========== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................... $ -- $ --
========== =========
Income taxes paid................................ $ 514,615 $ --6,087
========== =========
See accompanying notes to consolidated financial statements.
Page 6 of 2325
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
We provide communications software solutions that enable carriers
to more effectively design, deploy, diagnose, monitor and manage
communications networks that carry signaling information used to
manage communications sessions which include phone calls, dial-up
Internet access, and other service transactions. Our products also
address the fundamental business needs of communications carriers,
such as improved billing, targeted sales and marketing, fraud
prevention and enhanced routing. We currently provide these
comprehensive solutions primarily through our GeoProbe and Spectra
product offerings.
CONSOLIDATION
The consolidated financial statements include the accounts of our
wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
We have prepared the accompanying unaudited consolidated financial
statements in accordance with generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In our opinion, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair statement of the
results for the interim periods presented have been included. These
financial statements should be read in conjunction with the audited
financial statements and related notes for the three years ended
December 31, 1999, included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, or SEC, on March 3,
2000. Operating results for the three-month periodthree- and six-month periods ended
March 31,June 30, 2000 are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending
December 31, 2000.
CASH AND CASH EQUIVALENTS
All highly liquid securities with original maturities of three
months or less are classified as cash equivalents. The carrying
value of cash equivalents approximates fair market value.
INVENTORIES
Inventories are valued at the lower of standard cost, which
approximates actual cost determined on a first-in, first-out basis,
or market. At March 31,June 30, 2000 and December 31, 1999, inventories
consisted of the following (in thousands):
MARCH 31,JUNE 30, DECEMBER 31,
2000 1999
------------ ------------------------ ---------------
Raw materials.................... $ 2,3292,299 $ 1,791
Work-in-process.................. 4291,064 241
Finished goods................... 3,3553,597 3,861
------------ --------------------------
$ 6,1136,960 $ 5,893
============ ==========================
Page 7 of 2325
REVENUE RECOGNITION
Effective January 1, 2000, we adopted Statement of Position, or
SOP, 98-9, MODIFICATION OF SOP 97-2, `SOFTWARE REVENUE RECOGNITION'
WITH RESPECT TO CERTAIN TRANSACTIONS, which did not require a
significant change to our revenue recognition policies. In December
1999, the SEC issued Staff Accounting Bulletin, or SAB, No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. Based onSTATEMENTS, which will be
effective in the guidance received to date, wefourth quarter of this fiscal year. We believe our
revenue recognition policies are in compliance with SAB 101.
We derive revenues primarily from the sale of products and license
of software, and product installation, integration and
post-contract support services.
Product revenues are generally recognized in the period we have completed all
hardware manufacturing and/or software development to contractual
specifications, factory testing has been completed, the product has
been shipped to the customer, the fee is fixed and determinable and
collection is considered probable by us.probable. When we have significant
obligations subsequent to shipment (for example, installation and
system integration), revenues are not recognized prior to the time
the product has been delivered and installed at the customer's
premises and there are no significant unfulfilled obligations.
Revenues from arrangements that include significant acceptance
terms are not recognized until acceptance has occurred.
Revenues for fixed-priced contracts that require significant
software development and are generally in duration in excess of six
months are recognized on a percentage-of-completion method.
Revenues from these contracts are recognized upon attainment of
scheduled performance milestones. Anticipated losses on
fixed-priced contracts are recognized when estimable.
Revenues from installation, integration and other services,
excluding post-contract support services, are recognized when the
services have been completed.
We provide our customers with post-contract support services, which
include the correction of software problems, telephone access to
our technical personnel and the right to receive unspecified
product updates, upgrades and enhancements, when and if they become
available. Revenues from these services, including post-contract
support services included in initial licensing fees, are recognized
ratably over the contract period. Post-contract support services
included in the initial licensing fee are allocated from the total
contract amount based on the relative fair value of these services
determined using vendor-specific objective evidence, or VSOE.
Deferred revenue represents amounts billed to customers, but not
yet recognized as revenue. Unbilled receivables represent amounts
recognized as revenue, but not yet billed to customers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from these estimates.
NOTE 2 - RELATED PARTY TRANSACTION
On January 1, 2000, we sold our membership interest in Inet Global
Research, L.L.C., to an entity controlled by a related party for a
cash purchase price of $82,000. No gain or loss was recorded for
the sale. This entity is currently performing services for us, and
we intend to enter into a formal agreement with this entity for
certain contract services.us.
Page 8 of 2325
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31,
------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------
2000 1999 --------2000 1999
----------- ----------- ---------- --------
Numerator:
Net income for basic and diluted
earnings per share...................share..................... $ 8,6909,550 $ 4,354
=======5,493 $ 18,240 $ 9,847
=========== =========== ========== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares....... 45,895 40,89646,090 42,389 45,993 41,646
Effect of dilutive securities:
Employee stock options and purchase
rights................................ 928 1,742
--------rights................................. 743 1,737 839 1,755
----------- ----------- ---------- --------
Dilutive potential common shares......... 928 1,742
--------743 1,737 839 1,755
----------- ----------- ---------- --------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares................. 46,823 42,638
=======shares................ 46,833 44,126 46,832 43,401
=========== =========== ========== ========
Basic earnings per common share...........share............ $ 0.190.21 $ 0.11
=======0.13 $ 0.40 $ 0.24
=========== =========== ========== ========
Diluted earnings per common share.........share.......... $ 0.190.20 $ 0.10
=======0.12 $ 0.39 $ 0.23
=========== =========== ========== ========
NOTE 4 - COMPREHENSIVE INCOME
For all periods presented, we had no components of comprehensive
income other than net income.
NOTE 5 - SEGMENT INFORMATION
We operate in a single industry segment, providing communications
software solutions and associated services to our customers through
our sales personnel and certain foreign distributors. As a result,
the financial information disclosed in this report represents all
material financial information related to our principal operating
segment. The geographic distribution of our revenues as a
percentage of total revenues is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- -------------------- ---------- ----------
United States............................ 60.6% 52.4%36.3% 45.1% 47.8% 48.6%
Export:
Asia/Pacific........................... 8.1 4.84.9 3.0 6.4 3.9
Europe, Middle East and Africa......... 26.3 38.056.0 47.3 42.0 42.8
Other.................................. 5.02.8 4.6 3.8 4.7
------ ------- ------ -------
Total export revenue 39.4 47.663.7 54.9 52.2 51.4
------ ------- ------ -------
100.0% 100.0% 100.0% 100.0%
====== ======= ====== =======
We have no significant long-lived assets deployed outside of the
United States.
Page 9 of 2325
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN HISTORICAL OR
CURRENT FACTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS ABOUT OUR
BUSINESS, FINANCIAL CONDITION, BUSINESS STRATEGY, PLANS AND
OBJECTIVES OF MANAGEMENT AND OUR FUTURE PROSPECTS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THESE EXPECTATIONS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, WITHOUT LIMITATION, CHANGES IN PRODUCT DEMAND, THE
AVAILABILITY OF PRODUCTS, CHANGES IN COMPETITION, FOREIGN RISKS,
ECONOMIC CONDITIONS, CHANGES IN TAX RISKS, AND OTHER RISKS
INDICATED BELOW UNDER THE CAPTION "RISK FACTORS" AND IN OUR OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE RISKS
AND UNCERTAINTIES ARE BEYOND OUR CONTROL AND, IN MANY CASES, WE
CANNOT PREDICT THE RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS QUARTERLY REPORT, THE
WORDS "BELIEVES," "PLANS," "EXPECTS," "ANTICIPATES," "INTENDS,"
"CONTINUE," "MAY," "WILL," "SHOULD" OR THE NEGATIVE OF SUCH TERMS
AND SIMILAR EXPRESSIONS AS THEY RELATE TO US OR OUR MANAGEMENT ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000. HISTORICAL
RESULTS AND PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS IN THE
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN
OPERATING RESULTS FOR ANY FUTURE PERIODS.
OVERVIEW
Inet was founded in 1989, and during the early stages of our
operations we focused primarily on developing and selling
diagnostic tools for a predecessor to the Signaling System #7, or
SS7, signaling protocol. As the telecommunications industry
increasingly adopted SS7, we shifted our focus to developing and
deploying SS7-based solutions as well as broadening our product
offerings. Our diagnostic tool, Spectra, was first introduced in
December 1990 and is currently in its tenth generation release.
Beginning in 1993, we focused a significant portion of our product
development efforts on developing a complete monitoring and
surveillance solution for SS7 networks, culminating in the
introduction of our GeoProbe product in late 1995. We continue to
focus significant resources on the development of enhancements to
Spectra, enhancements and add-on applications to GeoProbe and new
products focused on network optimization and interoperability for
next-generation networks.
Historically, we have generated substantially all of our revenues
from Spectra and GeoProbe. Revenues attributable to GeoProbe
represented a majority of our total revenues since 1998. Revenues
attributable to Spectra represented a majority of our total
revenues in 1997. Although we expect Spectra revenues to continue
to represent a significant portion of total revenues for the
foreseeable future, Spectra revenues are expected to continue to
decline as a percentage of total revenues as a result of a higher
growth rate for the GeoProbe product and revenues from the
introduction of new products. Our remaining revenues are derived
from services relating to these products and other products. These
services include training, warranty and post-contract support.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
data derived from our unaudited consolidated statements of income
as a percentage of revenues. The operating results for the three
monthsand six
Page 10 of 2325
months ended March 31,June 30, 2000 are not necessarily indicative of the
results that may be expected for any future periods.
THREE MONTHS ENDED MARCH 31,SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2000 1999 2000 1999
-------- ---------- -------- --------
Revenues 100.0% 100.0%
Revenues:
Product and license fees 88.5% 89.4% 89.5% 90.6%
Services 11.5 10.6 10.5 9.4
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product and license fees 20.4 23.6 19.4 23.7
Services 5.7 6.0 5.5 6.4
------ ------ ------ ------
Total cost of revenues 23.5 30.7
------- -------26.1 29.6 24.9 30.1
------ ------ ------ ------
Gross profit 76.5 69.3
------- -------73.9 70.4 75.1 69.9
Operating expenses:
Research and development 21.6 20.921.3 21.5 21.4 21.2
Sales and marketing 12.8 12.710.8 11.0 11.8 11.8
General and administrative 7.5 8.7
------- -------8.2 8.2 7.8 8.5
------ ------ ------ ------
Total operating expenses 41.9 42.340.3 40.7 41.0 41.5
------- ------- ------- -------
Income from operations 34.6 27.033.6 29.7 34.1 28.4
Other income 5.4 1.45.7 2.6 5.5 2.0
------- ------- ------- -------
Income before provision for income taxes 40.0 28.439.3 32.3 39.6 30.4
Provision for income taxes 13.6 9.713.4 11.0 13.5 10.4
------- ------- ------- -------
Net income 26.4% 18.7%25.9% 21.3% 26.1% 20.0%
======= ======= ======= =======
REVENUES
Our revenues were $33.0PRODUCT AND LICENSE FEES. Revenues from product and license fees
increased 41.5% to $32.6 million for the three months ended March
31,June
30, 2000 an increase of 41.8% over the $23.2from $23.0 million reported for the three months ended March 31,June 30,
1999. For the six months ended June 30, 2000, revenues from product
and license fees increased 40.7% to $62.5 million from $44.4
million for the six months ended June 30, 1999. The growth in
revenues from product and license fees is primarily due to an
increase in unit sales. Forsales during the three and six months ended March 31, 2000, international revenues accounted for 39.4% of
total revenues comparedJune
30, 2000. We expect that product and license fees will continue to
47.6%increase in absolute dollars from the levels achieved in the
quarter ended June 30, 2000.
SERVICES. Revenues from services increased 54.9% to $4.2 million
for the three months ended March
31,June 30, 2000 from $2.7 million for the
three months ended June 30, 1999. For the six months ended June 30,
2000, revenues from services increased 58.1% to $7.3 million from
$4.6 million for the six months ended June 30, 1999. The decreaseincrease
in internationalthe services revenues as a percentage of total revenues wasis
primarily related to post-contract support services associated with
a larger installed customer base. We expect that services revenues
will continue to increase in absolute dollars from the result of several large, domestic GeoProbe
deployments.levels
achieved in the quarter ended June 30, 2000.
CONCENTRATION OF REVENUES. In the three and six months ended March 31,June
30, 2000, we had two customers that each accounted for slightly more than
10% of total revenues. We anticipate that in the future,
individual, large transactions may represent a large percentage of
total revenues, particularly on a quarterly basis.
INTERNATIONAL REVENUES. For the three months ended June 30, 2000,
international revenues accounted for 63.7% of total revenues
compared to 54.9% for the three months ended June 30, 1999. The
increase in international revenues as a percentage of total
revenues was the result of several large, international GeoProbe
deployments. For the six months ended June 30, 2000, international
revenues accounted for 52.2% of total revenues compared to 51.4%
for the six months ended June 30, 1999.
Page 11 of 25
COST OF REVENUES
PRODUCT AND LICENSE FEES. Cost of revenuesproduct and license fees consists
primarily of hardware expenses and personnel costs related to the
manufacturing, installationintegration and supportinstallation of our products. For the three months ended March 31, 2000,
costCost
of revenues increased to $7.8product and license fees was $7.5 million from $7.1and $6.1 million for
the three months ended March 31, 1999.June 30, 2000 and 1999, representing 23.0%
and 26.4% of product and license fee revenues, respectively. For
the six months ended June 30, 2000 and 1999, cost of product and
license fees was $13.5 million and $11.6 million, representing
21.6% and 26.1% of product and license fee revenues, respectively.
The increase in dollarsdollar amounts for both the three and six months
ended June 30, 2000 resulted primarily from additional installation expenses and
support expenses related to servicing our growing installed
customer base. Cost of revenues represented 23.5% and 30.7% of
revenues in the three months ended March 31, 2000 and 1999,
respectively.material
costs associated with higher unit sales. The decrease as a
percentage of product and license fee revenues was primarily
attributable to a higher percentage of revenues being derived from
more profitable expansions of existing systems versus new installations. Generally, expansionssystem
installations, as well as economies of existing systems have lower
hardwarescale achieved in
production and implementation activities.
SERVICES. Cost of services consists of expenses, primarily
personnel costs, than new installations on a per transaction basis.
We believe thatrelated to post-contract support, training and
warranty and non-warranty work. Cost of services was $2.1 million
and $1.6 million for the remainderthree months ended June 30, 2000 and 1999,
representing 50.1% and 56.8% of service revenues, respectively. For
the six months ended June 30, 2000 and 1999, cost of services was
$3.9 million and $3.1 million, representing 53.0% and 68.1% of
services revenues, respectively. Cost of services as a percentage
of services revenues will be higher thanhas fluctuated, and is expected to continue to
fluctuate, on a period-to-period basis based upon the level experienced in
the three months ended March 31, 2000.relative mix
of post-contract support, training and warranty and non-warranty
work.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and
other compensation expenses associated with our research and
development activities. These expenses increased to $7.1$7.8 million
for the three months ended March 31,June 30, 2000 from $4.9$5.5 million for the
three months ended March 31,June 30, 1999. The increase was primarily due to
increased staffing dedicated to research and development
activities. Research and development expenses as a percentage of
total revenues were 21.6%21.2% and 20.9%21.5% in the three months ended March 31,June
30, 2000 and 1999, respectively.
For the six months ended June 30, 2000, research and development
expenses increased to $14.9 million from $10.4 million for the
comparable prior-year period. The increase in dollars was primarily
due to additional staffing and related personnel costs. Research
and development expenses as a percentage of total revenues were
21.4% and 21.3% in the six months ended June 30, 2000 and 1999,
respectively. We expect that research and development
Page 11 of 23
expenses in
future periods will increase in absolute dollars, as these
investments are crucial to our ability to evolve our technologies
and expand our product offerings to meet our customers' needs.
Software development costs are expensed as incurred until
technological feasibility has been established, at which time
subsequent costs are permitted to be capitalized until the product
is available for general release to our customers. To date, either
the establishment of technological feasibility of our products has
substantially coincided with their general release, or costs
incurred subsequent to the achievement of technological feasibility
have not been material. As a result, software development costs
qualifying for capitalization have been insignificant and we have
not capitalized any software development costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel, travel
and facilities expenses related to sales and marketing activities,
distributor commissions and expenses for trade shows and
advertising. These expenses increased to $4.2$4.0 million in the three
months ended March 31,June 30, 2000 from $3.0$2.8 million in the three months
ended March 31,June 30, 1999. The increase was primarily related to
continued expansion of our direct sales force, increased
international sales activities and increased marketing and
promotional activities.
Page 12 of 25
Sales and marketing expenses as a percentage of total revenues were
10.8% and 11.0% in the three months ended June 30, 2000 and 1999,
respectively.
Sales and marketing expenses increased to $8.2 million in the six
months ended June 30, 2000 from $5.8 million in the six months
ended June 30, 1999. The increase was primarily related to
continued expansion of our direct sales force, increased
international sales activities and increased marketing and
promotional activities. Sales and marketing expenses as a
percentage of total revenues were 12.8% and 12.7%11.8% in both the threesix months
ended March 31,June 30, 2000 and 1999, respectively. We believe that1999. Although these expenses can be
affected by the timing of certain sales and marketing activities,
we expect that these expenses will continue to increase in absolute dollars
and as a percentage of total revenues through 2000 due to planned
expansion of our domestic and international sales efforts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel,
facilities and other costs of our finance, administrative and
executive departments as well as fees and expenses associated with
legal and accounting requirements. These expenses increased to $2.5$3.0
million for the three months ended March 31,June 30, 2000 from $2.0$2.1 million
for the three months ended March 31,June 30, 1999. The increase was
primarily related to increased staffing levels associated with the
growth of our business and increased costs related to being a
public company. General and administrative expenses as a percentage
of revenues were 7.5% and 8.7%8.2% in both the three months ended March 31,June 30, 2000
and 1999.
General and administrative expenses increased to $5.5 million for
the six months ended June 30, 2000 from $4.2 million for the six
months ended June 30, 1999. The increase was primarily related to
increased staffing levels associated with the growth of our
business and increased costs related to being a public company.
General and administrative expenses as a percentage of total
revenues were 7.8% and 8.5% in the six months ended June 30, 2000
and 1999, respectively. We anticipate that general and
administrative expenses will continue to increase in absolute
dollars but decrease slightly as a percentage of total revenues.
OTHER INCOME
Other income is primarily interest income earned on our cash and
cash equivalents. Other income was $1.8$2.1 million for the three
months ended March 31,June 30, 2000 compared to $300,000$700,000 for the three
months ended March 31,June 30, 1999. TheOther income was $3.9 million for the
six months ended June 30, 2000 compared to $1.0 million for the six
months ended June 30, 1999. For both the three and six months ended
June 30, 2000, the increase was due to higher balances of cash and
cash equivalents, which resulted from
increased cash flows from operations and proceeds from our initial
public offering completed in June 1999.
PROVISION FOR INCOME TAXES
We recorded income tax expense of $4.5$4.9 million and $2.2$2.8 million in
the three months ended March 31,June 30, 2000 and 1999, respectively. Our
effective income tax rate for each three-month period was 34.0%. We
recorded income tax expense of $9.4 million and $5.1 million in the
six months ended June 30, 2000 and 1999, respectively. Our
effective income tax rate for each six-month period was 34.0%.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily through cash flows from
operations and bank borrowings. We had working capital of $134.3$143.2
million at March 31,June 30, 2000, compared with $123.9 million at December
31, 1999. At March 31,June 30, 2000, we had $140.5$138.7 million in cash and cash
equivalents, an increase of $12.6$10.8 million from $127.9 million in
cash and cash equivalents at December 31, 1999. The increase in
cash and cash equivalents is attributable to higher levels of
income from operations increased taxes payable, increased deferred
revenue, and
Page 12 of 23
proceeds from the issuance of common
stock upon the exercise of stock options and purchases under our
employee stock purchases.purchase plan.
Page 13 of 25
We have arenewed our line of credit facility with a bank providing for
borrowings of up to $10.0 million which expiresmillion. This credit facility will expire
on June 15, 2000.2001. Up to $5.0 million may be utilized to support
letters of credit. The per annum usage fee on unused portions of
the line is 0.125%. Borrowings under this facility bear interest payable quarterly at
LIBOR plus 1.5% and are
collateralized by our accounts receivable, inventories, and
property and equipment.equipment and bear interest payable quarterly at LIBOR
plus a margin, determined by our level of indebtedness, ranging
from 0.25% to 0.5% for United States dollar borrowings and 1.25% to
1.5% for Eurodollar borrowings. The credit facility includes
covenants requiring us to maintain certain financial ratios and
restricts the payment of cash dividends without the bank's consent.
At March 31,June 30, 2000, no amounts were outstanding under the credit
facility, and the amount available to us, after considering
outstanding letters of credit, was $9.8 million.
Net cash provided by operating activities was $12.0 million for the
threesix months ended March 31,June 30, 2000, compared to $22.2$32.4 million during
the same period in 1999. Net cash provided by operating activities
resulted primarily from net income and changes in components of
working capital. The decline in cash provided by operating
activities for the six months ended June 30, 2000, compared to the
six months ended June 30, 1999,was attributable to changes in
working capital accounts.
Net cash used in investing activities was $1.3$3.2 million for the threesix
months ended March 31,June 30, 2000, compared to $1.0$2.5 million during the
same period in 1999. Net cash used in investing activities was
related to purchases of property and equipment.
Net cash provided by financing activities was $1.8$1.9 million for the
threesix months ended March 31,June 30, 2000, and $0 for the same period in
1999, and resultedresulting from proceeds from the
issuance of common stock upon the exercise of stock options and
purchases under our employee stock purchase plan. Net cash provided
by financing activities was $56.1 for the same period in 1999,
resulting from proceeds from the issuance of common stock in our
initial public offering and from proceeds from the issuance of
common stock upon the exercise of stock options.
In January 2000, we signed a ten-year lease agreement for office
space.corporate
headquarters in Richardson, Texas. We estimate that our remaining
commitment for leasehold improvements for this office space is
between $5.0$4.0 million and $6.0$5.0 million. Our current cash balances
are sufficient to cover these estimated capital expenditures.
Any material acquisition or joint venture could result in a
decrease in our working capital, depending on the amount, timing
and nature of the consideration to be paid. Absent any such
acquisitions and joint ventures, we anticipate that current cash
balances, potential cash flows from operations and available
borrowings under our revolving credit facility will be sufficient
to meet our anticipated cash needs for working capital, capital
expenditures and other activities for at least the next 12 months.
Thereafter, if current sources are not sufficient to meet our
needs, we may seek additional equity or debt financing. In
addition, any material acquisition of complementary businesses,
products or technologies or material joint venture could require us
to obtain additional equity or debt financing. There can be no
assurance that additional financing would be available on
acceptable terms, if at all.
RISK FACTORS
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO
PREDICT.
Since our future operating results are likely to vary significantly
from quarter to quarter, you should not rely on our results of
operations during any particular quarter as an indication of our
future performance in any fiscal year or quarterquarterly period. Our
quarterly operating results have varied significantly in the past
and are likely to vary significantly from quarter to quarter in the
future based on a number of factors, many of which are outside of
our control. Such factors include:
-* the size and timing of specific orders by customers;
-* competition;
Page 14 of 25
- the degree of market acceptance of new products and
technologies introduced by us and our competitors;
- the mix of products and services sold by us;
Page 13 of 23
- the timing of product shipments and product
installations by us;
- in limited circumstances, the timing of customer
acceptance of products we deliver to them;
- the capital spending patterns of our customers;
- the mix of domestic and international sales;
- the mix of new installations and system expansions;
- changes in the timing of and level of expenses;
- the relative percentages of products sold through our
direct and indirect sales channels;
- customer order deferrals in anticipation of
enhancements or new products;
- the timing of and level of investments in research
and development activities by us;
- changes in, and our ability to implement, our
strategy;
- changes in the availability or cost of materials
needed to produce our products;
- the progress and timing of the privatization and
restructuring of telecommunications markets and the
worldwide deregulation of the international
telecommunications industry;
- defects and product quality problems;
- intellectual property disputes;
- expansion of and risks associated with our
international operations; and
- changes in general economic conditions.
Furthermore, a large portion of our operating expenses, including
rent and salaries, are largely fixed in nature. Accordingly, if
revenues are below expectations, our operating results are likely
to be adversely and disproportionately affected because these
operating expenses are not variable in the short term, and cannot
be quickly reduced to respond to unanticipated decreases in
revenues.
The amount of revenues associated with particular product sales can
vary significantly. The deferral or loss of one or more
individually significant salessale could harm our operating results in a
particular quarter.
Our operating results also are likely to fluctuate due to factors
which impact our prospective customers. Expenditures by prospective
customers tend to vary in cycles that reflect overall economic
conditions and individual budgeting and buying patterns. Our
business would be adversely affected by a decline in the economic
prospects of our customers or the economy in general, because these
adverse conditions could alter current or prospective customers'
capital spending priorities or budget cycles, or extend our sales
cycle with respect to some of our customers. In addition, our
operating results historically have been influenced by seasonal
fluctuations, with revenues tending to be strongest in the fourth
quarter of each year. We believe that this seasonality has been due
to the capital appropriation practices of many of our
Page 15 of 25
customers. We expect that in future periods this seasonal trend may
cause our first quarter revenues to remain consistent with, or
decrease from, the level achieved in the preceding quarter.
As a result of all of the foregoing, we cannot assure you that our
revenues will grow in future periods or that we will remain
profitable. In addition, in some future quarters our operating
results may be below the expectations of public market analysts. In
such event, the market price of our common stock would likely fall.
Page 14 of 23
CONSOLIDATIONS IN, OR A SLOWDOWN IN THE GROWTH OF, THE
TELECOMMUNICATIONS INDUSTRY COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We have derived substantially all of our revenues from sales of
products and related services to the telecommunications industry.
The telecommunications industry has undergone a period of rapid
growth and consolidation during the past few years. Our business,
financial condition and results of operations could be materially
and adversely affected in the event of a significant slowdown in
the growth of this industry. Further, consolidations of our
prospective customers may delay or cause cancellations of
significant sales of our products, which could harm our operating
results in a particular period.
ANY REVERSAL OR SLOWDOWN IN DEREGULATION OF TELECOMMUNICATIONS
MARKETS COULD ADVERSELY AFFECT THE MARKET FOR OUR PRODUCTS.
Future growth in the markets for our products will depend in part
on privatization, deregulation and the restructuring of
telecommunications markets worldwide. Any reversal or slowdown in
the pace of this privatization, restructuring or deregulation could
have a material adverse effect on the markets for our products.
Moreover, the consequences of deregulation are subject to many
uncertainties, including judicial and administrative proceedings
that affect the pace at which the changes contemplated by
deregulation occur, and other regulatory, economic and political
factors. Any invalidation, repeal or modification of the
requirements imposed by the Telecommunications Act of 1996 or the
local telephone competition rules adopted by the U.S. Federal
Communications Commission to implement that Act could have a
material adverse effect on our business, financial condition and
results of operations. Furthermore, the uncertainties associated
with deregulation have in the past and could in the future cause
our customers to delay purchasing decisions pending the resolution
of these uncertainties.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG, WHICH COULD ADVERSELY
AFFECT OUR QUARTERLY OPERATING RESULTS.
The sales cycle for our products is long, typically ranging from
six to 12 months for GeoProbe sales (excluding the cycle for
subsequent applications and enhancements, which varies widely) and
up to sixthree months for occasional, large Spectra sales. As a
result, our ability to forecast the timing and amount of specific
sales is limited. Accordingly, the deferral or loss of one or more
significant sales could harm our operating results in a given
quarter, particularly if there are significant sales and marketing
expenses associated with the deferred or lost sales.
ANY DECREASE IN DEMAND FOR OUR GEOPROBE AND SPECTRA PRODUCTS COULD
SIGNIFICANTLY DECREASE OUR SALES.
Our two principal products, GeoProbe and Spectra, generate
substantially all of our revenues and are expected to continue to
account for a substantial majority of our revenues for the
foreseeable future. Any downturn in the demand for either or both
of these products could have a material adverse effect on our
business, financial condition and results of operations. Moreover,
we cannot assure you that we will be successful in developing any
other products or taking any other steps to reduce the risk
associated with any slowdown in demand for GeoProbe and Spectra.
IF THE MARKET FOR SS7 AND CONVERGING NETWORK SOLUTIONS FAILS TO
GROW OR GROWS MORE SLOWLY THAN WE ANTICIPATE, OUR OPERATING RESULTS
COULD BE HARMED.
Our future operating results are dependent in significant part on
the continued viability and expansion of SS7 signaling networks and
the convergence of the Packet-basedpacket-based networks (for example, Internet
Page 16 of 25
protocol, or IP, and asynchronous transfer mode, or ATM) and the
public switched telephone network. Our business, financial
condition and results of operations could be materially and
adversely affected if the market for SS7 and converging network
solutions fails to grow or grows more slowly than we currently
anticipate.
Page 15 of 23
COMPETITION COULD REDUCE OUR MARKET SHARE, WHICH WOULD LIKELY HARM
OUR BUSINESS AND OPERATING RESULTS AND CAUSE OUR STOCK PRICE TO
FALL.
The market for signaling-based communications network management
applications is relatively new, intensely competitive, both in the
U.S. and internationally, and subject to rapid technological
change, evolving industry standards and regulatory developments.
Competition is expected to persist, intensify and increase in the
future. We compete with a number of U.S. and international
suppliers that vary in size and in the scope and breadth of the
products and services offered. GeoProbe principally competes with
products offered by Agilent Technologies, a subsidiary of
Hewlett-Packard Company.Technologies. Our diagnostic tools
principally compete with products offered by Agilent Technologies,
Tekelec and Tektronix, Inc. There have been new entrants in both
the network optimization and diagnostic product areas, but to date
they do not comprise a significant portion of the market. Some of
our competitors have, in relation to our company, longer operating
histories, larger installed customer bases, longer-standing
relationships with customers, greater name recognition and
significantly greater financial, technical, marketing, customer
service, public relations, distribution and other resources.
Additionally, it is possible that new competitors or alliances
among competitors could emerge and rapidly acquire significant
market share. As a result, these competitors may be able to more
quickly develop or adapt to new or emerging technologies and
changes in customer requirements, or devote greater resources to
the development, promotion and sale of their products. Increased
competition is likely to result in price reductions, reduced
margins and loss of market share. The competitive pressures we face
could harm our business, financial condition and results of
operations.
OUR RAPID GROWTH AND EXPANSION MAY STRAIN OUR RESOURCES AND HINDER
OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY.
We have experienced rapid and significant growth that has placed,
and is expected to continue to place, a significant strain on our
management, information systems and operations. For example, our
revenues have increased from $17.5 million in 1995 to $110.0
million in 1999. The number of our employees has increased from 116
at December 31, 1995 to 457 at December 31, 1999 and 475516 at March
31,June
30, 2000. Our ability to effectively manage significant additional
growth will require us to improve our financial, operational and
management information and control systems and procedures and to
effectively attract, train, motivate and manage our employees. The
failure to manage growth effectively could harm our business,
financial condition and results of operations.
WE MAY BE UNABLE TO SUCCESSFULLY GROW OUR BUSINESS IF WE ARE UNABLE
TO ATTRACT ADDITIONAL HIGHLY SKILLEDHIGHLY-SKILLED PERSONNEL OR RETAIN OUR
EXISTING KEY PERSONNEL.
Our future success will depend to a significant extent upon the
continued service and performance of a relatively small number of
key senior managers, technical personnel, sales and marketing
personnel, most of whom are not bound by an employment agreement.
The loss of any existing key personnel or the inability to attract,
motivate and retain additional qualified personnel could harm our
business, financial condition and results of operations.
We anticipate that continued growth, if any, will require us to
recruit and hire a substantial number of new employees,
particularly sales and marketing personnel and technical personnel
with signaling and IP knowledge and experience, both in the U.S.
and internationally. Competition for personnel is intense, and we
have at times experienced difficulty in recruiting qualified
personnel. We historically have filled a portion of our new
personnel needs with non-U.S. citizens holding temporary work visas
that allow these individuals to work in the U.S. for only a limited
period of time. Accordingly, any change in U.S. immigration policy
limiting the issuance of temporary work visas could adversely
affect our ability to recruit new personnel. Furthermore, the
addition of significant numbers of new personnel requires us to
incur significant start-up expenses, including procurement of
office space and equipment, initial training
Page 17 of 25
costs and low utilization rates of new personnel. We may be unable
to successfully recruit additional personnel as needed. In
addition, the start-up expenses incurred in connection with the
hiring of additional personnel could harm our future operating
results.
Page 16 of 23
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND
EVOLVING CUSTOMER REQUIREMENTS.
The market for our products is characterized by rapid technological
advances, evolving industry and customer-specific protocol
standards, changes in customer requirements and frequent new
product introductions and enhancements. The introduction of
communications network management products involving superior
technologies or the evolution of alternative technologies or new
industry protocol standards could render our existing products, as
well as products currently under development, obsolete and
unmarketable. We believe our future success will depend in part
upon our ability, on a timely and cost-effective basis, to continue
to:
- enhance our network optimization and diagnostic
products;
- develop and introduce new products for the
communications network management market and other
markets;
- address evolving industry protocol standards and
changing customer needs; and
- achieve broad market acceptance for our products.
We cannot assure you that we will achieve these objectives.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP NEW
PRODUCTS BASED ON EMERGING TECHNOLOGIES.
Our future success will depend in part on our ability to develop
solutions for networks based on emerging technologies and
standards, such as ATMIP and Internet telephony,ATM, which are likely to be characterized
by continuing technological developments, evolving industry
standards and changing customer requirements. We may not
successfully develop competitive products for these emerging
technologies, and our failure to do so could harm our business,
financial condition and results of operations.
WE HAVE INTERNATIONAL CUSTOMERS, AND, AS A RESULT, OUR BUSINESS MAY
BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN
FOREIGN MARKETS.
Our international operations are subject to the risks inherent in
international business activities. Revenues from customers located
outside of the U.S. represented 39.4%52.2% of our total revenues for the
threesix months ended March 31,June 30, 2000 and 51.7%, 52.2% and 52.6% of our
total revenues in 1999, 1998 and 1997, respectively. We believe
that continued growth and profitability will require expansion of
our sales efforts in international markets. This expansion may be costly
and time-consuming and may not generate returns for a significant
period of time, if at all. The risks inherent in international
operations include:
- management of geographically dispersed operations;
- longer accounts receivable payment cycles;
- the ability to establish relationships with
government-owned or subsidized communications
providers;
- general economic conditions in each country;
- currency controls and exchange rate fluctuations;
- seasonal reductions in business activity particularspecific to
certain markets;
Page 18 of 25
- loss of revenues, property and equipment from
expropriation, nationalization, war, insurrection,
terrorism and other political risks;
Page 17 of 23
- foreign taxes and the overlap of different tax
structures;
- greater difficulty in safeguarding intellectual
property;
- import and export licensing requirements;
- trade restrictions; and
- involuntary renegotiation of contracts with foreign
governments and communications carriers.
International expansion of our business will require significant
management attention and financial resources. Moreover, in order to
further expand internationally, we may be required to establish
relationships with additional distributors and third-party
integrators. We cannot assure you that we will effectively
establish such relationships. If international revenues are not
adequate to offset the additional expense of expanding
international operations, it could harm our business, financial
condition and results of operations.
To date, a very high percentage of international sales have been
denominated solely in U.S. dollars, and accordingly we have not been
significantly exposed to fluctuations in non-U.S. currency exchange
rates. As a result, our revenues in international markets may be
adversely affected by a strengthening U.S. dollar. However, we
expect that in future periods a greater portion of international
sales may be denominated in currencies other than U.S. dollars,
thereby exposing us to gains and losses on non-U.S. currency
transactions. We may choose to limit such exposure by entering into
various hedging strategies. We cannot be certain that any hedging
strategies that we undertake would be successful in avoiding
exchange-related losses.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS
BECAUSE WE OBTAIN KEY COMPONENTS FROM SOLE AND LIMITED SOURCE
SUPPLIERS. IF WE ARE UNABLE TO OBTAIN THESE COMPONENTS, WE COULD BE
UNABLE TO SHIP OUR PRODUCTS IN A TIMELY MANNER.
Currently, our products utilize certain semiconductors that are
available from only one manufacturer and other components that are
available from a limited number of suppliers. While alternative
suppliers have been identified for certain key components, those
alternative sources have not been qualified by us. Our
qualification process could be lengthy, and we cannot assure you
that additional sources would become available to us on a timely
basis, or if such sources were to become available, that the
components would be comparable in price and quality to our current
components. We have no long-term agreements with our suppliers and
generally make our purchases with purchase orders on an "as-needed
basis." Furthermore, certain components require an order lead-time
of approximately six months. Other components that currently are
readily available may become difficult to obtain in the future.
Accordingly, we make advance purchases of certain components in
relatively large quantities to ensure that we have an adequate and
readily available supply. Our failure to order sufficient
quantities of these components sufficiently in advance of product
delivery deadlines could prevent us from adequately responding to
unanticipated increases in customer orders. In the past, we have
experienced delays in the receipt of certain of our key components,
which have resulted in delays in product deliveries. We could
experience delays or reductions in product shipments or increases
in product costs if we are unable to obtain sufficient key
components as required or to develop alternative sources if and as
required in the future.
Page 19 of 25
SINCE WE RELY ON THIRD-PARTY SUBCONTRACTORS TO MANUFACTURE AND
DEVELOP OUR PRODUCTS, IF THESE SUBCONTRACTORS DO NOT MEET THEIR
COMMITMENTS TO US, OUR ABILITY TO SELL PRODUCTS TO OUR CUSTOMERS
COULD BE IMPAIRED.
We rely exclusively upon third-party subcontractors to manufacture
our subassemblies. We also have retained, from time to time,
third-party design services in the development of
application-specific integrated circuits. Our reliance on
third-party subcontractors involves a number of risks, including
the potential absence of adequate capacity, the unavailability of
or interruption in access to certain process
Page 18 of 23
technologies, and
reduced control over product quality, delivery schedules,
manufacturing yields and costs. Any disruption in our relationships
with third-party subcontractors and our inability to develop
alternative sources if and as required in the future could result
in delays or reductions in product shipments or increases in
product costs.
WE RELY UPON SOFTWARE LICENSED FROM THIRD PARTIES; IF WE ARE UNABLE
TO MAINTAIN THESE SOFTWARE LICENSES ON COMMERCIALLY REASONABLE
TERMS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE HARMED.
We rely upon software that we license from third parties, including
software that is integrated with our internally developed software
and used in our products to perform key functions. The inability to
maintain any software licenses on commercially reasonable terms
could result in shipment delays or reductions until equivalent
software could be developed or licensed and integrated into our
products, which could harm our business, financial condition and
results of operations.
WE MAY NOT RECEIVE THE INTENDED BENEFITS OF FUTURE ACQUISITIONS,
JOINT VENTURES, OR OTHER BUSINESS RELATIONSHIPS.
We may in the future pursue acquisitions of businesses, products
and technologies, or the establishment of joint venture
arrangements, that could expand our business. The negotiation of
potential acquisitions or joint ventures as well as the integration
of an acquired or jointly developed business, technology or product
could cause diversion of management's time and resources. Future
acquisitions and joint ventures by our company could result in
potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities, amortization of goodwill and
other intangibles, research and development write-offs and other
acquisition-related expenses. Further, we cannot assure you that
any acquisition or joint venture will be successfully integrated
with our operations. If any such acquisition or joint venture were
to occur, we cannot be certain that we will receive the intended
benefits of the acquisition or joint venture. Also, we may pursue
arrangements with third parties to perform certain activities for
us such as the development of certain products or product features.
We cannot assure you that these arrangements will produce to the
level of quality or in the time frame expected, which could
materially and adversely harm our business.
WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS,
WHICH COULD SUBJECT US TO COSTLY AND TIME-CONSUMING LITIGATION.
The communications industry is characterized by the existence of a
large number of patents and frequent allegations of patent
infringement. We have received, and may receive in the future,
notices from holders of patents that raise issues as to possible
infringement by our products. As the number of communications
network management products increases and the functionality of
these products further overlaps, we believe that we may become
increasingly subject to allegations of infringement. To date, we
have engaged in correspondence with third-party holders of patents
as a result of two such notices. We believe that our products do
not infringe on any valid patents cited in the notices, however,
questions of infringement and the validity of patents in the field
of communications signaling technologies involve highly technical
and subjective analyses. We cannot assure you that any such patent
holders, or others, will not initiate legal proceedings in the
future against us, or that if any proceedings were initiated, we
could be successful in defending ourselves. Any proceeding could be
time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product
shipment delays, or force us to enter into
Page 20 of 25
royalty or license agreements rather than dispute the merits of any
such proceeding initiated against us. We cannot assure you that any
such royalty or license agreements could be available on terms
acceptable to us, if at all.
Page 19 of 23
OUR LIMITED ABILITY OR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY
MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Our continued success is dependent in part upon our proprietary
technology. To protect our proprietary technology, we rely on a
combination of technical innovation, trade secret, copyright and
trademark laws, non-disclosure agreements and, to a lesser extent,
patents, each of which affords only limited protection. In
addition, the laws of some foreign countries do not protect our
proprietary rights in the products to the same extent as do the
laws of the U.S. Despite the measures taken by us, it may be
possible for a third party to copy or otherwise obtain and use our
proprietary technology and information without authorization.
Policing unauthorized use of our products is difficult, and
litigation may be necessary in the future to enforce our
intellectual property rights. Any litigation could be time
consuming and expensive to prosecute or resolve, result in
substantial diversion of management resources, and have a material
adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will be successful in
protecting our proprietary technology or that our proprietary
rights will provide us a meaningful competitive advantage.
WE MAY FACE POTENTIAL LIABILITY FOR PRODUCT DEFECTS.
Products as complex as those we offer may contain undetected
defects or errors when first introduced or as enhancements are
released that, despite our testing, are not discovered until after
a product has been installed and used by customers, which could
result in delayed market acceptance of the product or damage to our
reputation and business. To date, we have not been materially
adversely affected by products containing defects or errors. We
attempt to include provisions in our agreements with customers that
are intended to limit our exposure to potential liability for
damages arising out of defects or errors in or the use of our products. However,
the nature and extent of these limitations tend to vary from
customer to customer and it is possible that these limitations may
not be effective as a result of unfavorable judicial decisions or
laws enacted in the future. Although we have not experienced any
product liability suits to date, the sale and support of our
products entails the risk of these claims. Any product liability
claim brought against us, regardless of its merit, could result in
material expense to us, diversion of management time and attention,
and damage to our business reputation and our ability to retain
existing customers or attract new customers.
OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OWN
APPROXIMATELY 80.9%80% OF OUR COMMON STOCK, WHICH ALLOWS THEM TO CONTROL
THE MANAGEMENT AND AFFAIRS OF OUR COMPANY OR PREVENT A CHANGE OF
CONTROL.
As of March 31,June 30, 2000, our three founders, Samuel S. Simonian, Elie
S. Akilian and Mark A. Weinzierl, beneficially owned approximately
80.9%80% of the outstanding shares of our common stock. Consequently,
two or more of these individuals, acting together, could control
the outcome of all matters submitted for stockholder action,
including the election of our board of directors and the approval
of significant corporate transactions, and could effectively
control the management and affairs of our company, which could have
the effect of delaying or preventing a change in control of our
company. In addition, Messrs. Simonian, Akilian and Weinzierl
constitute three of the six members of our board of directors and
could have significant influence in directing the actions taken by
our board.
OUR BUSINESS AND REPUTATION COULD SUFFER IF WE DO NOT PREVENT
SECURITY BREACHES.
We have included security features in some of our products that are
intended to protect the privacy and integrity of customer data.
Despite the existence of these security features, our products may
be vulnerable to breaches in security due to defects in the
security mechanisms, as well as vulnerabilities inherent in the
operating system or hardware platform on which the product runs,
and/or the networks linked to that platform. Security
vulnerabilities, regardless of origin, could jeopardize the
security of
Page 21 of 25
information stored in and transmitted through the computer systems
of our customers. Any security problem may require significant
capital expenditures to solve and could adversely affect our
reputation and product acceptance.
Page 20 of 23
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT
AN ACQUISITION OF OUR COMPANY.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that may have the effect of discouraging,
delaying or preventing a change in control of our company or
unsolicited acquisition proposals that a stockholder may consider
favorable. For example, we provide for a classified board of
directors with staggered three-year terms, our stockholders are unable to
take action by written consent and our stockholders are limited in
their ability to make proposals at stockholder meetings.
VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US.
The market price of our common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected
by factors such as:
- variations in our results of operations;
- future sales of common stock;
- the announcement of technological innovations or new
products by us, our competitors and others;
- market analysts' estimates of our performance; and
- general market and economic conditions.
The public markets have experienced volatility that has
particularly affected the market prices of securities of many
technology companies for reasons that have often been unrelated to
operating results. This volatility may adversely affect the market
price of theour common stock andas well as our visibility and credibility
in our markets.
Additionally, in the past, securities class action litigation often
has been brought against a company following periods of volatility
in the market price of its common stock. We may be the target of
similar litigation in the future. Securities litigation could
result in substantial costs and divert our management's attention
and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to immaterial levels of market risk.
Page 2122 of 2325
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2000, through March 31,In the three months ended June 30, 2000, we issued 678,00012,000 shares
of our common stock to employees pursuant to exercises of stock
options under our stock option plans1995 Employee Stock Option Plan (with exercise
prices ranging from $0.60 to $15.00$1.15 per share) and 89,900 shares pursuant
to employee stock purchases under our employee stock purchase
plan.. These issuances
were deemed exempt from registration under Section 5 of the
Securities Act of 1933 in reliance upon Rule 701 thereunder.
The Securities and Exchange Commission on May 26, 1999 declared
effective the Registration Statement on Form S-1 (File No.
333-59753) relating to the initial public offering of our common
stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 16, 2000, our
stockholders voted on and approved the following matters:
1. The election of two Class I Directors to serve until the annual
stockholders' meeting in 2001, or until their successors have
been elected and qualified.
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
James R. Adams 44,583,580 22,479
Grant A. Dove 44,580,955 25,104
2. The election of two Class II Directors to serve until the
annual stockholders' meeting in 2002, or until their successors
have been elected and qualified.
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
William H. Mina 43,804,236 801,823
Mark A. Weinzierl 43,772,590 833,469
3. The election of two Class III Directors to serve until the
annual stockholders' meeting in 2003, or until their successors
have been elected and qualified.
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
Elie S. Akilian 43,806,396 799,663
Samuel S. Simonian 42,892,296 1,713,763
Page 23 of 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
10.1 Executive Employment Agreement, dated August 30, 1999, between
the registrant and Luis Pajares.
10.2 Letter agreement, dated January 31, 2000, between the
registrant and Jeffrey A. Kupp.
27Exhibit
Number Exhibit
------- -------
10.1 Renewal, Extension, and Second Amendment to
Loan Agreement, dated June 15, 2000, between
Bank of America, N.A., f/k/a NationsBank,
N.A., and the Company
27.0 Financial Data Schedule (for SEC information
only)
(b) There were no reports filedWe did not file any Current Reports on Form 8-K during the
first quarter ofended June 30, 2000.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INET TECHNOLOGIES, INC.
By: /s/ Elie S. Akilian
-----------------------------------------------------------------------------------------------------
Elie S. Akilian
President, Chief Executive Officer and Director
(Principal executive officer)
By: /s/ Jeffrey A. Kupp
-----------------------------------------------------------------------------------------------------
Jeffrey A. Kupp
Vice President, - Chief Financial Officer and Secretary
(Principal accounting and financial officer)
Date: May 15,August 4, 2000
Page 2224 of 2325
INDEX TO EXHIBITS
Exhibit
Number Description
-------- -----------
10.1 Executive Employment Agreement, dated August
30, 1999, between the registrant and Luis
Pajares
10.2 Letter agreement, dated January 31, 2000,
between the registrant and Jeffrey A. Kupp
27Exhibit
Number Exhibit
------- -------
10.1 Renewal, Extension, and Second Amendment to
Loan Agreement, dated June 15, 2000, between
Bank of America, N.A., f/k/a NationsBank,
N.A., and the Company
27.0 Financial Data Schedule
(for SEC information
only)
Page 2325 of 2325