<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-59753
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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INET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3661 75-2269056
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code number) identification number)
</TABLE>
WILLIAM H. MINA
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
INET TECHNOLOGIES, INC.
1255 W. 15TH STREET, SUITE 600
PLANO, TEXAS 75075
(972) 578-6100
FACSIMILE: (972) 578-6113
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
1255 WEST 15TH STREET, SUITE 600
PLANO, TEXAS 75075
(972) 578-6100
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
Copies to:
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CARMELO M. GORDIAN, ESQ. KENNETH M. SIEGEL, ESQ.
RONALD G. SKLOSS, ESQ. PAUL R. TOBIAS, ESQ.
J. MATTHEW LYONS, ESQ. S. DAWN SMITH, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI,
301 CONGRESS AVENUE, SUITE 1200 PROFESSIONAL CORPORATION
AUSTIN, TEXAS 78701 650 PAGE MILL ROAD
(512) 477-5495 PALO ALTO, CALIFORNIA 94304
FACSIMILE: (512) 477-5813 (650) 493-9300
FACSIMILE: (650) 493-6811
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1998
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<S> <C> <C>
5,750,000 SHARES
INET TECHNOLOGIES, INC.
LOGO
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
</TABLE>
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Of the 5,750,000 shares of Common Stock offered, 4,600,000 shares are being
offered hereby in the United States and 1,150,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
Of the 5,750,000 shares of Common Stock being offered, 3,841,870 shares are
being sold by the Company and 1,908,130 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
Prior to the offerings, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $15.00 and $17.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "INTI", subject to official notice of issuance.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $740,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 690,000 shares at the initial public offering
price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional 172,500 shares
as part of the concurrent International offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
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The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about , 1998, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN
RAUSCHER INCORPORATED
HAMBRECHT & QUIST
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The date of this Prospectus is , 1998.
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[GRAPHIC]
[Graphic depicting a human eye, part of a freestanding binocular viewer and
the Company's name superimposed upon one another on a multi-colored background.]
Text:
Upper Left corner of graphic: "An eye for surveillance"
Lower Right corner of graphic: "A mind for business"
The Company intends to furnish to its stockholders annual reports
containing audited financial statements examined by its independent auditors.
"GeoProbe", "Spider", "OpenSeven" and the Company's logo are registered
trademarks of Inet. This Prospectus also contains trade names, trademarks and
service marks of organizations other than the Company, which are the property of
their respective owners.
Unless the context requires otherwise, the terms "Inet" and the "Company"
refer to Inet Technologies, Inc. and its predecessors and consolidated
subsidiaries.
In this Prospectus, references to "dollars" and "$" are United States
dollars.
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CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE> 4
[DESCRIPTION OF ARTWORK IN FOLDOUT OF INSIDE FRONT COVER]
[Graphic depicting the implementation of the Company's Geoprobe and Spectra
products within a simplified SS7 network. The elements of the SS7 network are
shown from left to right beginning with the Customer A's call routed from its
telephone to the central office of the calling party's local telephone company,
then to a Signal Transfer Point (STP) where the Geoprobe collects and processes
raw signaling data, then to another STP, then to the central office of the
receiving party's local telephone company and finally to Customer B's telephone.
Spectra is shown implemented at the STP level to conduct diagnostic testing and
monitoring of SS7 signals. In the upper right hand corner of the graphic is a
photograph of the Spectra.]
Text:
Text Down Left Margin of Graphic: "The Signaling Network. The Signaling network
carries a continuous, two-way stream of diverse messages that simultaneously
control all calls, services and elements in a telecommunications network. Some
messages carry instructions for individual calls that include dialed digits,
call status (busy or available) and the activation and deactivation of special
call services. Other messages carry instructions for maintenance functions that
include indicators for failed links, overloaded switched and other network
conditions that could affect call completion."
"The Geoprobe System. 1) Inet's Geoprobe collects all messages directly from the
signaling network. 2) The messages are processed at each collection site. Each
individual message is organized and connected in sequence with all associated
messages. The result - complete, organized and detailed data about every call,
service and maintenance condition occurring in the network. 3) The prepared data
is made available for advanced processing by surveillance, business and third-
party applications within seconds of its collection."
"The Spectra. 1) Off Line, the Spectra tests network elements and services in
development laboratories. 2) Deployed in a live network, the Spectra can be used
as a troubleshooting tool to monitor signaling traffic on connected links."
Text at Upper Left Center of Graphic: "Inet provides telecommunications hardware
and software to local, long distance, cellular and PCS carriers worldwide.
Inet's products help manufacturers and carriers evaluate and improve the
performance and revenue potential of signaling networks."
Text Below photograph of Spectra: "Conformance Testing, Load Benchmarking,
Traffic & Element Emulation, Network Troubleshooting."
Text in center of Graphic of certain data obtained by the GeoProbe from a call:
"Call Attempt: A to B. Call Time: 03:20:00 AM. Setup Time: 00:00:05. Call Route:
NY/Portland. Call Status: Answered. Call Duration: 00:03:36."
Heading at bottom of Graphic: "GEOPROBE SURVEILLANCE & BUSINESS OR THIRD-PARTY
APPLICATIONS"
Text Below Heading at bottom of Graphic:
"Surveillance. Helps to ensure that the network is running smoothly and
efficiently. Generates alarms and records statistics on network events and
conditions. Trouble-shoots network problems quickly.
"Fraud Management. Provides a real-time data feed to legacy fraud systems, which
detect suspicious activity occurring in the network. Provides an opportunity to
reduce revenue lost to wireline and wireless fraud.
"Service Quality Assurance. Verifies that customers are receiving a high
quality of service, call by call and service by service. Pinpoints network and
service usage trends. Preprocesses data for use with external applications.
"Marketing. Provides marketing data to help users make decisions regarding
growth and element deployment in the network by call volume, customer base and
services offered.
"Billing. Tracks usage of the signaling network by interconnecting networks.
Reconciles revenue between service providers for trunk connectivity, call
termination and the delivery of services.
"Third-Party Applications. Supports the development of custom software and the
formatting of data with Application Programming Interface tools."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial data appearing
elsewhere in this Prospectus, including the more detailed information and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated herein, all information in this
Prospectus (i) reflects the recent reincorporation of the Company in Delaware
and a 10-for-1 split of the Common Stock and (ii) assumes no exercise of the
Underwriters' over-allotment options. See "Underwriting".
THE COMPANY
Inet provides solutions that enable telecommunications carriers to more
effectively design, deploy, diagnose, monitor and manage communications networks
that carry signaling information used to manage telephone calls. Inet's products
also address the fundamental business needs of telecommunications carriers, such
as improved billing, targeted sales and marketing, fraud prevention and enhanced
call routing. Inet provides these comprehensive solutions primarily through its
GeoProbe and Spectra product offerings.
The GeoProbe system provides real-time monitoring of Common Channel
Signaling System #7 ("SS7") networks and serves as an open platform for business
applications developed by Inet, its customers or third parties. GeoProbe's
monitoring applications enable early warning of network faults, collection of
statistics for performance evaluation, real-time call tracing and
troubleshooting. GeoProbe's associated business applications provide fraud
detection tools, reconciliation of billing between carriers, service quality
reports and marketing data. The Spectra product can be integrated within the
GeoProbe platform or used on a stand-alone basis to provide diagnostic,
emulation and load generation capabilities for use in the design, deployment,
commissioning and diagnosis of signaling networks.
Inet's objective is to be the dominant provider of advanced signaling
network management solutions and associated business applications for
telecommunications networks worldwide. Key elements of Inet's strategy to
achieve this objective include expanding its global market share, increasing its
domestic sales and penetration of its existing customer base, enhancing its
technological leadership position in SS7 network management solutions, expanding
its product offerings by leveraging its core competency in SS7, and building
relationships with strategic partners.
As of June 30, 1998, the Company had sold its solutions to over 300
customers in 40 countries. The Company's target customers include
telecommunications network carriers and equipment manufacturers throughout North
America, Latin America, Europe and the Asia/Pacific region. To date, the
Company's network carrier customers include AT&T, British Telecom, KPN Telecom,
MCI, o.tel.o communications, Portugal Telecom, Singapore Telecom, Sprint, SPT
Telecom, Telia, Telstra and Worldcom, and its equipment manufacturer customers
include DSC Communications, Ericsson, Motorola and Nortel.
The Company was incorporated in Texas as "INET, Inc." in 1989 and was
subsequently reincorporated in Delaware as "Inet Technologies, Inc." in 1998.
The Company's executive offices are located at 1255 West 15th Street, Suite 600,
Plano, Texas 75075, and its telephone number is (972) 578-6100.
3
<PAGE> 6
THE OFFERINGS
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Common Stock offered by the Company......................... 3,841,870 shares
Common Stock offered by the Selling Stockholders............ 1,908,130 shares
Common Stock to be outstanding after the offerings.......... 44,722,450 shares(1)
Use of proceeds............................................. For working capital and general
corporate purposes, including
possible acquisitions. See "Use
of Proceeds".
Proposed Nasdaq National Market symbol...................... INTI
</TABLE>
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(1) Excludes 1,991,000 shares of Common Stock issuable upon exercise of options
outstanding at June 30, 1998, with exercise prices ranging from $0.60 to
$4.20 per share and with a weighted-average exercise price of $1.66 per
share. See "Management -- 1998 Stock Option/Stock Issuance Plan" and Note 6
of Notes to Consolidated Financial Statements.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1995 1996 1997 1997 1998
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<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues................................. $17,531 $42,041 $57,701 $25,090 $34,165
Income from operations................... 2,239 13,288 19,096 7,550 10,793
Net income............................... $ 1,659 $ 8,936 $12,714 $ 5,027 $ 7,248
======= ======= ======= ======= =======
Basic net income per share............... $ 0.04 $ 0.22 $ 0.31 $ 0.12 $ 0.18
Diluted net income per share............. $ 0.04 $ 0.22 $ 0.30 $ 0.12 $ 0.17
Shares used in computing basic net income
per share(1)........................... 39,600 40,998 41,244 41,237 41,256
Shares used in computing diluted net
income per share(1).................... 41,207 41,451 42,110 41,767 42,665
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $20,482 $ 76,909
Working capital............................................. 30,679 87,106
Total assets................................................ 49,183 105,610
Stockholders' equity........................................ 36,852 93,279
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(1) See Note 9 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net income per
share.
(2) Adjusted to give effect to the sale by the Company of 3,841,870 shares of
Common Stock in the offerings at an assumed initial public offering price of
$16.00 per share (assuming no exercise of the Underwriters' over-allotment
options and after deducting the estimated underwriting discount and
estimated offering expenses payable by the Company). See "Capitalization"
and "Use of Proceeds".
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should consider carefully the
following factors in evaluating the Company and its business. All statements,
trend analysis and other information contained in this Prospectus relative to
markets for the Company's products and trends in revenue, gross margin and
anticipated expense levels, as well as other statements, including such words as
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan" and
"should" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below as well
as those discussed elsewhere in this Prospectus.
FLUCTUATIONS IN QUARTERLY FINANCIAL RESULTS
The Company's 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 the Company's control.
Such factors include the size and timing of specific orders by customers;
competition; the market acceptance of new products and technologies by the
Company and its competitors; the mix of products and services sold by the
Company; the timing of product shipments and product installations by the
Company; the capital spending patterns of the Company's customers; the mix of
domestic and international sales; changes in the timing and level of expenses;
the relative percentages of products sold through the Company's direct and
indirect sales channels; customer order deferrals in anticipation of
enhancements or new products; the Company's timing of and investments in
research and development activities; changes in and the Company's ability to
implement its strategy; changes in the availability of materials needed to
produce the Company's products; the progress and timing of the privatization 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 the Company's
international operations; and changes in general economic conditions.
Furthermore, a large portion of the Company's operating expenses, including
rent, salaries and capital lease expenses, are set based upon expected future
revenues. Accordingly, if revenues are below expectations, the Company's
operating results are likely to be adversely and disproportionately affected
because such operating expenses are not variable in the short term, and cannot
be quickly reduced to respond to anticipated 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
sales could materially adversely affect operating results in a particular
quarter, particularly if there are significant sales and marketing expenses
associated with the deferred or lost sales.
The Company's operating results are also likely to fluctuate due to factors
which impact prospective customers of the Company. Expenditures by prospective
customers tend to vary in cycles that reflect overall economic conditions and
individual budgeting and buying patterns. The Company's business would be
adversely affected by a decline in the economic prospects of its customers or
the economy generally, which could alter current or prospective customers'
capital spending priorities or budget cycles or extend the Company's sales cycle
with respect to certain customers. In addition, the Company's operating results
historically have been influenced by certain seasonal fluctuations, with
revenues from Spectra tending to be strongest in the fourth quarter of each
year. The Company believes that this seasonality has been due to the capital
appropriation practices of many of its customers.
As a result of all of the foregoing, the Company believes that future
operating results are likely to vary significantly from quarter to quarter, and
historical operating results should not be relied
5
<PAGE> 8
upon as any indication of future performance. Moreover, there can be no
assurance that the Company's revenues will grow in future periods or that the
Company will remain profitable. In addition, in some future quarters the
Company's operating results may be below the expectations of public market
analysts. In such event, the market price of the Common Stock would likely be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
DEPENDENCE ON TELECOMMUNICATIONS INDUSTRY
The Company has derived all of its 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. The Company's business, financial condition and results of
operations would be materially adversely affected in the event of a significant
slowdown in the growth of this industry. Further, consolidations of prospective
customers of the Company may delay or cause cancellations of significant sales
of the Company's products, which could materially adversely affect the Company's
operating results in a particular period. See "Business -- Industry Background".
REGULATORY UNCERTAINTIES
Future growth in the markets for the Company's products will depend in part
on privatization and deregulation of certain telecommunications markets
worldwide. Any reversal or slowdown in the pace of this privatization or
deregulation could have a material adverse effect on the markets for the
Company's 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. For example, in the U.S.
certain litigation is pending which challenges the validity of the
Telecommunications Act and the local telephone competition rules adopted by the
U.S. Federal Communications Commission ("FCC") to implement the
Telecommunications Act of 1996 (the "Telecommunications Act"). Any invalidation,
repeal or modification of the requirements imposed by the Telecommunications Act
or the FCC could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, the uncertainties
associated with deregulation have in the past and could in the future cause
customers of the Company to delay purchasing decisions pending the resolution of
such uncertainties. See "Business -- Industry Background -- The
Telecommunications Industry".
LENGTHY SALES CYCLE
The sales cycle for the Company's products is long, typically ranging from
six to 24 months for GeoProbe sales (excluding the cycle for subsequent
applications and enhancements, which varies widely) and up to six months for
occasional, large Spectra sales. Accordingly, the Company's ability to forecast
the timing and amount of specific sales is limited, and the deferral or loss of
one or more significant sales could materially adversely affect operating
results in a particular quarter, particularly if there are significant sales and
marketing expenses associated with the deferred or lost sales. See
"-- Fluctuations in Quarterly Financial Results" and "Business -- Sales,
Marketing and Support -- Sales and Marketing".
PRODUCT CONCENTRATION; RELIANCE ON SS7 NETWORKS
The Company's two principal products, GeoProbe and Spectra, generated
substantially all of the Company's revenues in 1996, 1997 and the six months
ended June 30, 1998 and are expected to continue to account for a substantial
majority of the Company's revenues for the foreseeable future. Any downturn in
the demand for either or both of such products would have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, there can be no assurance that the Company will be successful in
developing any other products or
6
<PAGE> 9
taking any other steps to reduce the risk associated with any slowdown in demand
for GeoProbe and Spectra.
Inet's future operating results are dependent in significant part on the
continued viability and expansion of SS7 signaling networks. The Company's
business, financial condition and results of operations would be materially
adversely affected if the market for SS7 network solutions fails to grow or
grows more slowly than the Company currently anticipates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Industry Background".
COMPETITION
The market for SS7-based telecommunications network management applications
is 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. The Company competes 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 Hewlett-Packard
Company ("Hewlett-Packard"). Spectra principally competes with products offered
by Hewlett-Packard, Tekelec and Tektronix, Inc. ("Tektronix"). Certain of the
Company's competitors have, in relation to the 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, such 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. There can be no assurance that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations. See "Business -- Competition".
NEED TO MANAGE GROWTH AND EXPANSION
The Company has recently experienced rapid and significant growth that has
placed, and is expected to continue to place, a significant strain on the
Company's management, information systems and operations. For example, the
Company's revenues have increased from $12.2 million in 1994 to $57.7 million in
1997 and to $34.2 million in the six months ended June 30, 1998, and the number
of its employees has increased from 88 at December 31, 1994 to 230 at December
31, 1997 and to 310 at June 30, 1998. In addition, the Company's executive
officers have no experience managing a public company. The Company's ability to
effectively manage significant additional growth will require it to improve its
financial, operational and management information and control systems and
procedures and to effectively expand, train, motivate and manage its employees.
The failure to manage growth effectively would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company anticipates that continued growth, if any, will require it to
recruit and hire a substantial number of new employees, particularly sales and
marketing personnel and technical personnel with SS7 knowledge and experience,
both in the U.S. and internationally. Competition for such personnel is intense,
and the Company has at times in the past experienced difficulty in recruiting
qualified personnel. The Company historically has filled a portion of its new
personnel needs with non-U.S. citizens holding temporary work visas that allow
such persons 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 the Company's ability to recruit new personnel.
Furthermore, the addition of significant numbers of new personnel requires the
Company to incur significant start-up expenses, including procurement of office
space and equipment, initial
7
<PAGE> 10
training costs and low utilization rates of new personnel. There can be no
assurance that the Company will successfully recruit additional personnel as
needed or that the start-up expenses incurred in connection with the hiring of
additional personnel would not materially adversely affect the Company's future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- The Inet Strategy".
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent upon the
continued service and performance of a relatively small number of key senior
management, technical, sales and marketing personnel, particularly the Company's
three founders, Samuel S. Simonian, Elie S. Akilian and Mark A. Weinzierl, none
of whom is bound by an employment agreement. The Company has obtained $500,000
key man life insurance policies covering each of the three founders and each
founder has entered into an agreement not to compete against the Company until
one year after the termination of his employment. However, the terms of such
non-compete agreements are limited, and there can be no assurance that such
agreements will be of meaningful benefit to the Company. The Company's success
also depends upon its ability to continue to attract, motivate and retain other
highly qualified personnel, particularly personnel with SS7 knowledge and
experience. The loss of any existing key personnel or the inability to attract,
motivate and retain additional qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management" and "Business -- Employees".
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS
The market for the Company's 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 telecommunications network
management products involving superior technologies or the evolution of
alternative technologies or new industry protocol standards could render the
Company's existing products, as well as products currently under development,
obsolete and unmarketable. The Company believes its future success will depend
in part upon its ability, on a timely and cost-effective basis, to continue to:
enhance the GeoProbe and Spectra products; develop and introduce new products
for the telecommunications network management market and other markets; address
evolving industry protocol standards and changing customer needs; and achieve
broad market acceptance for its products. There can be no assurance the Company
will achieve these objectives.
The Company's future success will also depend in part on the Company's
ability to develop solutions for networks based on emerging technologies (e.g.,
Asynchronous Transfer Mode and Internet telephony) which are likely to be
characterized by continuing technological developments, evolving industry
standards and changing customer requirements. There can be no assurance that the
Company will successfully develop competitive products for these emerging
technologies, and the failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Products -- Products Under Development" and "-- Research and
Development".
INTERNATIONAL OPERATIONS
Revenues from customers located outside of the U.S. represented 32.3%,
49.4%, 52.6% and 49.5% of the Company's total revenues in 1995, 1996, 1997 and
the six months ended June 30, 1998, respectively. Inet believes that continued
growth and profitability will require expansion of its sales 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 Company's international
operations are subject to various risks inherent in international operations,
including: management of geographically dispersed operations; longer accounts
receivable payment cycles; the ability to establish relationships with
government-owned or subsidized telecommunications providers;
8
<PAGE> 11
general economic conditions in each country; currency controls and exchange rate
fluctuations; seasonal reductions in business activity particular to certain
markets; loss of revenues, property and equipment from expropriation,
nationalization, war, insurrection, terrorism and other political risks; 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 telecommunications carriers. International expansion of the
Company's business will require significant management attention and financial
resources. Moreover, in order to further expand internationally, the Company may
be required to establish relationships with additional distributors and
third-party integrators. There can be no assurance that the Company will
effectively establish such relationships. If international revenues are not
adequate to offset the additional expense of expanding international operations,
the Company's business, financial condition and results of operations could be
materially adversely affected.
During the last six months of 1997 and continuing into 1998, the
Asia/Pacific region has experienced unstable local economies and significant
devaluations in local currencies. These instabilities may continue or worsen,
which could have a material adverse effect on the Company's results of
operations as sales to customers in this region constituted approximately 9% of
total revenues in the six months ended June 30, 1998. At June 30, 1998, the
Company's collection risks with respect to customers in the Asia/Pacific region
were not significant.
Through June 30, 1998, international sales have been denominated solely in
U.S. dollars, and accordingly the Company has not been exposed to fluctuations
in non-U.S. currency exchange rates. As a result, the Company's sales in
international markets may be adversely affected by a strengthening U.S. dollar.
However, Inet expects that in future periods an increasing portion of
international sales may be denominated in currencies other than U.S. dollars,
thereby exposing the Company to gains and losses on non-U.S. currency
transactions. The Company may choose to limit such exposure by entering into
various hedging strategies. There can be no assurance that any such hedging
strategies undertaken by Inet would be successful in avoiding exchange-related
losses.
There can be no assurance that laws or administrative practices relating to
taxation, foreign exchange or other matters of countries in which the Company
operates or will operate will not change. Any such change could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS; DEPENDENCE ON SUBCONTRACTORS
AND LICENSED TECHNOLOGY
At present, the Company's 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 the Company. The Company's qualification process could be lengthy,
and there can be no assurance that additional sources would become available to
the Company on a timely basis, or if such sources were to become available, that
the components would be comparable in price and quality to the Company's current
components. The Company has no long-term agreements with its suppliers and
generally makes its 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, the Company makes advance
purchases of certain components in relatively large quantities to ensure that it
has an adequate and readily available supply. The Company's failure to order
sufficient quantities of these components sufficiently in advance of product
delivery deadlines could prevent the Company from adequately responding to
unanticipated increases in customer orders. In the past, the Company has
experienced delays in the receipt of certain of its key components, which have
resulted in delays in product deliveries. The inability to obtain sufficient key
9
<PAGE> 12
components as required or 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, which in turn could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company relies exclusively upon third-party subcontractors to
manufacture its subassemblies. The Company has also retained, from time to time,
third-party design services in the development of application-specific
integrated circuits. The Company's 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
technologies, and reduced control over product quality, delivery schedules,
manufacturing yields and costs. Any disruption in the Company's relationships
with third-party subcontractors and the Company's 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, which in turn
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing".
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. The
inability to maintain any such software licenses on commercially reasonable
terms could result in shipment delays or reductions until equivalent software
could be developed or licensed and integrated into the Company's products, which
could materially adversely affect the Company's business, financial condition
and results of operations. See "Business -- Proprietary Rights".
POTENTIAL ACQUISITIONS
The Company may in the future pursue acquisitions of businesses, products
and technologies, or the establishment of joint venture arrangements, that could
expand the Company's 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 by the 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, no
assurance can be given that any acquired business or joint venture will be
successfully integrated with the Company's operations. If any such acquisition
or joint venture were to occur, there can be no assurance that the Company will
receive the intended benefits of the acquisition or joint venture.
PROPRIETARY RIGHTS
The telecommunications industry is characterized by the existence of a
large number of patents and frequent allegations of patent infringement. The
Company has received, and may receive in the future, notices from holders of
patents that raise issues as to possible infringement by the Company's products.
As the number of telecommunications network management products increases and
the functionality of these products further overlaps, the Company believes that
it may become increasingly subject to allegations of infringement. To date, the
Company has engaged in correspondence with third-party holders of patents as a
result of two such notices. The Company believes that its products do not
infringe any valid patents cited in the notices received. However, questions of
infringement and the validity of patents in the field of telecommunications
signaling technologies involve highly technical and subjective analyses. There
can be no assurance that any such patent holders or others will not in the
future initiate legal proceedings against the Company or that, if any such
proceedings were initiated, the Company would be successful in defending against
such proceedings. Any such proceeding could be time consuming and expensive to
defend or resolve, result in substantial diversion of management resources,
cause product shipment delays, or force the Company to enter into royalty or
license agreements rather than dispute the merits of any
10
<PAGE> 13
such proceeding initiated against the Company. There can be no assurance that
any such royalty or license agreements would be available on terms acceptable to
the Company, if at all. Any such claims against the Company, with or without
merit, could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's continued success is dependent in part upon its proprietary
technology. To protect its proprietary technology, the Company relies 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 the Company's proprietary rights in the products to the same
extent as do the laws of the U.S. Despite the measures taken by the Company, it
may be possible for a third party to copy or otherwise obtain and use the
Company's proprietary technology and information without authorization. Policing
unauthorized use of the Company's products is difficult, and litigation may be
necessary in the future to enforce the Company's intellectual property rights.
Any such 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 the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be
successful in protecting its proprietary technology or that the Company's
proprietary rights will provide a meaningful competitive advantage to the
Company. See "Business -- Proprietary Rights".
PRODUCT LIABILITY
Products as complex as those offered by the Company may contain undetected
defects or errors when first introduced or as enhancements are released that,
despite testing by the Company, 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 the Company's reputation and business. To
date, the Company has not been materially adversely affected by products
containing defects or errors. The Company attempts to include provisions in its
agreements with customers that are designed to limit the Company's exposure to
potential liability for damages arising out of defects or errors in or the use
of the Company's products. However, the nature and extent of such limitations
tend to vary from customer to customer and it is possible that such limitations
may not be effective as a result of unfavorable judicial decisions or laws
enacted in the future. Although the Company has not experienced any product
liability suits to date, the sale and support of the Company's products entails
the risk of such claims. Any product liability claim brought against the
Company, regardless of its merit, could result in material expense to the
Company, diversion of management time and attention, and damage to the Company's
business reputation and its ability to retain existing customers or attract new
customers. See "-- Year 2000 Compliance" and "Business -- Products -- Products
Under Development" and "-- Research and Development".
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the offerings, Messrs. Simonian, Akilian and Weinzierl
will beneficially own 28.0%, 28.2% and 28.1% of the outstanding shares of Common
Stock (27.5%, 27.7% and 27.5%, respectively, if the Underwriters' over-allotment
options are exercised in full). Consequently, two or more of such individuals,
acting together, will be able to control the outcome of all matters submitted
for stockholder action, including the election of the Board of Directors of the
Company and the approval of significant corporate transactions, and will
effectively control the management and affairs of the Company, which may have
the effect of delaying or preventing a change in control of the Company. In
addition, Messrs. Simonian, Akilian and Weinzierl will constitute three of the
six members of the Board of Directors and will have significant influence in
directing the actions taken by the directors. See "Management" and "Principal
and Selling Stockholders".
11
<PAGE> 14
YEAR 2000 COMPLIANCE
Many currently-installed computer systems and software products are coded
to accept only two-digit entries in date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. As a result, telecommunications equipment, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the
telecommunications and software industries concerning the potential effects
associated with such compliance.
The Company believes that the purchasing patterns of customers and
potential customers may be significantly affected by Year 2000 issues. Many
companies are expending significant resources to correct or replace their
current software systems to achieve Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the Company. Many potential customers may also defer purchasing Year 2000
compliant products until they believe it is absolutely necessary, thus resulting
in potentially deferred sales. Conversely, Year 2000 issues may cause other
companies to accelerate purchases, thereby causing an increase in short-term
demand and a consequent decrease in long-term demand for products. Additionally,
Year 2000 issues could cause a significant number of companies, including
current customers of the Company, to reevaluate their current system needs and
as a result consider switching to other systems or suppliers. These Year 2000
issues could materially adversely affect the Company's business, financial
condition and results of operations.
The Company has reviewed its products offered to customers, and believes
that the versions currently offered to customers are Year 2000 compliant.
Certain earlier versions of its Spectra product are not Year 2000 compliant, and
the Company has developed and is offering upgrades to customers that would bring
such earlier versions into compliance with Year 2000 requirements. Nonetheless,
there can be no assurance that the Company's products, particularly when such
products incorporate third-party software, contain all date code changes
necessary to ensure Year 2000 compliance. Although the Company has not
experienced any Year 2000-related product liability claims or lawsuits to date,
the sale and support of products that are not Year 2000 compliant entail the
risk of such claims and lawsuits. The Company's defense against any future
lawsuits, regardless of their merit, could result in substantial expense to the
Company as well as the diversion of management time and attention. In addition,
Year 2000 product liability claims, regardless of the merit or eventual outcome
of such claims, could affect the Company's business reputation and its ability
to retain existing customers or attract new customers which, in turn, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition, an inventory and analysis of internal management and other
information systems has been performed and the Company has determined that it
will be required to upgrade certain portions of its computer hardware and
software tools so that they will be Year 2000 compliant. These upgrades are
being and will continue to be made in conjunction with the Company's overall
information systems initiatives. In addition, the Company is contacting
third-party vendors to ensure that any of their products that are incorporated
into the Company's products or currently in use by the Company can adequately
deal with the change in century. Areas being addressed include third-party
suppliers of semiconductors and other components of the Company's products as
well as full reviews of the Company's manufacturing equipment, telephone and
voice mail systems, security systems and other office support systems. The
Company also plans to formally communicate with significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. To date, no
information technology initiatives have been deferred by the Company as a result
of its Year 2000 compliance project.
The Company expects to complete its Year 2000 project during the fall of
1999. The Company currently expects to incur aggregate pre-tax expenses of less
than $250,000 during 1998 and 1999 in connection with correction of Year 2000
issues, of which approximately $50,000 had been
12
<PAGE> 15
incurred through June 30, 1998. Such expenses are being funded through operating
cash flows, and are not expected to exceed 10% of the Company's information
technology budgets for either 1998 or 1999. Based on available information, the
Company does not believe any material exposure to significant business
interruption exists as a result of Year 2000 compliance issues, or that the cost
of remedial actions will have a material adverse effect on its business,
financial condition or results of operations. Accordingly, the Company has not
adopted any formal contingency plan in the event its Year 2000 compliance
project is not completed in a timely manner.
SECURITY
The Company has included security features in certain of its products that
are intended to protect the privacy and integrity of customer data. Despite the
existence of these security features, the Company's 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
information stored in and transmitted through the computer systems of the
Company's customers. Solving any security problems may require significant
capital expenditures and adversely affect the Company's reputation and product
acceptance which, in turn, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Product
Liability".
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of discouraging, delaying or preventing a change in control
of the Company or unsolicited acquisition proposals that a stockholder may
consider favorable, including provisions: authorizing the issuance of "blank
check" preferred stock; providing for a classified Board of Directors with
staggered, three-year terms; prohibiting cumulative voting in the election of
directors; requiring super-majority voting to effect certain amendments to the
Certificate of Incorporation and Bylaws; limiting the persons who may call
special meetings of stockholders; prohibiting stockholder action by written
consent; and establishing advance notice requirements for nominations for
election to the Board of Directors or for proposing matters that can be acted
upon at stockholders meetings. Certain provisions of Delaware law and the
Company's stock incentive plans may also have the effect of discouraging,
delaying or preventing a change in control of the Company or unsolicited
acquisition proposals. See "Management -- 1998 Stock Option/Stock Issuance Plan"
and "Description of Capital Stock -- Certain Anti-Takeover, Limited Liability
and Indemnification Provisions".
NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the offerings, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after the offerings. The initial public offering price for the
Common Stock will be determined by negotiations among the Company, the Selling
Stockholders and the representatives of the Underwriters, and may not be
representative of the price that will prevail in the open market. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Factors that may cause the market price of the Common Stock to fluctuate
significantly after the offerings include variations in the Company's results of
operations; future sales of Common Stock; the announcement of technological
innovations or new products by the Company, its competitors and others; market
analysts' estimates of the Company's performance; and general market 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
13
<PAGE> 16
operating results. Such volatility may adversely affect the market price of the
Common Stock and the Company's visibility and credibility in its markets.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after the offerings
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through the sale of equity securities. Upon
completion of the offerings, the Company will have outstanding 44,722,450 shares
of Common Stock (45,584,950 shares if the Underwriters' over-allotment options
are exercised in full), assuming no exercise of options after June 30, 1998. Of
these shares, the 5,750,000 shares offered hereby (6,612,500 shares if the
Underwriters' over-allotment options are exercised in full) will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144"). The remaining 38,972,450 shares of Common Stock outstanding upon
completion of the offerings will be "restricted securities" as that term is
defined in Rule 144.
Upon the expiration of lock-up agreements between the Company's
stockholders and the Underwriters (the "Lock-Up Agreements"), beginning 180 days
after the date of this Prospectus, 37,871,500 shares held by certain
stockholders of the Company will become eligible for sale pursuant to the
volume, manner of sale and notice requirements of Rule 144 and 1,191,950 shares
held by certain other stockholders of the Company will become eligible for sale
without regard to the volume limitations and manner of sale and notice
requirements of Rule 144. In addition, as of June 30, 1998, there were
outstanding options to purchase an aggregate of 1,991,000 shares of Common
Stock. Pursuant to the lock-up provisions set forth in the stock option
agreements used under the Company's 1995 Employee Stock Option Plan, 1,097,000
shares underlying such options will become eligible for sale pursuant to Rule
701 under the Securities Act ("Rule 701") beginning 180 days after the date of
this Prospectus, and the remaining 894,000 shares underlying such options will
become eligible for sale pursuant to Rule 701 more than 180 days after the date
of this Prospectus as such options vest. See "Shares Eligible for Future Sale".
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of Common Stock in the offerings will incur immediate,
substantial dilution in net tangible book value per share of $13.91 (assuming an
initial public offering price of $16.00 per share). In addition, the Company has
issued options to acquire Common Stock at prices substantially below the initial
public offering price. To the extent such options are exercised, there will be
further dilution. See "Dilution".
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<PAGE> 17
USE OF PROCEEDS
Based on an assumed initial public offering price of $16.00 per share, the
Company will receive approximately $56.4 million from the sale of shares of
Common Stock to be sold by the Company pursuant to the offerings (approximately
$69.3 million if the Underwriters' over-allotment options are exercised in full)
after deducting the estimated underwriting discount and estimated offering
expenses payable by the Company.
The principal purposes of the offerings are to increase the Company's
equity capital, to create a public market for the Common Stock, to facilitate
future access by the Company to public equity markets, to provide liquidity for
certain of the Company's existing stockholders and to provide increased
visibility of the Company in a marketplace where many of its competitors are
publicly held companies.
The Company currently intends to use the net proceeds of the offerings for
working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of its business.
The Company may also apply a portion of the proceeds of the offerings to acquire
businesses, products and technologies, or enter into joint venture arrangements,
that are complementary to the Company's business and product offerings. Although
the Company has not identified any specific businesses, products, technologies
or joint ventures that it may acquire or enter into, nor are there any current
agreements or negotiations with respect to any such transactions, the Company
from time to time evaluates such opportunities. Pending such uses, the net
proceeds will be invested in government securities and other short-term,
investment-grade, interest-bearing instruments. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock since 1993 and does not intend to pay any cash dividends on its Common
Stock in the foreseeable future. Future dividends, if any, will be determined by
the Board of Directors. The Company's revolving credit facility restricts the
payment of cash dividends without the bank's consent.
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<PAGE> 18
DILUTION
The net tangible book value of the Company at June 30, 1998 was $36.9
million, or $0.90 per share of Common Stock. Net tangible book value represents
the amount of total tangible assets of the Company reduced by the amount of its
total liabilities. After giving effect to the Company's sale of 3,841,870 shares
of Common Stock in the offerings at an assumed initial public offering price of
$16.00 per share (assuming no exercise of the Underwriters' over-allotment
options and after deducting the estimated underwriting discount and estimated
offering expenses payable by the Company), the Company's pro forma net tangible
book value at June 30, 1998 would have been $93.3 million, or $2.09 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $1.19 per share to the Company's existing stockholders and an immediate
dilution in net tangible book value of $13.91 per share to new investors
purchasing shares of Common Stock in the offerings. The following table
illustrates the per share dilution in net tangible book value to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Net tangible book value per share as of June 30, 1998..... $ 0.90
Increase per share attributable to new investors.......... 1.19
------
Pro forma net tangible book value per share after the
offerings................................................. 2.09
------
Dilution per share to new investors in the offerings........ $13.91
======
</TABLE>
The following table sets forth, as of June 30, 1998, the differences in the
number of shares purchased, consideration paid and the average price per share
paid to the Company by existing stockholders and by investors purchasing shares
of Common Stock in the offerings at an assumed initial public offering price of
$16.00 (assuming no exercise of the Underwriters' over-allotment options and
before deducting the estimated underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 40,880,580 91.4% $ 37,000 0.1% *(2)
New investors(1)........... 3,841,870 8.6 61,469,920 99.9 $16.00
---------- ----- ----------- -----
Total............ 44,722,450 100.0% $61,506,920 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) The net effect of sales by the Selling Stockholders in the offerings will be
to reduce the number of shares held by existing stockholders to 38,972,450
or 87.1% of the total number of shares of Common Stock outstanding after the
offerings, and to increase the number of shares held by new investors to
5,750,000 or 12.9% of the total number of shares of Common Stock outstanding
after the offerings.
(2) Less than $0.01 per share.
The preceding table assumes no exercise of any stock options outstanding as
of June 30, 1998. As of June 30, 1998, there were outstanding stock options to
purchase a total of 1,991,000 shares of Common Stock, with exercise prices
ranging from $0.60 to $4.20 per share and with a weighted-average exercise price
of $1.66 per share. To the extent these options are exercised, new investors
will experience further dilution. See "Management -- 1998 Stock Option/Stock
Issuance Plan" and Note 6 of Notes to Consolidated Financial Statements.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, and such capitalization as adjusted to reflect the sale by the Company
of 3,841,870 shares of Common Stock in the offerings at an assumed initial
public offering price of $16.00 per share. See "Use of Proceeds".
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value, no shares authorized;
and 25,000,000 shares authorized and none issued....... $ -- $ --
Common Stock, $0.001 par value, 175,000,000 shares
authorized; 40,919,422 shares issued; and 44,722,450
shares issued, as adjusted(1).......................... 41 45
Additional paid-in capital................................ 1,228 57,434
Unearned compensation..................................... (580) (580)
Treasury stock, at cost (38,842 shares)................... (217) --
Retained earnings......................................... 36,380 36,380
------- -------
Total stockholders' equity............................. 36,852 93,279
------- -------
Total capitalization................................... $36,852 $93,279
======= =======
</TABLE>
- ---------------
(1) Excludes 1,991,000 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1998, with exercise prices ranging from $0.60 to
$4.20 per share and with a weighted-average exercise price of $1.66 per
share. See "Management -- 1998 Stock Option/ Stock Issuance Plan" and Note 6
of Notes to Consolidated Financial Statements.
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<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Consolidated Financial Statements and the Notes
thereto and the other financial information included elsewhere in this
Prospectus. The statements of income data for the years ended December 31, 1995,
1996 and 1997 and the balance sheet data at December 31, 1996 and 1997 are
derived from the Consolidated Financial Statements included elsewhere in this
Prospectus which have been audited and reported on by Ernst & Young LLP,
independent auditors. The statements of income data for the years ended December
31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995
are derived from financial statements not included herein which have been
audited and reported on by Ernst & Young LLP, independent auditors. The
statements of income data for the six months ended June 30, 1997 and 1998 and
the balance sheet data as of June 30, 1998 have been derived from unaudited
interim consolidated financial statements. The unaudited interim consolidated
financial statements reflect all adjustments (consisting only of normal
recurring entries) which, in the opinion of the Company's management, are
necessary for a fair presentation of the results for the interim periods
presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues.................................... $12,036 $12,247 $17,531 $42,041 $57,701 $25,090 $34,165
Cost of revenues............................ 3,172 2,358 4,305 11,138 12,579 5,196 7,693
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 8,864 9,889 13,226 30,903 45,122 19,894 26,472
Operating expenses:
Sales and marketing....................... 446 1,588 2,699 5,566 7,069 4,015 3,563
General and administrative................ 3,452 3,899 4,323 7,530 14,181 6,045 9,084
Research and development.................. 1,418 2,697 3,965 4,519 4,776 2,284 3,032
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 5,316 8,184 10,987 17,615 26,026 12,344 15,679
------- ------- ------- ------- ------- ------- -------
Income from operations...................... 3,548 1,705 2,239 13,288 19,096 7,550 10,793
Other income (expense):
Interest income........................... 46 24 75 20 147 49 322
Interest expense.......................... (15) (10) (6) (42) (123) (44) --
Other..................................... (14) (17) (5) (6) (8) 2 --
------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes.... 3,565 1,702 2,303 13,260 19,112 7,557 11,115
Provision for income taxes.................. 1,235 468 644 4,324 6,398 2,530 3,867
------- ------- ------- ------- ------- ------- -------
Net income.................................. $ 2,330 $ 1,234 $ 1,659 $ 8,936 $12,714 $ 5,027 $ 7,248
======= ======= ======= ======= ======= ======= =======
Basic net income per share.................. $ 0.06 $ 0.03 $ 0.04 $ 0.22 $ 0.31 $ 0.12 $ 0.18
Diluted net income per share................ $ 0.06 $ 0.03 $ 0.04 $ 0.22 $ 0.30 $ 0.12 $ 0.17
Shares used in computing basic net income
per share(1).............................. 39,600 39,600 39,600 40,998 41,244 41,237 41,256
Shares used in computing diluted net income
per share(1).............................. 39,600 39,600 41,207 41,451 42,110 41,767 42,665
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------ ------ ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 243 $ 166 $ 181 $ 742 $ 3,386 $20,482
Working capital........................................ 3,746 4,569 6,130 15,101 24,290 30,679
Total assets........................................... 5,472 7,551 18,641 27,105 38,308 49,183
Stockholders' equity................................... 4,737 5,971 7,629 16,614 29,386 36,852
</TABLE>
- ---------------
(1) See Note 9 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net income per
share.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus. This discussion contains forward-looking statements that are
subject to business and economic risks and uncertainties. All statements, trends
and other information contained in this Prospectus relative to markets for the
Company's products and trends in revenue, gross margin and anticipated expense
levels, as well as other statements, including such words as "anticipate",
"believe", "plan", "estimate", "expect", "intend", "may" and "should" and other
similar expressions, constitute forward-looking statements. The Company's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Inet was founded in 1989, and during the early stages of its operations it
focused primarily on developing and selling diagnostic tools that addressed a
predecessor to the SS7 signaling protocol. As the telecommunications industry
increasingly adopted SS7, the Company shifted its focus to developing and
deploying SS7-based solutions as well as broadening its product offerings.
Spectra was first introduced in December 1990 and is currently in its ninth
generation release. Beginning in 1993, the Company focused a significant portion
of its product development efforts on developing a complete monitoring and
surveillance solution for SS7 networks, culminating in the introduction of
GeoProbe in late 1995. The Company continues to focus significant resources on
the development of enhancements to Spectra and enhancements and add-on
applications to GeoProbe.
Historically, the Company has generated substantially all of its revenues
from Spectra and GeoProbe. As a result, factors adversely affecting GeoProbe and
Spectra, such as the condition of the telecommunications market, competition,
technological change and disputes regarding proprietary rights utilized in these
products, would have a material adverse effect on the pricing of and demand for
these products. Revenues attributable to Spectra represented a majority of total
revenues in 1997. Revenues attributable to GeoProbe represented a majority of
total revenues in the six months ended June 30, 1998. Although Inet expects
Spectra revenues to continue to represent a significant portion of total
revenues for the foreseeable future, Spectra sales are expected to continue to
decline as a percentage of total revenues as a result of increasing sales of
GeoProbe. The remaining revenues are derived from sales of other products and
training, warranty and support services related to the Company's products.
Revenues from GeoProbe sales are recognized when the system has been
delivered to the customer and installed at the customer's premises. Unbilled
receivables represent GeoProbe revenues recognized but not billable pursuant to
the individual contract until formal customer acceptance. Formal customer
acceptance generally has been received within 60 days of installation. Revenues
from sales of Spectra and other products are recognized upon shipment.
During the last three years, a substantial and increasing portion of the
Company's total revenues were derived from customers located outside of the
U.S., and Inet believes that continued growth and profitability will require
expansion of its sales in international markets. The Company currently maintains
a product support facility and a sales support facility outside London, England
and a product development facility in the Republic of Armenia, and expects to
establish additional international sales and other offices in the future.
Through June 30, 1998, international sales have been denominated solely in U.S.
dollars, and accordingly the Company has not been exposed to fluctuations in
non-U.S. currency exchange rates. However, Inet expects that in future periods
an increasing portion of international sales may be denominated in currencies
other than U.S. dollars, thereby exposing the Company to gains and losses on
non-U.S. currency transactions. The Company may choose to limit such exposure by
entering into various hedging strategies. There can
19
<PAGE> 22
be no assurance that any such hedging strategies undertaken by Inet would be
successful in avoiding exchange rate-related losses. For a discussion of a
number of other risks associated with international operations, see "Risk
Factors -- International Operations".
During the last six months of 1997 and continuing into 1998, the
Asia/Pacific region has experienced unstable local economies and significant
devaluations in local currencies. These instabilities may continue or worsen,
which could have a material adverse effect on the Company's results of
operations as sales to customers in this region constituted approximately 9% of
total revenues in the six months ended June 30, 1998. At June 30, 1998, the
Company's collection risks with respect to customers in the Asia/Pacific region
were not significant.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in the Company's
consolidated statements of income:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -------------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................... 24.6 26.5 21.8 20.7 22.5
----- ----- ----- ----- -----
Gross profit...................................... 75.4 73.5 78.2 79.3 77.5
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing............................... 15.4 13.2 12.2 16.0 10.4
General and administrative........................ 24.6 17.9 24.6 24.1 26.6
Research and development.......................... 22.6 10.8 8.3 9.1 8.9
----- ----- ----- ----- -----
Total operating expenses.................. 62.6 41.9 45.1 49.2 45.9
----- ----- ----- ----- -----
Income from operations.............................. 12.8 31.6 33.1 30.1 31.6
Other income (expense).............................. 0.3 (0.1) 0.0 0.0 0.9
----- ----- ----- ----- -----
Income before provision for income taxes............ 13.1 31.5 33.1 30.1 32.5
Provision for income taxes.......................... 3.6 10.2 11.1 10.1 11.3
----- ----- ----- ----- -----
Net income.......................................... 9.5% 21.3% 22.0% 20.0% 21.2%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUES
The Company's revenues increased 36.2% from $25.1 million in the six months
ended June 30, 1997 to $34.2 million in the six months ended June 30, 1998,
primarily due to increased unit sales of GeoProbe. The Company anticipates that
any changes in revenues in future periods will be attributable primarily to
changes in sales volume. International revenues increased in absolute dollars
from $13.8 million in the six months ended June 30, 1997 to $16.9 million in the
six months ended June 30, 1998, but decreased from 55.0% of total revenues in
the 1997 period to 49.5% of total revenues in the 1998 period. The Company
anticipates that in the future individual, large sales may represent a greater
percentage of total revenues. Accordingly, the deferral or loss of one or more
significant sales could materially adversely affect operating results in a
particular period, particularly if there are significant sales and marketing
expenses associated with the deferred or lost sales.
20
<PAGE> 23
COST OF REVENUES
Cost of revenues consists primarily of hardware expenses related to the
manufacturing of GeoProbe and Spectra. Cost of revenues increased 48.1% from
$5.2 million in the six months ended June 30, 1997 to $7.7 million in the six
months ended June 30, 1998. Cost of revenues represented 20.7% and 22.5% of
total revenues in the six months ended June 30, 1997 and 1998, respectively. The
increase in cost of revenues in absolute dollars primarily resulted from
increased costs directly associated with an increase in the number of GeoProbe
and Spectra units sold. The Company believes that for at least the remainder of
1998, cost of revenues should not vary significantly as a percentage of total
revenues from the level experienced in the six months ended June 30, 1998.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of personnel, travel and facilities expenses related to sales and
marketing, distributor commissions and expenses of trade shows and advertising.
Such expenses decreased 11.3% from $4.0 million in the six months ended June 30,
1997 to $3.6 million in the six months ended June 30, 1998. The decrease in
absolute dollars was primarily related to an approximately $600,000 decrease in
expenses of trade shows and advertising (primarily due to reduced activity).
Sales and marketing expenses as a percentage of total revenues were 16.0% and
10.4% in the six months ended June 30, 1997 and 1998, respectively. The decrease
as a percentage of total revenues during the 1998 period was primarily due to
relatively higher growth in total revenues in combination with decreased trade
show and advertising activity and reduced commissions paid to distributors. The
Company believes that sales and marketing expenses will increase, both in
absolute dollars and, for at least the remainder of 1998, as a percentage of
total revenues from the levels experienced in the six months ended June 30,
1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel, facilities and other costs of the finance,
administrative, product management and support and executive departments of the
Company as well as fees and expenses associated with legal and accounting
requirements. Such expenses increased 50.3% from $6.0 million in the six months
ended June 30, 1997 to $9.1 million in the six months ended June 30, 1998. The
increase in absolute dollars was primarily related to increased staffing and
related costs of $2.3 million associated with the growth of the Company's
business during the 1998 period, as well as increased depreciation expense of
approximately $500,000. General and administrative expenses as a percentage of
total revenues were 24.1% and 26.6% in the six months ended June 30, 1997 and
1998, respectively. The Company anticipates that general and administrative
expenses will continue to increase in absolute dollars for the foreseeable
future as the Company accommodates its growth, adds related infrastructure and
incurs expenses related to being a public company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses have
historically consisted primarily of salaries and other compensation expenses
associated with the Company's research and development activities. Such expenses
increased 32.7% from $2.3 million in the six months ended June 30, 1997 to $3.0
million in the six months ended June 30, 1998, representing 9.1% and 8.9% of
total revenues, respectively. The increase in absolute dollars was primarily due
to increased staffing and related personnel costs associated with the Company's
research and development efforts. The Company expects that research and
development expenses in future periods will increase in absolute dollars as
these investments are crucial to the Company's ability to evolve its
technologies and expand its product offerings to meet its customers' needs.
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility has been established, at which time subsequent costs are capitalized
until the product is available for general release to customers. To date, either
the establishment of technological feasibility of the Company's products and
their general release have substantially coincided or costs incurred subsequent
to the achievement of
21
<PAGE> 24
technological feasibility have not been material. As a result, software
development costs qualifying for capitalization have been insignificant, and the
Company has not capitalized any software development costs.
OTHER INCOME (EXPENSE)
Other income (expense) increased from $7,000 in the six months ended June
30, 1997 to $322,000 in the six months ended June 30, 1998. The increase
resulted from increased interest earned on higher balances of cash and cash
equivalents resulting from increased cash flow from operations and decreased
interest expense due to the repayment of substantially all of the Company's
indebtedness in November 1997.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $2.5 million and $3.9 million in
the six months ended June 30, 1997 and 1998, respectively. The Company's
effective income tax rates were 33.5% and 34.8% in the six months ended June 30,
1997 and 1998, respectively. The increase in the Company's effective tax rate is
due to growth in the Company's net income and a higher percentage of revenues
from domestic sources in the six months ended June 30, 1998.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES
Total revenues increased 139.8% from $17.5 million in 1995 to $42.0 million
in 1996, and increased an additional 37.2% from 1996 to $57.7 million in 1997.
The increase from 1995 to 1996 was primarily due to $19.0 million of revenues
attributable to GeoProbe, which were first recognized in 1996. The increase from
1996 to 1997 was primarily due to increased unit sales of both GeoProbe and
Spectra. Revenues from other sources collectively accounted for less than 5% of
total revenues in 1996 and 1997. International revenues represented 32.3%, 49.4%
and 52.6% of total revenues in 1995, 1996 and 1997, respectively.
COST OF REVENUES
Cost of revenues increased 158.7% from $4.3 million in 1995 to $11.1
million in 1996, and increased an additional 12.9% from 1996 to $12.6 million in
1997. Cost of revenues represented 24.6%, 26.5% and 21.8% of total revenues in
1995, 1996 and 1997, respectively. The increase both in absolute dollars and as
a percentage of total revenues during 1996 primarily resulted from additional
start-up manufacturing, materials and integration expenses associated with the
initial release of GeoProbe. The decrease as a percentage of total revenues
during 1997 primarily resulted from the absence of such start-up expenses as
well as a decrease in the cost of semiconductor memory chips. There can be no
assurance that additional expenses associated with the initial release of other
new products will not be incurred in the future. New product offerings or
changes in the Company's product mix can affect the cost of revenues as a
percentage of total revenues.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 106.2%
from $2.7 million in 1995 to $5.6 million in 1996, and increased an additional
27.0% from 1996 to $7.1 million in 1997. The increase in absolute dollars in
1996 was primarily related to a $1.2 million increase in commissions paid to
distributors (primarily due to a higher percentage of sales through
distributors), a $1.0 million increase in personnel expense (primarily due to
expansion of the domestic and international sales forces) and an approximately
$600,000 increase in expenses of trade shows and advertising (primarily due to
increased activity). The increase in absolute dollars in 1997 was primarily
related to an approximately $700,000 increase in personnel expense (primarily
due to expansion of the domestic and international sales forces and an
approximately $800,000 increase in expenses of trade shows and advertising
(primarily due to increased activity), partly
22
<PAGE> 25
offset by an approximately $600,000 decrease in commissions paid to distributors
(primarily due to a higher percentage of sales through the Company's direct
sales channel). Such expenses as a percentage of total revenues were 15.4%,
13.2% and 12.2% in 1995, 1996 and 1997, respectively. The decreases as a
percentage of total revenues during 1996 and 1997 were primarily due to
relatively higher growth in total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 74.2% from $4.3 million in 1995 to $7.5 million in 1996, and increased
an additional 88.3% to $14.2 million in 1997. The increases in absolute dollars
were primarily related to increased staffing and related costs associated with
the growth of the Company's business and, to a lesser extent in 1997, the
establishment of bad debt reserves as a result of increasing levels of
receivables. General and administrative expenses as a percentage of total
revenues were 24.6%, 17.9% and 24.6% in 1995, 1996 and 1997, respectively. The
decrease as a percentage of total revenues during 1996 was primarily due to
relatively higher growth in total revenues and the Company's ability to leverage
its base of resources to support a larger organization. General and
administrative expenses increased as a percentage of total revenues during 1997
primarily due to increased staffing and related costs incurred in anticipation
of future growth and because the Company had not previously established bad debt
reserves.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 14.0% from $4.0 million in 1995 to $4.5 million in 1996, and increased
an additional 5.7% to $4.8 million in 1997. The increases in absolute dollars
were primarily due to costs associated with increased staffing dedicated to
research and development activities. Such expenses represented 22.6%, 10.8% and
8.3% of total revenues during 1995, 1996 and 1997, respectively. The decreases
as a percentage of total revenues in 1996 and 1997 were primarily attributable
to increased revenues relative to research and development expenditures.
OTHER INCOME (EXPENSE)
Other income (expense) was $64,000, ($28,000) and $16,000 in 1995, 1996 and
1997, respectively. The decrease in 1996 resulted from increased interest
expense attributable to additional indebtedness incurred to finance the growth
of the Company's business and decreased interest earned on reduced balances of
cash and cash equivalents. The increase in 1997 resulted from increased interest
earned on higher balances of cash and cash equivalents resulting from increased
cash flow from operations, partially offset by increased interest expense
attributable to additional indebtedness.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $644,000, $4.3 million and $6.4
million in 1995, 1996 and 1997, respectively. The Company's effective income tax
rates were 28.0%, 32.6% and 33.5% in 1995, 1996 and 1997, respectively. The
effective income tax rate was higher in 1996 and 1997 than in 1995 primarily due
to higher levels of income.
SELECTED QUARTERLY FINANCIAL RESULTS
The following tables set forth unaudited consolidated statements of income
data for the ten quarters ended June 30, 1998, as well as such data expressed as
a percentage of the Company's total revenues for such periods. This data has
been derived from unaudited interim consolidated financial statements that, in
the opinion of management, have been prepared on a basis consistent with the
Consolidated Financial Statements included elsewhere herein and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information when read in conjunction with the
Consolidated Financial Statements and the Notes
23
<PAGE> 26
thereto. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
1996 1997 1998
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $15,824 $6,349 $ 4,764 $15,104 $11,608 $13,482 $12,136 $20,475 $15,512 $18,653
Cost of revenues............ 5,556 1,306 1,289 2,987 2,580 2,616 3,345 4,039 3,645 4,048
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Gross profit............... 10,268 5,043 3,475 12,117 9,028 10,866 8,791 16,436 11,867 14,605
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........ 640 989 1,183 2,754 2,109 1,906 1,718 1,336 1,544 2,019
General and
administrative........... 1,866 1,654 1,632 2,377 2,951 3,094 3,480 4,655 4,718 4,366
Research and development... 1,202 1,115 1,141 1,062 1,155 1,129 1,293 1,199 1,156 1,876
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 3,708 3,758 3,956 6,193 6,215 6,129 6,491 7,190 7,418 8,261
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 6,560 1,285 (481) 5,924 2,813 4,737 2,300 9,246 4,449 6,344
Interest income............. 6 6 6 2 31 18 43 55 125 197
Interest expense............ (4) (12) (20) (6) (18) (26) (68) (12) -- --
Other income (expense)...... -- (3) -- (3) 3 (1) -- (9) -- --
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes...................... 6,562 1,276 (495) 5,917 2,829 4,728 2,275 9,280 4,574 6,541
Provision (benefit) for
income taxes............... 2,140 416 (162) 1,930 947 1,583 762 3,106 1,537 2,330
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $ 4,422 $ 860 $ (333) $ 3,987 $ 1,882 $3,145 $ 1,513 $ 6,174 $ 3,037 $ 4,211
======= ======= ======== ======= ======= ======= ======= ======= ======= =======
Basic net income per
share...................... $ 0.11 $ 0.02 $ (0.01) $ 0.10 $ 0.05 $ 0.08 $ 0.04 $ 0.15 $ 0.07 $ 0.10
Diluted net income per
share...................... $ 0.11 $ 0.02 $ (0.01) $ 0.10 $ 0.05 $ 0.08 $ 0.04 $ 0.15 $ 0.07 $ 0.10
Shares used in computing
basic net income per
share(1)................... 40,391 41,200 41,200 41,200 41,224 41,250 41,250 41,250 41,250 41,263
Shares used in computing
diluted net income per
share(1)................... 41,197 41,200 41,200 41,746 41,756 41,778 42,415 42,491 42,664 42,665
</TABLE>
- ---------------
(1) See Note 9 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net income per
share.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
1996 1997 1998
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL
REVENUES:
Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............ 35.1 20.6 27.1 19.8 22.2 19.4 27.6 19.7 23.5 21.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............... 64.9 79.4 72.9 80.2 77.8 80.6 72.4 80.3 76.5 78.3
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing........ 4.0 15.6 24.8 18.2 18.2 14.1 14.1 6.5 9.9 10.8
General and
administrative........... 11.8 26.0 34.2 15.8 25.4 23.0 28.6 22.7 30.4 23.4
Research and development... 7.6 17.6 24.0 7.0 10.0 8.4 10.7 5.9 7.5 10.1
Total operating
expenses............ 23.4 59.2 83.0 41.0 53.6 45.5 53.4 35.1 47.8 44.3
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 41.5 20.2 (10.1) 39.2 24.2 35.1 19.0 45.2 28.7 34.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Interest income............. 0.0 0.1 0.1 0.0 0.3 0.2 0.4 0.2 0.8 1.1
Interest expense............ (0.0) (0.2) (0.4) (0.0) (0.1) (0.2) (0.6) (0.1) (0.0) 0.0
Other income (expense)...... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes...................... 41.5 20.1 (10.4) 39.2 24.4 35.1 18.8 45.3 29.5 35.1
Provision (benefit) for
income taxes............... 13.6 6.6 (3.4) 12.8 8.2 11.8 6.3 15.1 9.9 12.5
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)........... 27.9% 13.5% (7.0)% 26.4% 16.2% 23.3% 12.5% 30.2% 19.6% 22.6%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's operating results historically have been influenced by
certain seasonal fluctuations, with revenues from Spectra tending to be
strongest in the fourth quarter of each year. The Company believes that this
seasonality has been due to the capital appropriation practices of many of its
customers. Notwithstanding this historical seasonality, the levels of revenues
and net income achieved during the quarter ended March 31, 1996 were
disproportionately high relative to the levels of revenues and net income
achieved during any other quarter of 1996 primarily due to the initial release
of GeoProbe.
24
<PAGE> 27
Except for the quarter ended March 31, 1996, cost of revenues fluctuated
between 19.4% and 27.6% of total revenues during the ten quarters ended June 30,
1998. Such costs were 35.1% of total revenues in the quarter ended March 31,
1996 primarily due to additional start-up manufacturing, materials and
integration expenses associated with the initial release of GeoProbe.
Sales and marketing expenses generally decreased as a percentage of total
revenues during each quarter of 1997 primarily due to decreased sales through
indirect sales channels, which typically require the payment of higher
commissions than sales through the Company's direct sales organization. Sales
through indirect sales channels may increase in future periods.
General and administrative expenses increased in absolute dollars during
each quarter from the quarter ended September 30, 1996 through the quarter ended
March 31, 1998. General and administrative expenses fluctuated between 11.8% and
34.2% of total revenues during the ten quarters ended June 30, 1998. The growth
of general and administrative expenses in absolute dollars has been primarily
due to increases in personnel and related costs required to support the growth
of the Company. Such expenses have fluctuated as a percentage of total revenues
primarily due to variability in total revenues and because certain of such
expenses were incurred in anticipation of future revenues.
Research and development expenses in absolute dollars remained relatively
flat during the nine quarters preceding the quarter ended June 30, 1998, during
which quarter research and development spending increased. However, such
expenses fluctuated between 5.9% and 24.0% of total revenues during those
periods primarily due to variability in total revenues. The Company expects that
research and development expenses in future periods will increase as a
percentage of total revenues as these investments are crucial to the Company's
ability to evolve its technologies and expand its product offerings to meet its
customers' needs.
Other than during the quarter ended September 30, 1996, income from
operations fluctuated between 19.0% and 45.2% of total revenues during the ten
quarters ended June 30, 1998. During the quarter ended September 30, 1996, loss
from operations represented 10.1% of total revenues primarily due to lower
revenues. A large portion of the Company's operating expenses, including rent,
salaries and capital lease expenses, are set based upon expected future
revenues. Accordingly, if revenues are below expectations, operating results are
likely to be adversely and disproportionately affected because such operating
expenses are not variable in the short term, and cannot be quickly reduced to
respond to anticipated decreases in revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations and met its
capital expenditure requirements primarily through cash flows from operations
and bank borrowings. The Company had working capital of $30.7 million at June
30, 1998, compared with $24.3 million at December 31, 1997. At June 30, 1998,
the Company had $20.5 million in cash and cash equivalents, an increase of $17.1
million from $3.4 million in cash and cash equivalents at December 31, 1997.
The Company currently maintains a $10.0 million revolving credit facility
with a commercial bank that expires in June 2000. Up to $5.0 million of the
credit facility may be used to issue letters of credit. At the Company's option,
borrowings under the credit facility bear interest at either (i) the bank's
prime rate less up to 0.50% or (ii) the London interbank offered rate (LIBOR),
as adjusted to meet specified Federal Reserve requirements with respect to
Eurocurrency liabilities, plus up to 1.50%. The credit facility is secured by
all of the Company's accounts receivable, inventories, property, equipment and
investments and contains customary restrictive covenants, including covenants
requiring the Company to maintain certain financial ratios and restricts the
payment of cash dividends without the bank's consent, and requires the payment
of a commitment fee equal to 0.125% of the unused portion of the facility. At
June 30, 1998, no amounts were outstanding under the credit facility, and the
amount available to the Company, after considering outstanding letters of
credit, was $9.4 million.
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Cash provided by operating activities was $759,000, $1.8 million and $7.7
million in 1995, 1996 and 1997, respectively, and $1.0 million and $19.2 million
in the six months ended June 30, 1997 and 1998, respectively. Operating cash
flows have increased primarily due to increased levels of income from
operations, offset in 1996 by an increase in trade accounts receivable and a
decrease in deferred revenue, and offset in 1997 by increases in trade accounts
and unbilled receivables and a decrease in accounts payable. Operating cash
flows during the six months ended June 30, 1998 increased primarily due to
increased levels of income from operations, an increase in deferred revenue and
a decrease in trade accounts and unbilled receivables. Cash used in investing
activities was primarily related to purchases of property and equipment, and
aggregated $1.0 million, $2.1 million and $3.8 million in 1995, 1996 and 1997,
respectively, and aggregated $1.5 million and $2.2 million in the six months
ended June 30, 1997 and 1998, respectively. Financing activities related
primarily to proceeds of borrowings and repayment of borrowings and provided
cash of $300,000 and $837,000 in 1995 and 1996, respectively, used cash of $1.3
million in 1997 and provided cash of $1.0 million in the six months ended June
30, 1997. At June 30, 1998, the Company did not have any material commitments
for capital expenditures.
The Company may in the future pursue acquisitions of businesses, products
or technologies, or enter into joint venture arrangements, that could complement
or expand the Company's business and product offerings. Any material acquisition
or joint venture could result in a decrease in the Company's working capital
depending on the amount, timing and nature of the consideration to be paid. See
"Risk Factors -- Potential Acquisitions".
Inet believes that the net proceeds received by the Company from the
offerings, together with current cash balances, potential cash flows from
operations and available borrowings under its revolving credit facility will be
sufficient to meet its 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 the Company's needs, it may seek
additional equity or debt financing. In addition, any material acquisition of
complementary businesses, products or technologies or material joint venture
could require the Company to obtain additional equity or debt financing. There
can be no assurance that such additional financing would be available on
acceptable terms, if at all.
YEAR 2000 COMPLIANCE
The Company has reviewed its products offered to customers, and believes
that the versions currently offered to customers are Year 2000 compliant.
Certain earlier versions of its Spectra product are not Year 2000 compliant, and
the Company has developed and is offering upgrades to customers that would bring
such earlier versions into compliance with Year 2000 requirements. Nonetheless,
there can be no assurance that the Company's products, particularly when such
products incorporate third-party software, contain all date code changes
necessary to ensure Year 2000 compliance. Although the Company has not
experienced any Year 2000-related product liability claims or lawsuits to date,
the sale and support of products that are not Year 2000 compliant entail the
risk of such claims and lawsuits. The Company's defense against any future
lawsuits, regardless of their merit, could result in substantial expense to the
Company as well as the diversion of management time and attention. In addition,
Year 2000 product liability claims, regardless of the merit or eventual outcome
of such claims, could affect the Company's business reputation and its ability
to retain existing customers or attract new customers which, in turn, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition, an inventory and analysis of internal management and other
information systems has been performed and the Company has determined that it
will be required to upgrade certain portions of its computer hardware and
software tools so that they will be Year 2000 compliant. These upgrade are being
and will continue to be made in conjunction with the Company's overall
information systems initiatives. In addition, the Company is contacting
third-party vendors to ensure that any of their products that are incorporated
into the Company's products or currently in use by the Company can adequately
deal with the change in century. Areas being addressed include third-
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party suppliers of semiconductors and other components of the Company's products
as well as full reviews of the Company's manufacturing equipment, telephone and
voice mail systems, security systems and other office support systems. The
Company also plans to formally communicate with significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. To date, no
information technology initiatives have been deferred by the Company as a result
of its Year 2000 compliance project.
The Company expects to complete its Year 2000 project during the fall of
1999. The Company currently expects to incur aggregate pre-tax expenses of less
than $250,000 during 1998 and 1999 in connection with correction of Year 2000
issues, of which approximately $50,000 had been incurred through June 30, 1998.
Such expenses are being funded through operating cash flows, and are not
expected to exceed 10% of the Company's information technology budgets for
either 1998 or 1999. Based on available information, the Company does not
believe any material exposure to significant business interruption exists as a
result of Year 2000 compliance issues, or that the cost of remedial actions will
have a material adverse effect on its business, financial condition or results
of operations. Accordingly, the Company has not adopted any formal contingency
plan in the event its Year 2000 compliance project is not completed in a timely
manner.
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BUSINESS
OVERVIEW
Inet provides solutions that enable telecommunications carriers to more
effectively design, deploy, diagnose, monitor and manage communications networks
that carry signaling information used to manage telephone calls. Inet's products
also address the fundamental business needs of telecommunications carriers, such
as improved billing, targeted sales and marketing, fraud prevention and enhanced
call routing. Inet provides these comprehensive solutions primarily through its
GeoProbe and Spectra product offerings.
The GeoProbe system provides real-time monitoring of Common Channel
Signaling System #7 ("SS7") networks and serves as an open platform for business
applications developed by Inet, its customers or third parties. GeoProbe's
monitoring applications enable early warning of network faults, collection of
statistics for performance evaluation, real-time call tracing and
troubleshooting. GeoProbe's associated business applications provide fraud
detection tools, reconciliation of billing between carriers, service quality
reports and marketing data. The Spectra product can be integrated within the
GeoProbe platform or used on a stand-alone basis to provide diagnostic,
emulation and load generation capabilities for use in the design, deployment,
commissioning and diagnosis of signaling networks.
Inet's objective is to be the dominant provider of advanced signaling
network management solutions and associated business applications for
telecommunications networks worldwide. Key elements of Inet's strategy to
achieve this objective include expanding its global market share, increasing its
domestic sales and penetration of its existing customer base, enhancing its
technological leadership position in SS7 network management solutions, expanding
its product offerings by leveraging its core competency in SS7, and building
relationships with strategic partners.
As of June 30, 1998, the Company had sold its solutions to over 300
customers in 40 countries. The Company's target customers include
telecommunications network carriers and equipment manufacturers throughout North
America, Latin America, Europe and the Asia/Pacific region. To date, the
Company's network carrier customers include AT&T, British Telecom, KPN Telecom,
MCI, o.tel.o communications, Portugal Telecom, Singapore Telecom, Sprint, SPT
Telecom, Telia, Telstra and Worldcom, and its equipment manufacturer customers
include DSC Communications, Ericsson, Motorola and Nortel.
INDUSTRY BACKGROUND
THE TELECOMMUNICATIONS INDUSTRY
Historically, telecommunications carriers operated in a highly regulated
environment with little or no competition. Recently, governments worldwide have
begun to deregulate the telecommunications industry in order to reduce costs and
improve service. Deregulation has allowed the emergence of many new
telecommunications carriers and has increased the level of competition. New
entrants to the global telecommunications landscape include competitive long
distance and local exchange carriers; competitors to government post, telephone
and telegraph companies ("PTTs") outside the U.S.; wireless carriers; resellers
such as calling card providers; and Internet telephony providers.
Greater competition is forcing telecommunications carriers to differentiate
themselves by providing advanced, value-added services and features. Examples of
these services include toll-free "800" numbers, prepaid calling cards, Caller
ID, customized routing and billing and voice messaging. Carriers in a growing
number of markets are also being required to provide Local Number Portability
("LNP"), which enables open access to competitors by allowing telephone numbers
to be moved, or "ported", from one carrier to another.
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Telecommunications network architectures have significantly increased in
complexity in order to accommodate the functionality requirements of value-added
services and LNP. These "intelligent networks" allow various functions and
service resources to be created and distributed flexibly throughout the network.
For example, intelligent network functions enable carriers to provision, monitor
and bill for multiple services in an efficient manner, which reduces cost and
increases quality of service to the customer.
The growth of intelligent networks, coupled with a significant worldwide
increase in demand for telecommunications and Internet-related data services,
has resulted in corresponding demand for telecommunications infrastructure and
advanced networking technologies, including network management and diagnostic
systems. Telecommunications networks operate in real time and are
mission-critical to their end users. Thus, telecommunications carriers must
provide the very highest quality and reliability of service to remain
competitive.
SS7 AND MODERN TELECOMMUNICATIONS NETWORK ARCHITECTURES
A telecommunications network not only must convey information between
points, it also must determine the best routes for connections, control the
allocation of resources used to transfer the information and keep transaction
records for billing and measurement purposes. A simple telephone call, or other
network service such as voice message retrieval or a conference call, involves
two types of information: the call content (voice, computer data or video) and
information about the call (such as the party initiating the call and the number
being called) which is required to connect, manage and bill for the transaction.
This information about a telephone call or other service is generally referred
to as "signaling".
The first generation of telephone networks were designed to pass both call
content and signaling over a single internal network path, called a "trunk",
from the source of the call to the called destination. Signaling information was
passed via audio tones or voltage changes on the telephone line or trunk
connection. It became apparent, however, that the "single path" method of
transferring both call content and signaling becomes inefficient and unreliable
as network traffic grows, leading to network congestion and service quality
problems. Single path signaling also lacks flexibility because the control
information cannot be separated easily from the call content flowing over a
trunk. As a result, advanced services cannot be offered in networks in which
single path signaling is used.
These problems were first recognized during the 1960s and were subsequently
resolved through the development and deployment of "Common Channel Signaling".
In Common Channel Signaling, the call content is separated from the signaling
information. The signaling information is then passed over an entirely separate
path through the carrier's network, while the call content is passed over a
trunk. Signaling paths in the network are connected to a set of systems that
control and monitor the progress of calls and other transactions and route the
signaling information as required. The signaling paths, or "links", and
signaling network control systems comprise a separate network infrastructure,
called a "signaling network", that operates in parallel with the network of
trunks used to convey call content. The technique is called Common Channel
Signaling because signaling information for multiple calls passes over a shared,
or "common", set of signaling channels. This method of combining signaling
information for multiple calls results in much higher overall network
efficiency.
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The following illustration depicts a simplified carrier network
incorporating Common Channel Signaling:
[ILLUSTRATION]
[Illustration of two boxes, each representing a telephone switching office, each
connected to separate customer telephones. The two switching offices are
connected by two lines. The top connecting line depicts the voice path between
the two switched offices. A second line depicting the signaling link extends
from the bottom of each switching office and connects at a bubble in the center
of the illustration depicting the signaling network.]
Modern signaling networks are based on a globally standardized architecture
and set of protocols called SS7, or sometimes referred to internationally as
"C7". Since the mid-1980s, SS7 has been implemented by telecommunications
carriers worldwide, including incumbent carriers, emerging competitive service
providers, Internet service providers, and wireless carriers. SS7 utilizes
digital packet-switching technology and is designed to be robust, flexible, and
scalable, enabling telecommunications carriers to provide new services quickly
and to optimize the network bandwidth used for trunk connections. When a call is
placed, the originating location's call switching equipment uses the SS7 network
to "look ahead" and determine whether the destination is busy or otherwise
unavailable before allocating a trunk to the call and connecting both parties.
The look ahead operation also enables information such as Caller ID to be passed
before the call is actually connected. The SS7 network's speed and power allow
these operations to occur almost instantly, which significantly reduces the time
required to process each call and improves service to the end user.
The principal components of an SS7 network are:
- SIGNALING SERVICE POINT ("SSP"). A subsystem of a telephone switch
that connects to the SS7 network and processes signaling information
associated with that particular switch. SSPs are the origination and
termination points for SS7 messages in the network. SSPs exchange
messages with other SSPs, STPs, and SCPs throughout the network.
- SIGNAL TRANSFER POINT ("STP"). A router that controls the flow of
messages among the other elements in the SS7 network. An STP may
include additional functionality that allows it to access external
databases in addition to performing simple routing based on the
source and destination address information included in network
messages.
- SERVICE CONTROL POINT ("SCP"). A database server that provides
additional information for call routing, billing and other services.
- LINKS. A set of dedicated digital channels through which the SS7
messages flow among SSPs, STPs, SCPs and other devices throughout
the network. These are typically 56 or 64 kilobits-per-second (kbps)
standard digital connections.
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The following illustration depicts the basic architecture of an SS7
signaling network:
[ILLUSTRATION]
[Illustration depicting a telephone at the bottom left (labeled 'New York
Caller') and a telephone at the bottom right (labeled 'Inet Operator'), each
linked linearly to a circle (representing an SSP) and then a box (representing
an STP), with each STP connected to a bubble labeled 'Telecommunications
Carrier's Network.']
SS7: AN ILLUSTRATIVE EXAMPLE
In order to better illustrate the critical role of the SS7 network in
modern telecommunications and to demonstrate the complexity of this network,
consider the example of a person in New York who wishes to call the toll-free
"800" number for Inet. The caller picks up the telephone and dials
1-800-WOW-INET. At the caller's local phone company's central office, an SSP
collects the dialed digits and analyzes them, attempting to determine the
destination location. Since the number dialed is an "800" number, the SSP uses
the SS7 network to query an SCP database. The SCP translates the "800" number
into the local phone number assigned to Inet's headquarters (972-578-6100), and
returns the number through the SS7 network back to the SSP.
The originating SSP then sends a "call setup" message, indicating the 972
number, to the nearest STP. This STP determines that the call must be routed
through the long distance carrier associated with the "800" number, and forwards
the message through the particular long distance carrier's STP, which in turn
determines that the call should terminate at Inet's office in Plano, Texas. The
message is then routed by the long distance company's STP to the local phone
company's STP in Dallas, and finally to the SSP at the local central office in
Plano that will deliver the call to Inet's internal telephone system.
When the SSP in Plano receives the call setup message, it first checks to
see if Inet's number is busy. If the number is available to receive a call, the
SSP in Plano acknowledges the call setup message by sending an acknowledgement
message back to the originating SSP through the SS7 network, and simultaneously
sends SS7 messages to set up a voice channel between the two central offices.
All of these interactions take place in less than one second. At this point,
Inet's phone begins to ring.
When Inet's operator answers the phone, the SSP in Plano sends an "answer"
message through the SS7 network back to the originating SSP, which completes the
voice connection. After both parties hang up the phone and the call ends,
additional messages are sent through the SS7 network to close the call, free up
the voice trunks, and bill for the call.
THE NEED FOR SS7 NETWORK MANAGEMENT SOLUTIONS
As the example above demonstrates, even a relatively simple transaction
like an "800" call requires a sophisticated series of SS7 network operations.
Long-distance authorization codes, pre-paid calling cards, cellular phones, LNP
and other advanced services increase the number of SS7
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messages required for each network transaction, which in turn tends to increase
the number of STPs, SCPs and links required in the network.
Each SS7 network typically contains equipment and software manufactured by
multiple vendors. Moreover, multiple SS7 networks are connected between
carriers, often spanning international boundaries. The entire "network of
networks" must operate as a seamless whole, in real time, with a minimal number
of errors. Any indication of trouble in the network must be detected and
diagnosed as quickly as possible. Network capacity utilization must be monitored
continuously for "bottlenecks" and other conditions. To maintain reliability,
each new connection between two carriers' networks must be certified and
approved by the engineering staffs at both carriers before traffic is allowed to
flow through the connection.
In the past, when SS7 networks were used exclusively on wireline networks
to complete standard telephone calls, it was sufficient for carriers to employ
localized diagnostic equipment and a large number of technicians who could be
dispatched in reasonable time to any point where trouble was suspected or where
new connections were being installed. However, this approach is not readily
scalable. It requires significant numbers of personnel with specialized domain
expertise and does not adequately provide for diagnosis of network-wide,
interrelated conditions that tend to arise in complex environments. The
combination of new and different types of interconnected SS7 networks (such as
satellite and cellular networks), increased traffic levels and complexity within
each SS7 network and strict performance requirements has led to an increased
need for systems and software that enable carriers to get a complete picture of
all signaling network facilities and monitor any or all SS7 message traffic in
real time. Comprehensive network management solutions are required to enable
advanced intelligent networks to reach their full potential.
There is also a growing need for SS7 network management systems to be fully
integrated into the overall collection of systems that manage all aspects of a
carrier's operations, such as billing, service order entry, provisioning,
repair, and service definition. Seamless integration of SS7 management with
applications that enable a carrier to use and leverage the information gathered
in its SS7 network allows a carrier to improve its customer service, reduce
costs, and increase operational efficiency. To provide a carrier with these
advantages, an SS7 network management system must offer a suite of software
applications above and beyond more traditional management functions such as
monitoring and diagnostics.
THE INET SOLUTION
Inet provides solutions that enable telecommunications carriers to more
effectively design, deploy, diagnose, monitor and manage communications networks
that carry signaling information used to manage telephone calls. Inet's products
also address the fundamental business needs of carriers, such as improved
billing, targeted sales and marketing, fraud prevention and enhanced call
routing. Inet provides these comprehensive solutions primarily through its
GeoProbe and Spectra product offerings.
Inet's GeoProbe system provides real-time, network-wide monitoring and
serves as an open platform for business applications developed by Inet, its
customers or third parties. GeoProbe's monitoring applications enable early
warning of network faults, collection of statistics for performance evaluations,
real-time call tracing and troubleshooting. GeoProbe's associated business
applications provide fraud detection tools, reconciliation of billing between
carriers, service quality reports and marketing data. GeoProbe provides many
advantages, including:
- GLOBAL NETWORK VIEW. GeoProbe is designed to provide a comprehensive view
of a carrier's entire SS7 network. This design ensures that all relevant
events and/or signaling throughout the carrier's network, regardless of
their point of origin, path and termination point, are properly
correlated and processed for presentation to network management systems
or personnel. In the absence of such a global approach, carriers must
rely on a patchwork of systems scattered throughout their networks in
order to diagnose problems. Inet's
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proprietary call tracking technology enables a carrier to reconstruct an
entire call and its related transactions at any time during or after the
call. Traditional sampling techniques, by contrast, tend to produce
erroneous and inaccurate results because collected data is usually
incomplete and only local in scope.
- REAL-TIME FUNCTIONALITY. GeoProbe is designed to collect, process and
present data in real time, even under extreme network load conditions.
This key attribute makes real-time management and operation of SS7
networks possible. Without a real-time monitoring system, carrier
networks are more vulnerable to overloads, fraud and delayed problem
resolution, which can lead to customer dissatisfaction and compromised
network integrity.
- ADVANCED ENGINEERING AND PLANNING CAPABILITIES. GeoProbe continuously
provides an accurate and detailed view of real-time and historical
statistics on a carrier's SS7 network usage and the service applications
delivered through the network. This allows carriers to implement network
designs optimized for cost and performance, and to refine network
configuration over time based on changes in demand. For example, a
carrier can use data collected by GeoProbe to identify a point in the
network that is constricting traffic flow. The carrier can then install
additional equipment at that point, increasing the throughput of its
entire network.
- FAST, COST-EFFECTIVE DIAGNOSTICS. GeoProbe's software applications
rapidly isolate problems between interconnected SS7 elements and
networks, enabling telecommunications carriers to reduce downtime,
maintenance and costs.
- REDUNDANCY AND RELIABILITY. GeoProbe is available with various levels of
redundancy in order to guard against data loss and help ensure that
critical applications remain operational. Available redundancy features
include power, interfaces, processors, storage devices and transport
network access, and certain business applications such as billing.
- VENDOR INDEPENDENCE. All GeoProbe applications are based on data captured
directly from the SS7 network, as opposed to information provided in
vendor-specific format by individual network elements such as STPs and
SCPs. As a result, carriers can use GeoProbe regardless of which vendors'
equipment is deployed in their SS7 network.
The Spectra product is a vendor-independent tool that provides diagnostic,
emulation and load generation capabilities for use in the design, deployment,
commissioning and diagnosis of SS7 networks. Spectra can be integrated within
the GeoProbe platform or used on a stand-alone basis with a carrier's own
equipment. Spectra can also be used by equipment manufacturers to design and
test SS7 network equipment. Key benefits of Inet's Spectra product are:
- EASE OF USE. Spectra provides a multitude of easy-to-access emulation and
diagnostic functions. These capabilities allow testing and
troubleshooting personnel to quickly and effectively perform tasks that
would otherwise require lengthy set-up times and programming efforts.
- COMPREHENSIVE CAPABILITIES. Spectra provides customers with the ability
to monitor, emulate and generate signaling data for use in
troubleshooting, validation, conformance and regression testing of
switches and other network equipment. Spectra's load generation
capabilities and multiple emulation functions can test the various layers
of the SS7 protocol, up to and including the signaling information
involved with complex applications, such as LNP.
- MULTIPLE PROTOCOL SUPPORT. Spectra enables network equipment
manufacturers and telecommunications carriers to perform end-to-end
testing of applications utilizing multiple signaling protocols, such as
country-specific variations of SS7. Spectra alleviates the need to use
multiple diagnostic tools and provides easy and consolidated access to
test results.
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- VERSATILE CONFIGURATION AND COMPATIBILITY WITH GEOPROBE. Inet offers
Spectra in a rack-mounted version that supports up to 16 links and a
portable version that supports up to eight links. Spectra's versatility
is enhanced by its portability and the ability to integrate with the
GeoProbe system.
Together, GeoProbe and Spectra represent an integrated and comprehensive
set of solutions for signaling network design, monitoring, management, testing
and diagnosis.
THE INET STRATEGY
Inet's objective is to be the dominant provider of advanced signaling
network management solutions and associated business applications for
telecommunications networks. Key elements of Inet's strategy to achieve this
objective include:
EXPAND GLOBAL MARKET SHARE. The Company is pursuing business in markets
throughout the world that are in the process of being deregulated or privatized.
The percentage of the Company's revenues attributable to international markets
exceeded 50% of its revenues in 1997 and is expected to remain a substantial
portion of the Company's revenues going forward. The Company believes that its
future growth and profitability require continued expansion in international
markets. Inet also selectively pursues incumbent carriers in newly emerging
markets and in advanced but monopolistic markets in order to establish its
presence in these markets prior to the time at which such a market is
deregulated or privatized. The Company intends to expand its international
presence by adding offices in key global markets.
ACCELERATE DOMESTIC SALES AND INCREASE PENETRATION OF EXISTING CUSTOMER
BASE. Inet intends to seek additional revenue opportunities by working closely
with its installed customer base to identify opportunities for the sale of
additional GeoProbe systems, add-on business applications and other products.
Based on experience with its existing customers, the Company believes that
achieving early widespread deployment of the GeoProbe in a particular carrier's
network provides significant ongoing opportunities for sales of additional
GeoProbe systems and add-on applications. The Company is expanding its domestic
sales force in order to pursue opportunities with its installed customer base,
as well as first-time sales to new customers.
ENHANCE TECHNOLOGY LEADERSHIP POSITION. The Company intends to maintain its
position as a technological leader in SS7 network management and associated
business solutions. To accomplish this objective, the Company intends to, among
other things, continue investing in research and development, including new
product development and enhancements to its current products.
EXPAND PRODUCT OFFERINGS. Inet believes that it has gained significant
expertise in SS7 technologies in the course of the design, development and
implementation of its Spectra and GeoProbe product offerings and through its
work with its existing customer base. The Company intends to leverage its core
competency in SS7 to expand its current product offerings and to develop new
product offerings for complementary signaling environments such as ISDN,
Asynchronous Transfer Mode and Internet telephony.
BUILD RELATIONSHIPS WITH STRATEGIC PARTNERS. Inet intends to build
strategic relationships with complementary software vendors and signaling
equipment manufacturers worldwide in order to integrate the Company's product
offerings with others' products and/or to create joint-marketing opportunities.
In addition, the Company intends to augment its sales efforts by establishing
and expanding relationships with other telecommunications equipment vendors,
systems consulting and integration firms and network management providers.
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PRODUCTS
GEOPROBE
The GeoProbe system contains the following key elements:
- A core hardware platform designed as a scalable, distributed,
RISC-based multi-processing data I/O platform, which captures
network data traffic and processes that data through multiple
software applications.
- Advanced SS7 network monitoring software applications.
- The Company's OpenSeven application programming interface ("API"),
which enables customers and third party developers to customize
and extend the features of the system.
- A suite of business software applications which enable a carrier
to leverage the data collected by the GeoProbe system, such as
call-based interconnect billing, usage measurement billing,
customer quality assurance and LNP monitoring.
The following illustration depicts the functional architecture of the
GeoProbe system:
[TARGET CHART]
[Illustration of four concentric circles depicting the functional architecture
of the GeoProbe system. In the outermost circle (which a legend indicates to be
the Business-Level Applications) is text describing the following types of
applications: 'Real-Time Fraud Data Feed,' 'Third Party Applications,'
'Marketing Applications,' 'Service Quality Assurance' and 'Interconnect Billing
Reconciliation.' The next circle inward is the interface to the Application
Programming Interface tools labeled 'OpenSeven API.' The next inward circle
contains the following Surveillance-Level Applications: 'Alarms,' 'Network
Performance,' 'Call Completion Stats,' 'Mass Call Detection,' 'Global Call
Trace,' 'Service Performance' and 'Signal Unit Storage.']
The GeoProbe system provides a network-wide view regardless of topology or
number of protocols in use. GeoProbe passively (i.e., non-intrusively) monitors
all messages that flow over each signaling link and can automatically correlate
these messages to reconstruct every call in a carrier's network. This capability
provides comprehensive call analysis for troubleshooting, problem detection, and
network integrity assurance. In addition, the information collected by GeoProbe
improves a carrier's ability to optimize its network and provide enhanced
services to its customers.
GeoProbe provides call data and network status information to users via a
graphical user interface and through Web-based reporting applications. GeoProbe
displays maps that represent network elements (e.g., SSPs, STPs and SCPs). When
failures or user-specified events occur, an icon representing the affected
network element changes to alert the user to potential trouble or the
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occurrence of the failure or event. GeoProbe also provides users with a wide
range of flexibility to configure their system to set up triggers (i.e., event
detection), filters, alarms and statistics.
The GeoProbe platform contains three elements: SpIprobes, SpIstations and
SpIservers. This modular design accommodates growth in a carrier's network and
facilitates the implementation of enhanced features simply by adding processor
cards to the SpIprobes or deploying additional SpIstations. The following
illustration depicts the elements of the GeoProbe platform in a simplified SS7
network environment:
[ILLUSTRATION]
[Illustration depicting the elements of the GeoProbe platform in a simplified
SS7 network environment. One the left of the graphic is a PC workstation labeled
'SpIstation' contained in a shaded box and denoted as the 'Regional Operations
Center(s)'. Below this picture is an elliptical bubble made up of dashed lines
and connected to the shaded box by a dashed line. Inside the bubble are the
words 'Transport Network (TCP/IP).' Below the bubble is a shaded box also
connected to the bubble by dashed lines. Inside the shaded box denoted as the
'Centralized Network Operations Center' is a computer server labeled 'SpIserver'
and a PC workstation labeled 'SpIstation.' On the right side of the graphic is a
second bubble containing the following elements of the SS7 Network
interconnected by solid black lines: STP, SCP, STP and SSP. Also within the
second bubble are two SpIprobes, each connected to one of the STPs in the second
bubble and also connected by dashed lines to the elliptical bubble on the left
side of the graphic.]
SPIPROBE. SpIprobes are typically co-located with the carrier's STPs
because STPs have the greatest concentration of links and all SS7 messages must
traverse through the STPs. The SpIprobe passively monitors each link at each STP
site. The SpIprobe contains four primary subsystems:
- An Interface subsystem that provides a passive, non-intrusive physical
interface to the monitored links.
- A Processor subsystem based on RISC architecture that processes data
passed from the Interface.
- A Controller subsystem that provides command and control for redundancy,
communication and other "housekeeping" activities.
- A Storage subsystem which provides storage for captured signal units and
statistics.
SPISERVER. SpIserver is a UNIX-based computer that acts as a central file
server for the GeoProbe system. SpIserver is located at the carrier's Network
Operations Center and serves as the processing core for the alarm distribution,
system configuration and database functions of GeoProbe. SpIservers are scalable
so that additional applications and system upgrades can be easily added without
the need for additional SpIservers.
SPISTATION. SpIstations are UNIX-based workstations that can be located
wherever the customer needs network information. Each SpIstation features a
graphical user interface through which the user can view network information
provided by GeoProbe. This displayed information includes SS7 network
configuration and status.
GEOPROBE SOFTWARE APPLICATIONS. Inet has developed a number of software
applications for use with GeoProbe. These applications incorporate Oracle's
relational database and the X-Windows OSF/Motif toolkit. In addition, Inet's
OpenSeven API provides the carrier's personnel or a third party
36
<PAGE> 39
software developer with the ability to expand or customize existing applications
or develop new applications to meet their needs.
The following applications are available for use in the GeoProbe system:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------
APPLICATION FUNCTIONALITY
- ------------------------------------------------------------------------------------
Surveillance Alarms
Statistics
Local Number Portability monitoring
- ------------------------------------------------------------------------------------
Billing Call-based interconnect billing
Usage measurement billing
- ------------------------------------------------------------------------------------
Fraud Management Feed to real-time fraud
detection systems
- ------------------------------------------------------------------------------------
Marketing Customer quality assurance
Traffic engineering
- ------------------------------------------------------------------------------------
Service Quality Assurance Performance monitoring
- ------------------------------------------------------------------------------------
</TABLE>
Pricing for a GeoProbe system varies based on a number of factors, such as
the amount of network traffic, number of links monitored, network configuration,
number of protocols present, and number and type of add-on applications.
GeoProbe prices generally have ranged from $350,000 to $8.6 million, and in 1997
averaged approximately $1.4 million. GeoProbe system add-ons are priced
according to similar metrics. Since 1995, the Company has sold GeoProbe systems
to over 30 customers worldwide.
SPECTRA
Inet's Spectra diagnostic unit, designed to serve either as a stand-alone
tool or to be integrated with GeoProbe, provides telecommunications carriers
with the ability to quickly and cost-effectively design, deploy and maintain
their networks. Spectra offers a wide array of filters, traps, traces and other
diagnostic capabilities. Spectra also can be used by equipment manufacturers in
the design of new products through its extensive emulation and conformance
packages and its ability to simulate network conditions.
Spectra is a multi-protocol diagnostic tool targeted to the needs of
advanced SS7/C7, PCS, GSM, IS-41, X.25 and ISDN networks and development
environments. Spectra is designed for ease-of-use, with an intuitive user
interface featuring pop-up menus and single-keystroke commands. Spectra can be
configured by the user to change message text and monitoring scenarios and to
save commonly used configurations, filters, tests and other settings for quick
setup. Spectra translates complex SS7 messages into plain language, and its
display format shows network statistics and test results in an
easy-to-understand format.
Spectra can be purchased in either a portable version, capable of
monitoring up to eight full-duplex links, or in a rack-mounted configuration
that can monitor up to 16 full-duplex links. Depending on configuration and
enhancements, beginning in 1996 prices for a Spectra unit generally have ranged
from $30,000 to $100,000. Since the first Spectra sale in 1990, over 2,000
Spectras have been sold to over 300 customers worldwide.
OTHER CURRENT PRODUCTS - SPIDER
The Company also produces a wireless modem known as Spider for use by law
enforcement, field service, sales force automation and other wireless data
applications. One of the most compact wireless CDPD modems on the market today,
Spider is a single Type III PCMCIA computer card and does not rely on external
power. Spider provides a full duplex, RC4 data-encrypted, 19.2 kbps
37
<PAGE> 40
cellular packet data link to LANs, intranets and other networks, including the
Internet. Spider comes bundled with management software to enable the user to
manage signal strength while simplifying installation and use.
PRODUCTS UNDER DEVELOPMENT
The Company utilizes a common standards-based open architecture approach in
the design of its products. This approach facilitates and accelerates the
development of new applications and products and permits the Company to enhance
existing products by substituting new hardware or software modules. This modular
approach also helps to extend the life cycles of the Company's products, ensure
compatibility among successive generations of products and simplify the
manufacturing process.
Some of the Company's current and planned product development efforts
include a number of add-on marketing applications built on its Customer Quality
Assurance application that will enable carriers to offer improved customizable
services to corporate clients; a high speed link interface module for GeoProbe;
and an ISDN interface to address the needs of its current customers to interface
with ISPs. Among the enhancements being developed for Spectra are an API to
provide access to the new testing automation tools on the market today, a
Japanese protocol interface and a call-path continuity tester.
Products as complex as those currently under development by the Company
frequently are subject to delays, and there can be no assurance that the Company
will not encounter difficulties that could delay or prevent the successful and
timely development, introduction and marketing of these potential new products.
Moreover, even if such potential new products are developed and introduced,
there can be no assurance that they will achieve any significant degree of
market acceptance. Failure to release these or any other potential new products
on a timely basis, or failure of these or any other potential new products, if
and when released, to achieve any significant degree of market acceptance, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Rapid Technological Change and
New Products" and "-- Product Liability".
CUSTOMERS
As of June 30, 1998, the Company had sold versions of its products to over
300 customers in over 40 countries. In 1995 and 1997, MCI and British Telecom
individually accounted for approximately 10% and 14%, respectively, of the
Company's revenues. No individual customer accounted for 10% or more of the
Company's revenues in 1996. The Company's target customers include
telecommunications network carriers and equipment manufacturers throughout North
America, Latin America, Europe and the Asia/Pacific region.
38
<PAGE> 41
The following is a list of customers in various market segments which have
purchased in excess of $250,000 worth of the Company's products since 1996.
<TABLE>
<CAPTION>
LONG DISTANCE CARRIERS (IXCS) WIRELESS CARRIERS PTTS EQUIPMENT MANUFACTURERS
- ------------------------------- --------------------- ---------------- -----------------------
<S> <C> <C> <C>
AT&T 3608 Communications British Telecom Ascend
MCI Airtouch Cable & Wireless Bellcore
Sprint AT&T Wireless KPN Telecom Cisco
Worldcom Bell Atlantic Mobile Latvia PTT DSC
Bell South Mobility o.tel.o Ericsson
LOCAL EXCHANGE CARRIERS Cellular One-Maryland communications Motorola
Entel-Chile Portugal Telecom Nortel
Brooks Fiber LA Cellular SPT Telecom PT NEC Nusantara
Cincinnati Bell Startel Telecom Italia Communication
Frontier Telebahia Telia
Intermedia Western Wireless Telstra
Communications
LDI
</TABLE>
SALES, MARKETING AND SUPPORT
SALES AND MARKETING
The Company sells the GeoProbe and Spectra to telecommunications carriers
and equipment manufacturers globally through both direct and indirect channels.
The direct channel is used domestically for both product lines with the
Company's sales force structured around a two-tier model -- strategic accounts
and geographic accounts. Internationally, the Company uses both
channels -- GeoProbe is sold directly and in cooperation with system
integrators, distributors and consultants, while Spectra is sold primarily via
distributors. The Company maintains six sales offices in the U.S. and a sales
support facility outside London, England. The Company plans to open a sales
office in Germany in 1998.
Sales of the Company's products are made predominately to large
telecommunications service providers and involve significant capital
expenditures and lengthy implementation processes. Prospective customers
generally commit significant resources to an evaluation of the Company's and its
competitors' products and require each vendor to expend substantial time, effort
and money educating the prospective customer about the value of the vendor's
solutions. Consequently, sales to this type of customer generally require an
extensive sales effort throughout the customer's organization and final approval
by an executive officer or other senior level employee. The Company frequently
experiences delays following initial contact with a prospective customer and
expends substantial funds and management effort pursuing these sales.
Additionally, delays associated with potential customers' internal approval and
contracting procedures, procurement practices, testing and acceptance processes
are common and may cause potential sales to be delayed or foregone. As a result
of these or other factors, the sales cycle for the Company's products is long,
typically ranging from six to 24 months for GeoProbe sales (excluding the cycle
for subsequent applications and enhancements, which varies widely) and up to six
months for occasional, large Spectra sales. Accordingly, the Company's ability
to forecast the timing and amount of specific sales is limited, and the deferral
or loss of one or more significant sales could materially adversely affect
operating results in a particular quarter, particularly if there are significant
sales and marketing expenses associated with the deferred or lost sales.
The Company's primary marketing activities include raising potential
customer awareness of the benefits of actively managed SS7 networks and
identification of new opportunities with existing customers. To accomplish these
tasks, Inet uses direct sales and marketing efforts, advertising in trade
magazines, exhibitions at industry trade shows and presence on the Internet via
the
39
<PAGE> 42
Company's website. These activities focus on generating qualified sales leads
and demonstration opportunities for the Company's products.
The Company provides extensive training and support for its direct sales
force and its worldwide distributors, including classroom training, product
brochures, demonstration systems and promotional literature.
SERVICES, SUPPORT AND WARRANTY
The Company believes that customer service, support and training are
important to building and maintaining strong customer relationships. The Company
services, repairs and provides technical support for its products. Support
services include 24-hour technical support, remote access diagnostic and
servicing capabilities, installation support and advance replacements for
emergency situations. The extent and nature of customer interaction with the
support organization are shared with the sales organization via a common
database.
The Company maintains an in-house repair facility and provides on-going
telephone assistance to customers from its support center in Plano, Texas. In
addition, the Company services its European customers from a product support
office outside London, England. As Inet's customers become more geographically
diverse, the Company may open service centers in other key locations.
The Company typically warrants its products against defects in materials
and workmanship for one year after the sale and thereafter offers extended
service warranties.
PRODUCT MANAGEMENT AND SUPPORT
The Company's product management and support activities primarily include
the verification of product functionality through the use of a laboratory
environment that can be configured to simulate an end customer's network and
load conditions as well as interfacing between the Company's marketing and
product development departments. Product management and support personnel are
also responsible for fixing product defects discovered by customers.
RESEARCH AND DEVELOPMENT
The Company's product development efforts include expenditures for research
and development, new product design and enhancement of existing products.
Research and development expenses were $4.0 million, $4.5 million, $4.8 million
and $3.0 million in 1995, 1996, 1997 and the six months ended June 30, 1998,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
The Company's primary development facilities are located in its Plano,
Texas headquarters. In 1997, the Company opened a development facility in the
Republic of Armenia, and at June 30, 1998 employed 12 individuals at such
facility. The Company believes that recruiting and retaining highly skilled
engineering personnel is essential to its success. To the extent that the
Company is not successful in attracting and retaining qualified technical
personnel, its business, financial condition and results of operations would be
materially adversely affected.
The Company's products are designed to comply with a significant number of
standards and regulations, some of which are evolving as new technologies are
deployed. For sales to customers in the U.S., the Company's products must comply
with various standards established by Bellcore and the American National
Standards Institute. Internationally, the Company's products must comply with
standards established by telecommunications authorities in various countries as
well as with recommendations of the International Telecommunications Union and
the European Telephone Standards Institute. The failure of the Company's
products to comply, or delays in compliance, with the various existing and
evolving standards could have a material adverse effect on the Company's
business and operating results.
40
<PAGE> 43
MANUFACTURING
Inet's production process consists of procurement and inspection of
components, final assembly, burn-in, quality control testing and packaging. Inet
outsources the manufacturing of its hardware to a number of Dallas, Texas-area
contract manufacturers. The Company has obtained ISO 9001 certification for
in-house processes and has obtained the CE certification for shipments to the
European Community.
Inet generally uses industry-standard components for its products which are
available from multiple sources. However, the Company's products currently
utilize certain semiconductors that are available from only one manufacturer and
other components that are available from a limited number of suppliers. The
Company attempts to minimize the need for sole and limited source components by
performing design reviews, prior to the manufacture of any new product, during
which the Company seeks to eliminate sole source components. During manufacture,
Inet forecasts annual parts usage and meets with key vendors to obtain their
commitment to meet forecast supply needs. The Company periodically reevaluates
the sources of components identified as having potential delivery problems and
the costs and benefits of redesigning the Company's products to incorporate
alternative components. If any sole or limited source components should become
unavailable, Inet believes that it could design similar functionality into its
product using other components. See "Risk Factors -- Dependence on Sole and
Limited Source Suppliers; Dependence on Subcontractors and Licensed Technology".
COMPETITION
The market for SS7-based telecommunications 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. The Company competes 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 Hewlett-Packard. Spectra principally competes with products offered
by Hewlett-Packard, Tekelec and Tektronix. Certain of the Company's competitors
have, in relation to the 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, such 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 Company believes that its ability to compete successfully depends on
numerous factors, both within and outside the Company's control, including:
responsiveness to telecommunications service providers' needs; the Company's
ability to support existing and new industry standards; the development of
technical innovations; the attraction and retention of qualified personnel;
regulatory changes; the quality, reliability and security of the Company's and
its competitors' products and services; sufficient market presence by the
Company; the ability to execute a strategy of rapid expansion; ease of use of
the Company's products; the pricing policies of the Company's competitors and
suppliers; the timing of introductions of new products and services by the
Company and its competitors; and general market and economic conditions. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
41
<PAGE> 44
PROPRIETARY RIGHTS
The telecommunications industry is characterized by the existence of a
large number of patents and frequent allegations of patent infringement. The
Company has received, and may receive in the future, notices from holders of
patents that raise issues as to possible infringement by the Company's products.
As the number of telecommunications network management products increases and
the functionality of these products further overlaps, the Company believes that
it may become increasingly subject to allegations of infringement. To date, the
Company has engaged in correspondence with third-party holders of patents as a
result of two such notices. The Company believes that its products do not
infringe any valid patents cited in the notices received. However, questions of
infringement in the field of telecommunications signaling technologies involve
highly technical and subjective analyses. There can be no assurance that any
such patent holders or others will not in the future initiate legal proceedings
against the Company or that, if any such proceedings were initiated, the Company
would be successful in defending against such proceedings. Any such proceeding
could be time consuming and expensive to defend, prosecute or resolve, result in
substantial diversion of management resources, cause product shipment delays, or
force the Company to enter into royalty or license agreements rather than
dispute the merits of any such proceeding initiated against the Company. There
can be no assurance that any such royalty or license agreements would be
available on terms acceptable to the Company, if at all. Any such claims against
the Company, with or without merit, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's continued success is dependent in part upon its proprietary
technology. To protect its proprietary technology, the Company relies 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 the Company's proprietary rights in the products to the same
extent as do the laws of the U.S. Moreover, although the Company holds one U.S.
patent, has additional patent applications pending and is in the process of
preparing additional patent applications for filing, there can be no assurance
that the Company will receive additional patents. Despite the measures taken by
the Company, it may be possible for a third party to copy or otherwise obtain
and use the Company's proprietary technology and information without
authorization. Policing unauthorized use of the Company's products is difficult,
and litigation may be necessary in the future to enforce the Company's
intellectual property rights. Any such 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 the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be successful in protecting its proprietary technology or that
the Company's proprietary rights will provide a meaningful competitive advantage
to the Company.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to the Company on commercially reasonable terms. The inability to
maintain any such software licenses could result in shipment delays or
reductions until equivalent software could be developed or licensed and
integrated into the Company's products, which could materially adversely affect
the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 310 employees, of whom 124 were
engaged in product development, 43 were engaged in product management and
support, 33 were engaged in sales and marketing, 54 were engaged in customer
support services, 21 were engaged in manufacturing and 35 were engaged in
administrative and other business support functions. The Company believes it has
experienced good employee relations to date.
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<PAGE> 45
The Company's success depends, in part, upon its ability to continue to
attract, motivate and retain additional highly qualified employees, particularly
employees with SS7 knowledge and experience. The process of locating such
employees with the combination of skills and attributes necessary to implement
the Company's strategy is lengthy. The loss of any existing key employees or the
inability to attract, motivate and retain additional qualified employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Dependence on Key Personnel".
FACILITIES
The Company is headquartered in Plano, Texas, where it currently leases
approximately 90,000 square feet of office space. The Company also leases sales
offices in Georgia, New Jersey, Maryland, Illinois and California. Additionally,
the Company leases three international offices, two outside of London, England
which provide product and sales support to many of the Company's customers
located in Europe, and another in the Republic of Armenia which serves as a
research and development facility. The Company currently plans to open a sales
office in Germany in 1998. Although the Company is evaluating the lease of
additional space for its headquarters operations, the Company believes that its
existing facilities are adequate for its current needs and that additional space
will be available as needed.
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<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Samuel S. Simonian.......... 43 President, Chief Executive Officer and Director
Elie S. Akilian............. 42 Executive Vice President and Director
Mark A. Weinzierl........... 34 Executive Vice President, Secretary and Director
William H. Mina............. 53 Senior Vice President, Chief Financial Officer and Director
Robert G. Mechaley, Jr...... 47 Director Nominee
</TABLE>
SAMUEL S. SIMONIAN co-founded and has served as President and director of
Inet since 1989, and as its Chief Executive Officer since March 1994. Mr.
Simonian holds a B.S. in Electrical Engineering from the University of Texas at
Arlington. Prior to co-founding Inet, Mr. Simonian worked from 1979 to 1989 at
Electrospace Systems, Inc. in its antenna control systems division and its
switching department. Currently, Mr. Simonian also serves as Inet's chief
technical officer. Mr. Simonian is the nephew of William H. Mina's spouse.
ELIE S. AKILIAN co-founded Inet in 1989 and has served as Executive Vice
President and director of the Company since March 1989. Mr. Akilian received his
B.S. in Electrical Engineering from the University of Texas at Arlington. Prior
to co-founding Inet, Mr. Akilian worked from 1980 to 1989 at Electrospace
Systems, Inc. in its switching department. Currently, Mr. Akilian oversees
Inet's sales and marketing organization.
MARK A. WEINZIERL co-founded Inet in 1989 and has served as Executive Vice
President, Secretary and director of the Company since March 1990. Mr. Weinzierl
received his B.S. in Electrical Engineering from Iowa State University in 1986
and attended the University of Texas at Dallas M.B.A. program. Prior to
co-founding Inet, Mr. Weinzierl worked from 1986 to 1989 at Electrospace
Systems, Inc. in its switching department. Currently, Mr. Weinzierl oversees
Inet's support services and manufacturing organizations.
WILLIAM H. MINA has served as Senior Vice President and Chief Financial
Officer of the Company since February 1997 and as a director of the Company
since June 1996. From 1985 to February 1997, Mr. Mina was employed by Wafra
Investment Advisory Group Inc. ("Wafra"), a New York based investment banking
firm. While at Wafra, he served in various positions, including Senior Vice
President and Chief Financial Officer. Mr. Mina holds an M.B.A. from Southern
Methodist University and a B.A. in Business Administration from Dallas Baptist
University. Mr. Mina is married to Samuel Simonian's aunt.
ROBERT G. MECHALEY, JR. has consented to become a director of the Company
upon consummation of the offerings. Mr. Mechaley has served as a Director and
President and Chief Executive Officer of Wildfire Communications, Inc. since
August 1996. Prior to that time, Mr. Mechaley served as Senior Vice President
with AT&T Wireless Services from June 1993 to July 1996.
BOARD OF DIRECTORS
The Board of Directors is currently composed of four members. Upon
consummation of the offerings, the Company intends to increase the number of
directors to six and elect Mr. Mechaley and one additional non-employee to fill
the two resulting vacancies. Within 90 days following the completion of the
offerings, the Company intends to establish a Compensation Committee and an
44
<PAGE> 47
Audit Committee of the Board of Directors. Each director holds office until the
next annual meeting of the stockholders or until his successor is duly elected
and qualified. The Company's Certificate of Incorporation and Bylaws provide
that, beginning with the first annual meeting of stockholders following the
offerings, the Board of Directors will be divided into three classes, with each
class serving staggered, three-year terms. See "Description of Capital
Stock -- Certain Anti-Takeover, Limited Liability and Indemnification
Provisions -- Certificate of Incorporation and Bylaw Provisions".
The Company anticipates that, for an undetermined period following the
offerings, directors of the Company will not be paid any fees or compensation
for service as members of the Board of Directors or any committee thereof, but
will be reimbursed for any reasonable out-of-pocket expenses incurred in
connection with attending meetings of the Board of Directors and any committees
thereof. In addition, directors who are not employees of the Company or any of
its subsidiaries periodically receive automatic grants of non-qualified options
under the Company's 1998 Stock Option/Stock Issuance Plan. See "-- 1998 Stock
Option/Stock Issuance Plan".
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. Prior to consummation
of the offerings, the Company intends to obtain directors' and officers'
liability insurance and expects to enter into indemnification agreements with
all of its directors and executive officers. In addition, the Company's
Certificate of Incorporation limits the liability of directors of the Company to
the Company or its stockholders for breaches of the directors' fiduciary duties
to the fullest extent permitted by Delaware law. See "Description of Capital
Stock--Certain Anti-Takeover, Limited Liability and Indemnification Provisions".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Company had no compensation committee or other committee
of the Board of Directors performing similar functions. Decisions concerning
compensation of executive officers were made during such year by the Board of
Directors, each member of which also served as an executive officer.
EMPLOYMENT CONTRACTS
The officers serve at the discretion of the Board of Directors. The Company
does not presently have an employment contract in effect with any of its
executive officers.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and the other
executive officers of the Company whose
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<PAGE> 48
salary and bonus exceeded $100,000 for services rendered in all capacities to
the Company and its subsidiaries during 1997 (collectively, the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- -------------
NAME AND OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION(S) SALARY BONUS COMPENSATION(1) (# OF SHARES) COMPENSATION
--------------------- -------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Samuel S. Simonian......... $201,400 $355,253 $16,500 -- $ 216(2)
President and Chief
Executive Officer
Elie S. Akilian............ 201,400 328,573(3) 16,500 -- 216(2)
Executive Vice President
Mark A. Weinzierl.......... 201,400 323,573(3) 16,500 -- 216(2)
Executive Vice President
and Secretary
William H. Mina(4)......... 155,833 107,500(5) 16,500 110,000 16,379(6)
Senior Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(1) Represents a retainer and fees received for services rendered as a director
of the Company.
(2) Represents life insurance premiums paid on behalf of such officer.
(3) Includes $3,323 earned during 1996 but paid in 1997.
(4) Mr. Mina commenced employment with the Company in February 1997. Prior to
that time, Mr. Mina had served on the Company's Board of Directors.
(5) Includes $57,500, the fair market value as determined by the Board of
Directors on the date of issuance of 50,000 shares of Common Stock issued to
Mr. Mina as a bonus in connection with his commencement of employment with
the Company.
(6) Consists of contributions to Mr. Mina's participation in the Company's
401(k) plan.
OPTION GRANTS
The following table provides certain information concerning stock options
granted to each of the Named Officers during 1997. No stock appreciation rights
were granted to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED(1) IN 1997 PER SHARE DATE 5% 10%
---- ---------- ---------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Samuel S. Simonian....... -- -- -- -- -- --
Elie S. Akilian.......... -- -- -- -- -- --
Mark A. Weinzierl........ -- -- -- -- -- --
William H. Mina.......... 110,000(1) 29% $ 1.15 2/28/07 $79,555 $201,608
</TABLE>
- ---------------
(1) The options were granted on March 1, 1997 and will become fully vested and
exercisable upon the consummation of the offerings.
(2) Future value assumes appreciation in the market value of the Common Stock of
5% and 10% per year over the ten-year option period. The actual value
realized may be greater than or less than the potential realizable values
set forth in the table.
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<PAGE> 49
YEAR-END OPTION VALUES
No options were exercised by the Named Officers during 1997. The following
table provides certain information concerning option holdings at December 31,
1997 with respect to each of the Named Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Samuel S. Simonian.................... -- -- -- --
Elie S. Akilian....................... -- -- -- --
Mark A. Weinzierl..................... -- -- -- --
William H. Mina....................... -- 110,000(1) -- $485,870(2)
</TABLE>
- ---------------
(1) The options will become fully exercisable upon the consummation of the
offerings.
(2) Value is determined by subtracting the exercise price from the fair market
value of the Common Stock at December 31, 1997 ($5.57 per share), multiplied
by the number of shares underlying the options.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1998 Stock Option/Stock Issuance Plan (the "1998 Plan") is
intended to serve as the successor equity incentive program to the Company's
existing 1995 Employee Stock Option Plan (the "Predecessor Plan"). The 1998 Plan
became effective on July 23, 1998 upon adoption by the Board of Directors and
was subsequently approved by the stockholders on July 23, 1998. Common Stock has
initially been authorized for issuance under the 1998 Plan in the amount of
6,750,000. In addition, the share reserve will automatically be increased on the
last trading day of January each calendar year, beginning in January 2000, by a
number of shares equal to one percent (1%) of the total number of shares of
Common Stock outstanding on the last trading day of the immediately preceding
calendar year, but no such annual increase shall exceed 500,000 shares. However,
in no event may any one participant in the 1998 Plan receive option grants or
direct stock issuances for more than 1,000,000 shares in the aggregate per
calendar year.
Outstanding options under the Predecessor Plan will be incorporated into
the 1998 Plan upon the date of the offerings, and no further option grants will
be made under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, unless the Plan Administrator elects to extend
one or more features of the 1998 Plan to those options. However, except as
otherwise noted below, the outstanding options under the Predecessor Plan
contain substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the 1998 Plan.
The 1998 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price determined by
the Plan Administrator, (ii) the Stock Issuance Program under which such
individuals may, in the Plan Administrator's discretion, be issued shares of
Common Stock directly, through the purchase of such shares at a price determined
by the Plan Administrator or as a bonus tied to the performance of services and
(iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100% of
the fair market value of those shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee of the Board. The Compensation
Committee, as Plan
47
<PAGE> 50
Administrator, will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the U.S.
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the Automatic Option Grant Program is
self-executing in accordance with the express provisions of that program.
The exercise price for the shares of Common Stock subject to option grants
made under the Plan may be paid in cash or in shares of Common Stock valued at
fair market value on the exercise date. The option may also be exercised through
a same-day sale program without any cash outlay by the optionee. In addition,
the Plan Administrator may provide financial assistance to one or more
participants in the 1998 Plan in connection with their acquisition of shares, by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the option exercise price and or direct issue
price plus any associated withholding taxes incurred in connection with such
acquisition.
In the event of an acquisition of the Company, whether by merger or asset
sale or a sale by the stockholders of more than 50% of the total combined voting
power of the Company recommended by the Board, each outstanding option under the
Discretionary Option Grant Program which is not to be assumed by the successor
corporation or otherwise continued will automatically accelerate in full, and
all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation or otherwise continued in effect. The Plan Administrator will have
the authority under the Discretionary Option Grant Program to provide that the
shares subject to options granted under that program will automatically vest (i)
upon an acquisition of the Company, whether or not those options are assumed or
continued, (ii) a hostile change in control of the Company effected through a
successful tender offer for more than 50% of the Company's outstanding voting
stock or by proxy contest for the election of Board members or (iii) in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a designated period (not to exceed eighteen
(18) months) following an acquisition in which those options are assumed or
otherwise continued in effect or a hostile change in control. The vesting of
outstanding shares under the Stock Issuance Program may be accelerated upon
similar terms and conditions. Options currently outstanding under the
Predecessor Plan will accelerate either at the time of an acquisition or a
change in control or upon the termination of the optionee's service following an
acquisition or change in control.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. There are currently no outstanding stock
appreciation rights under the Predecessor Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee member of the Board on the date the underwriting agreement for
the offerings is executed and who has not previously been in the employ of the
Company will receive at that time an option grant for 20,000 shares of Common
Stock with a exercise price equal to the price per share at which the
48
<PAGE> 51
Common Stock is to be sold in the offerings. Each individual who first joins the
Board after the effective date of the offerings as a non-employee Board member
will also receive an option grant for 20,000 shares of Common Stock at the time
of his or her commencement of Board service, provided such individual has not
otherwise been in the prior employ of the Company. In addition, at each Annual
Stockholders Meeting, beginning with the 1999 Annual Meeting, each individual
who is to continue to serve as a non-employee Board member will receive an
option grant to purchase 10,000 shares of Common Stock, whether or not such
individual has been in the prior employ of the Company.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of 10 years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase, at the option exercise price paid per share, should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
20,000-share grant will vest in three equal and successive annual installments
over the optionee's period of Board service. Each additional 10,000-share grant
will vest upon the optionee's completion of one year of Board service measured
from the grant date. However, each outstanding option will immediately vest upon
(i) certain changes in the ownership or control of the Company or (ii) the death
or disability of the optionee while serving as a Board member.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) July 23, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on July 23, 1998 and approved by the
stockholders on July 23, 1998. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan. A reserve of 750,000 shares of Common Stock
has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the Underwriting Agreement is executed in
connection with the offerings and will end on the last business day in July
2000. The next offering period will commence on the first business day in August
2000, and subsequent offering periods will commence as designated by the Plan
Administrator.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (February 1 or August 1 each year). Individuals who
become eligible employees after the start date of the offering period may join
the Purchase Plan on any subsequent semi-annual entry date within that period.
Payroll deductions may not exceed 15% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll deductions
will be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date (the last business day in January and July each year),
at a purchase price per share not less than eighty-five percent (85%) of the
lower of (i) the fair market value of the Common Stock on the participant's
entry date into the offering period or (ii) the fair market value on the
semi-annual purchase date. In no event, however, may any participant purchase
more than 1,000 shares, nor may all participants in the aggregate purchase more
than 187,500 shares on any one semi-annual purchase date. Should the fair market
49
<PAGE> 52
value of the Common Stock on any semi-annual purchase date be less than the fair
market value of the Common Stock on the first day of the offering period, then
the current offering period will automatically end and a new offering period
will begin, based on the lower fair market value.
The Board may amend or modify the Purchase Plan following any semi-annual
purchase date. The Purchase Plan will terminate on the last business day in July
2008, unless sooner terminated by the Board.
CERTAIN TRANSACTIONS
In February 1997, the Company issued 50,000 shares of Common Stock to Mr.
Mina, the Company's Senior Vice President and Chief Financial Officer, as a
bonus in connection with the commencement of Mr. Mina's employment with the
Company.
Pursuant to a Registration Rights Agreement dated as of July 17, 1998 (the
"Registration Rights Agreement") by and among the Company and Messrs. Simonian,
Akilian and Weinzierl, the Company has agreed to provide such stockholders with
certain rights to include their respective shares of Common Stock in any
Company-initiated registered offering of shares of Common Stock ("piggyback
rights"). In addition, under the Registration Rights Agreement, beginning 180
days after the date of this Prospectus, such stockholders have the right,
subject to certain conditions and limitations, to require the Company to file up
to six registration statements under the Securities Act covering all or part of
such stockholders' shares of Common Stock. The Company has agreed to bear
substantially all expenses associated with offerings by such stockholders under
the Registration Rights Agreement, other than underwriting commissions and
discounts attributable to sales by such stockholders. The Company and each such
stockholder have agreed to indemnify the others from certain liabilities which
may arise in connection with any offering made pursuant to the Registration
Rights Agreement.
Since the beginning of the Company's 1997 fiscal year, Wildfire
Communications, Inc. ("Wildfire") has purchased approximately $111,400 of the
Company's products. Robert G. Mechaley, a nominee to become a director of the
Company, is the President and Chief Executive Officer and a director of
Wildfire.
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors on the Board of Directors, and will continue to be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
50
<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1998, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, director-nominees and Named
Officers, (iii) all current executive officers, directors and director-nominees
as a group, and (iv) each of the other Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERINGS(1) NUMBER OFFERINGS(1)(2)
------------------------ OF SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
---------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Samuel S. Simonian(3)........... 13,037,000(4) 31.9% 500,000 12,537,000(4) 28.0%
Elie S. Akilian(3).............. 13,134,000(5) 32.1 500,000 12,634,000(5) 28.2
Mark A. Weinzierl(3)............ 13,057,500 31.9 500,000 12,557,500 28.1
William H. Mina................. 193,000(6) * 50,000 143,000(6) *
Robert G. Mechaley, Jr.......... 0 -- 0 0 *
All executive officers,
directors and
director-nominees as a
group (five persons).......... 39,421,500(7) 96.2 1,550,000 37,871,500(7) 84.5
Other Selling Stockholders:
Brandenburg Life Foundation... 15,000 * 1,000 14,000 *
Pierce Brockman............... 280,000 * 120,000 160,000 *
Chad Harper................... 40,000 * 20,000 20,000 *
Roy Henke..................... 40,000 * 25,000 15,000 *
Steve Holcomb................. 40,000 * 29,000 11,000 *
Mike Reiman................... 280,000 * 120,000 160,000 *
Gary Ruwaldt.................. 131,580 * 13,130 118,450 *
George Zahar.................. 400,000 * 30,000 370,000 *
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission under Rule 13d-3(d)(i). In computing the
number of shares beneficially owned by a person and the percentage ownership
of that person, shares of Common Stock subject to options held by that
person that are currently exercisable or become exercisable within 60 days
following June 30, 1998 are deemed outstanding. However, such shares are not
deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated in the footnotes to this table,
the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) Assumes no exercise of the Underwriters' over-allotment options.
(3) The address for such stockholder is 1255 W. 15th Street, Suite 600, Plano,
Texas 75075.
(4) Includes 264,000 shares held by such stockholder's minor children.
(5) Includes 176,000 shares held by such stockholder's minor children.
(6) Includes 110,000 shares purchasable upon the exercise of options and 33,000
shares held jointly by such stockholder and his spouse.
(7) Includes 110,000 shares purchasable upon the exercise of options. See notes
(4), (5) and (6) above.
The Company will pay all costs and expenses of the offerings, other than
the underwriting discount relating to shares sold by the Selling Stockholders,
the fees and disbursements of legal counsel and other advisors to the Selling
Stockholders and stock transfer and other taxes attributable to the sale of
shares by the Selling Stockholders which will be borne by the Selling
Stockholders.
51
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 175,000,000 shares
of Common Stock, par value $0.001 per share, and 25,000,000 shares of Preferred
Stock, par value $0.001 per share ("Preferred Stock"). The following summary is
qualified in its entirety by reference to the Company's Certificate of
Incorporation and Bylaws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. In
addition, the Company's revolving credit facility restricts the payment of cash
dividends without the bank's consent. See "Dividend Policy". In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued in the
offerings will be fully paid and nonassessable.
As of June 30, 1998, there were outstanding 40,880,580 shares of Common
Stock and options to purchase 1,991,000 shares of Common Stock. Upon completion
of the offerings, 44,722,450 shares of Common Stock (45,584,950 shares if the
Underwriters' over-allotment options are exercised in full) will be outstanding,
assuming no exercise of options after June 30, 1998.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. No shares of Preferred Stock are outstanding, and the
Company has no current plans to issue any shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 ("Section 203") of the Delaware
General Corporation Law (the "DGCL") which subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
52
<PAGE> 55
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder, (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder, or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of the Company or an unsolicited acquisition proposal that a stockholder
might consider favorable, including a proposal that might result in the payment
of a premium over the market price for the shares held by stockholders. These
provisions are summarized in the following paragraphs.
CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation and Bylaws
provide, beginning with the first annual meeting of stockholders following the
offerings, for the Board of Directors to be divided into three classes of
directors serving staggered, three-year terms. The classification of the Board
of Directors has the effect of requiring at least two annual stockholder
meetings, instead of one, to replace a majority of the members of the Board of
Directors.
SUPERMAJORITY VOTING. The Certificate of Incorporation requires the
approval of the holders of at least 66 2/3% of the Company's combined voting
power to effect certain amendments to the Certificate of Incorporation. The
Bylaws may be amended by either (a) a majority of the Board of Directors or (b)
the holders of a majority of the Company's voting stock, provided that certain
amendments approved by stockholders require the approval of at least 66 2/3% of
the Company's combined voting power.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK. The Company's
authorized capital stock consists of 175,000,000 shares of Common Stock and
25,000,000 shares of Preferred Stock. No Preferred Stock will be designated upon
consummation of the offerings. After the offerings, the Company will have
outstanding 44,722,450 shares of Common Stock (45,584,950 shares if the
Underwriters' over-allotment options are exercised in full). The authorized but
unissued (and in the case of Preferred Stock, undesignated) stock may be issued
by the Board of Directors in one or more transactions. In this regard, the
Company's Certificate of Incorporation grants the Board of Directors broad power
to establish the rights and preferences of authorized and unissued Preferred
Stock. The issuance of shares of Preferred Stock pursuant to the Board of
Directors' authority described above could decrease the amount of earnings and
assets available for distribution to holders of Common Stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of the
53
<PAGE> 56
Company. The Board of Directors does not currently intend to seek stockholder
approval prior to any issuance of Preferred Stock, unless otherwise required by
law.
SPECIAL MEETINGS OF STOCKHOLDERS. The Bylaws provide that special meetings
of stockholders of the Company may be called only by the Board of Directors, or
by the Company's Chairman of the Board, President or Chief Executive Officer.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation
and the Bylaws provide that an action required or permitted to be taken at any
annual or special meeting of the stockholders of the Company may only by taken
at a duly called annual or special meeting of stockholders. This provision
prevents stockholders from initiating or effecting any action by written
consent, and thereby taking actions opposed by the Board of Directors.
NOTICE PROCEDURES. The Bylaws establish advance notice procedures with
regard to all stockholder proposals, including proposals entered relating to the
nomination of candidates for election as directors, the removal of directors and
amendments to the Certificate of Incorporation or Bylaws to be brought before
meetings of stockholders of the Company. These procedures provide that notice of
such stockholder proposals must be timely given in writing to the Secretary of
the Company prior to the meeting. Generally, to be timely, notice must be
received by the Secretary of the Company not more than 60 days nor less than 10
days prior to the meeting. The notice must contain certain information specified
in the Bylaws.
LIMITATION OF DIRECTOR LIABILITY. The Certificate of Incorporation limits
the liability of directors of the Company (in their capacity as directors but
not in their capacity as officers) to the Company or its stockholders to the
fullest extent permitted by the DGCL. Specifically, directors of the Company
will not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, which relates to unlawful
payments of dividends or unlawful stock repurchases or redemptions, or (iv) for
any transaction from which the director derived an improper personal benefit.
INDEMNIFICATION ARRANGEMENTS. The Certificate of Incorporation and Bylaws
require the directors and officers of the Company to be indemnified and permit
the advancement to them of expenses in connection with actual or threatened
proceedings and claims arising out of their status as such, to the fullest
extent permitted by the DGCL. Prior to consummation of the offerings, the
Company will enter into indemnification agreements with each of its directors
and executive officers that provide for indemnification and expense advancement
to the fullest extent permitted under the DGCL.
OTHER ANTI-TAKEOVER PROVISIONS
See "Management -- 1998 Stock Option/Stock Issuance Plan" for a discussion
of certain provisions of the 1998 Plan which may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas
75201, telephone: (214) 965-2235.
54
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offerings, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and impair the Company's ability
to raise capital through the sale of equity securities.
Upon completion of the offerings, the Company will have outstanding
44,722,450 shares of Common Stock (45,584,950 shares if the Underwriters'
over-allotment options are exercised in full), assuming no exercise of options
after June 30, 1998. Of these shares, the 5,750,000 shares offered hereby
(6,612,500 shares if the Underwriters' over-allotment options are exercised in
full) will be freely tradable without restriction or further registration under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 38,972,450 shares
of Common Stock outstanding upon completion of the offerings will be "restricted
securities" as that term is defined in Rule 144.
Upon the expiration of the Lock-Up Agreements beginning 180 days after the
date of this Prospectus, 37,871,500 shares held by certain stockholders of the
Company will become eligible for sale pursuant to the volume limitations, manner
of sale and notice requirements of Rule 144 and 1,191,950 shares held by certain
other stockholders of the Company will become eligible for sale without regard
to the volume limitations, manner of sale and notice requirements of Rule 144.
In addition, as of June 30, 1998, there were outstanding options to purchase an
aggregate of 1,991,000 shares of Common Stock. Pursuant to the lock-up
provisions set forth in the stock option agreements used under the Company's
1995 Employee Stock Option Plan, 1,097,000 shares underlying such options will
become eligible for sale pursuant to Rule 701 beginning 180 days after the date
of this Prospectus, and the remaining 894,000 shares underlying such options
will become eligible for sale pursuant to Rule 701 more than 180 days after the
date of this Prospectus as such options vest.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased from the
Company (or any affiliate thereof) at least one year previously, is entitled to
sell in "brokers' transactions" or to market makers, within any three-month
period commencing 90 days after the date of this Prospectus, a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of Common Stock (approximately 447,000 shares immediately after the
offerings, or approximately 456,000 shares if the Underwriters' over-allotment
options are exercised in full) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks preceding the date on which the
required notice of such sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are generally subject to the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who owns shares that were purchased from the Company (or
any affiliate thereof) at least two years previously and who has not been an
affiliate of the Company at any time during the 90 days preceding a sale, would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitations or manner of sale, public information or notice requirements of Rule
144. Under Rule 701, persons who purchase shares from the Company upon exercise
of options granted prior to the date of this Prospectus are entitled to sell
such shares in the public markets commencing 90 days after the date of this
Prospectus in reliance on Rule 144 without having to comply with the holding
period requirements thereof and, in the case of non-affiliates of the Company,
without having to comply with the volume limitations or public information or
notice requirements thereof.
Within 90 days after the date of this Prospectus, the Company intends to
file registration statements under the Securities Act covering the shares of
Common Stock reserved for issuance under the Company's stock incentive plans and
not eligible for sale pursuant to Rule 701. See "Management -- 1998 Stock
Option/Stock Issuance Plan" and "-- Employee Stock Purchase Plan". Such
registration statements will become effective upon filing, thus permitting the
resale of
55
<PAGE> 58
such shares in the public markets without restriction under the Securities Act
subject, however, to applicable lock-up arrangements and limitations applicable
to affiliates.
Commencing 180 days after the date of this Prospectus, the holders of
37,728,500 shares of Common Stock will be entitled to certain "piggyback" and
demand registration rights under the Securities Act with respect to such shares.
Such rights are scheduled to expire not later than October 2003. See "Certain
Transactions".
56
<PAGE> 59
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain anticipated United States
federal income tax consequences of the purchase, ownership and disposition of
the Common Stock by a "Non-U.S. Holder". A Non-U.S. Holder is a person that, for
U.S. federal income tax purposes, (i) is not a "U.S. person," (ii) is not, and
has not been, engaged in a U.S. trade or business, (iii) is not subject to tax
pursuant to provisions of U.S. tax laws applicable to certain former U.S.
citizens or residents and (iv) in the case of an individual, is not present in
the U.S. for 183 days or more during the relevant tax year of the ownership and
disposition of the Common Stock. A U.S. person means a citizen or resident of
the U.S. for U.S. federal income tax purposes, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any state thereof, an estate the income of which is subject to U.S. federal
income taxation regardless of its source, or a trust that meets the following
two tests: (A) a U.S. court is able to exercise primary supervision over the
administration of the trust, and (B) one or more U.S. persons have the authority
to control all substantial decisions of the trust.
The following discussion does not consider specific facts and circumstances
that may be relevant to the taxation of a particular Non-U.S. Holder.
Specifically, this discussion does not address the U.S. tax consequences to any
person who might own, or be considered as owning under certain attribution
rules, 5% or more of the outstanding shares of the Common Stock or who acquired
or holds Common Stock other than for investment.
The discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), judicial decisions, administrative pronouncements, and existing
and proposed Treasury Regulations issued by the U.S. Department of the Treasury
now in effect. Each prospective investor should understand that future
legislative, administrative and judicial changes could modify the tax
consequences described below, possibly with retroactive effect. The following
discussion is limited to U.S. federal income tax consequences and does not
address any state, local or non-U.S. consequences of the purchase, ownership and
disposition of the Common Stock.
EACH NON-U.S. HOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMMON STOCK, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL AND NON-U.S. TAX LAWS AND PROPOSED CHANGES IN
APPLICABLE LAWS.
DIVIDENDS
The Company does not anticipate paying a dividend to stockholders in the
foreseeable future. In the event a dividend is paid by the Company, the payment
will be a taxable dividend for U.S. federal income tax purposes to the extent of
the current or accumulated earnings and profits of the Company. Each Non-U.S.
Holder who receives a taxable dividend will be subject to withholding of U.S.
federal income tax equal to 30% of the taxable dividend unless such Non-U.S.
Holder is eligible for a reduced tax rate or tax exemption under an applicable
income tax treaty.
Currently, for purposes of determining whether tax is to be withheld at the
30% rate or at a reduced treaty rate, the Company will ordinarily presume that
dividends paid to an address in a foreign country are paid to a resident of such
country absent knowledge that such presumption is not warranted. Under the Final
Regulations (defined below) effective for payments made after December 31, 1999,
Non-U.S. Holders will be required to satisfy certain applicable certification
requirements to claim treaty benefits. Other recently adopted Treasury
Regulations provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty, dividends paid to a Non-U.S.
Holder that is an entity should be treated as paid to the entity or those
holding an interest in that entity.
57
<PAGE> 60
GAIN ON DISPOSITIONS
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on gain realized on the sale or exchange of Common Stock.
FEDERAL ESTATE TAXES
Common Stock held by an individual Non-U.S. Holder at the date of his or
her death will be included in his or her gross estate for United States federal
estate tax purposes unless an applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to and the tax withheld, if any, with respect to such
holder. These information reporting requirements apply regardless of whether
withholding was reduced by an applicable tax treaty. Copies of these information
returns may also be available to tax authorities in other jurisdictions under
the provisions of a specific treaty or agreement with such tax authorities in
the country in which the Non-U.S. Holder resides.
DISPOSITIONS OF COMMON STOCK
The payment of the proceeds from the disposition of shares of Common Stock
through the U.S. office of a broker will be subject to information reporting and
backup withholding unless the holder, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. Generally, the payment of the proceeds from the disposition of shares
of Common Stock to or through a non-U.S. office of a broker will not be subject
to backup withholding and will not be subject to information reporting. In the
case of the payment of proceeds from the disposition of shares of Common Stock
through a non-U.S. office of a broker that is a U.S. person or a U.S.-related
person (as defined by U.S. tax laws) information reporting (but not backup
withholding) is required on the payment unless the broker has documentary
evidence in its files of the holder's Non-U.S. Holder status and has no actual
knowledge to the contrary.
Any amounts withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a credit against such holder's U.S. federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS. Non-U.S. Holders should consult
their tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom and the procedures for
obtaining such an exemption, if available.
On October 6, 1997, the U.S. Department of the Treasury issued final
Treasury Regulations (the "Final Regulations") regarding the withholding and
information reporting rules. The Final Regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules. The
Final Regulations generally do not alter the substantive withholding and
information reporting requirements, but rather unify current certification
procedures and forms and clarify reliance standards. PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE EFFECT TO THEM, IF ANY,
OF THE FINAL REGULATIONS.
58
<PAGE> 61
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Brobeck, Phleger & Harrison LLP, Austin,
Texas. Certain legal matters in connection with the offerings will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1995,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules to the Registration Statement. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. Statements contained in
this Prospectus concerning the contents of any contract or any other document
are not necessarily complete; reference is made in each instance to the copy of
such contract or any other document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048 after payment of fees
prescribed by the Commission. The Commission also maintains a Web site which
provides online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
59
<PAGE> 62
INET TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (Unaudited)............................. F-3
Consolidated Statements of Income for the Years ended
December 31, 1995, 1996, and 1997 and the Six Months ended
June 30, 1997 and 1998 (Unaudited)........................ F-4
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1995, 1996 and 1997 and the Six
Months ended June 30, 1998 (Unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996, and 1997 and the Six Months ended
June 30, 1997 and 1998 (Unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Inet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Inet
Technologies, Inc. (the Company), as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inet
Technologies, Inc. at December 31, 1996 and 1997, and the consolidated results
of its operations and its cash flows for the three years then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
------------------------------------
Dallas, Texas
February 17, 1998
except for Note 1,
as to which the date is
July 23, 1998
F-2
<PAGE> 64
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 742 $ 3,386 $20,482
Trade accounts receivable, net of allowance for doubtful
accounts of $50,000 and $500,000 at December 31, 1996
and 1997, respectively, and $663,000 at June 30,
1998.................................................. 13,236 15,832 11,438
Unbilled receivables..................................... 3,413 5,355 2,208
Inventories.............................................. 6,513 6,963 7,279
Other current assets..................................... 304 1,565 1,508
------- ------- -------
Total current assets............................. 24,208 33,101 42,915
Property and equipment, net................................ 2,893 5,162 6,194
Other assets............................................... 4 45 74
------- ------- -------
Total assets..................................... $27,105 $38,308 $49,183
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,434 $ 1,329 $ 1,814
Accrued compensation and benefits........................ 1,076 2,237 2,042
Foreign sales commissions payable........................ 881 256 425
Deferred revenue......................................... 2,339 3,271 6,512
Deferred income taxes.................................... 773 759 118
Other accrued liabilities................................ 604 959 1,325
------- ------- -------
Total current liabilities........................ 9,107 8,811 12,236
Deferred tax liabilities................................... 34 111 95
Note payable............................................... 1,350 -- --
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 25,000,000
Issued shares -- None................................. -- -- --
Common stock, $.001 par value:
Authorized shares -- 175,000,000
Issued shares -- 40,850,422 and 40,900,422 at December
31, 1996 and 1997, respectively, and 40,919,422 at
June 30, 1998....................................... 41 41 41
Additional paid-in capital............................... 372 430 1,228
Unearned compensation.................................... -- -- (580)
Retained earnings........................................ 16,418 29,132 36,380
Treasury stock, 38,842 common shares at December 31, 1996
and 1997 and June 30, 1998, at cost................... (217) (217) (217)
------- ------- -------
Total stockholders' equity....................... 16,614 29,386 36,852
------- ------- -------
Total liabilities and stockholders' equity....... $27,105 $38,308 $49,183
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 65
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................. $17,531 $42,041 $57,701 $25,090 $34,165
Cost of revenues......................... 4,305 11,138 12,579 5,196 7,693
------- ------- ------- ------- -------
Gross profit................... 13,226 30,903 45,122 19,894 26,472
Operating expenses:
Sales and marketing expenses........... 2,699 5,566 7,069 4,015 3,563
General and administrative expenses.... 4,323 7,530 14,181 6,045 9,084
Research and development expenses...... 3,965 4,519 4,776 2,284 3,032
------- ------- ------- ------- -------
10,987 17,615 26,026 12,344 15,679
------- ------- ------- ------- -------
Income from operations......... 2,239 13,288 19,096 7,550 10,793
Other income (expense):
Interest income........................ 75 20 147 49 322
Interest expense....................... (6) (42) (123) (44) --
Other.................................. (5) (6) (8) 2 --
------- ------- ------- ------- -------
Other income (expense), net.............. 64 (28) 16 7 322
------- ------- ------- ------- -------
Income before provision for
income taxes................. 2,303 13,260 19,112 7,557 11,115
Provision for income taxes............... 644 4,324 6,398 2,530 3,867
------- ------- ------- ------- -------
Net income..................... $ 1,659 $ 8,936 $12,714 $ 5,027 $ 7,248
======= ======= ======= ======= =======
Basic net income per common share........ $ 0.04 $ 0.22 $ 0.31 $ 0.12 $ 0.18
======= ======= ======= ======= =======
Diluted net income per common share...... $ 0.04 $ 0.22 $ 0.30 $ 0.12 $ 0.17
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 66
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------- PAID-IN UNEARNED RETAINED --------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS SHARES AMOUNT EQUITY
---------- ------ ---------- ------------ -------- ------ ------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.. 39,250,422 $39 $ 109 $ -- $ 5,823 -- $ -- $ 5,971
Net income.................. -- -- -- -- 1,659 -- -- 1,659
---------- --- ------ ----- ------- ------ ----- -------
Balance at December 31, 1995.. 39,250,422 39 109 -- 7,482 -- -- 7,630
Issuance of common stock
upon exercise of employee
stock options............ 1,600,000 2 2 -- -- -- -- 4
Income tax benefit from
exercise of employee
stock options............ -- -- 261 -- -- -- -- 261
Purchase of common stock of
the Company.............. -- -- -- -- -- 38,842 (217) (217)
Net income.................. -- -- -- -- 8,936 -- -- 8,936
---------- --- ------ ----- ------- ------ ----- -------
Balance at December 31, 1996.. 40,850,422 41 372 -- 16,418 38,842 (217) 16,614
Issuance of common stock.... 50,000 -- 58 -- -- -- -- 58
Net income.................. -- -- -- -- 12,714 -- -- 12,714
---------- --- ------ ----- ------- ------ ----- -------
Balance at December 31, 1997.. 40,900,422 41 430 -- 29,132 38,842 (217) 29,386
Issuance of common stock
(unaudited).............. 19,000 -- 106 -- -- -- -- 106
Net income (unaudited)...... -- -- -- -- 7,248 -- -- 7,248
Stock option compensation
(unaudited).............. -- -- 692 (580) -- -- -- 112
---------- --- ------ ----- ------- ------ ----- -------
Balance at June 30, 1998
(unaudited)................. 40,919,422 $41 $1,228 $(580) $36,380 38,842 $(217) $36,852
========== === ====== ===== ======= ====== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 67
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 1,659 $ 8,936 $12,714 $ 5,027 $ 7,248
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 602 1,038 1,521 632 1,139
Deferred income taxes.................. 12 857 63 -- (848)
Stock option compensation expense...... -- -- -- -- 112
Tax benefit of employee stock
options............................. -- 261 -- -- --
Change in assets and liabilities:
(Increase) decrease in trade
accounts receivable............... (2,388) (5,891) (2,596) 1,952 4,394
(Increase) decrease in unbilled
receivables....................... -- (3,413) (1,942) (511) 3,147
(Increase) decrease in
inventories....................... (7,988) 2,222 (450) (792) (316)
(Increase) decrease in other
assets............................ (234) 176 (1,303) (3,953) 219
Increase (decrease) in accounts
payable........................... 633 2,057 (2,105) (1,331) 485
Increase (decrease) in accrued
compensation and benefits......... 274 633 1,161 345 (195)
Increase (decrease) in foreign sales
commissions payable............... 125 733 (624) (698) 169
Increase (decrease) in deferred
revenue........................... 7,861 (5,809) 932 258 3,241
Increase in accrued liabilities..... 203 43 355 55 366
------- ------- ------- ------- -------
Net cash provided by operating
activities............................. 759 1,843 7,726 984 19,161
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (1,044) (2,119) (3,790) (1,496) (2,171)
------- ------- ------- ------- -------
Net cash used in investing activities.... (1,044) (2,119) (3,790) (1,496) (2,171)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of stock option exercises....... -- 4 -- -- --
Treasury stock purchase.................. -- (217) -- -- --
Issuance of common stock................. -- -- 58 58 106
Payments of note payable................. (400) (3,400) (7,068) (2,950) --
Proceeds from note payable............... 700 4,450 5,718 3,900 --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................. 300 837 (1,292) 1,008 106
------- ------- ------- ------- -------
Net increase in cash and cash
equivalents............................ 15 561 2,644 496 17,096
Cash and cash equivalents at beginning of
period................................. 166 181 742 742 3,386
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period................................. $ 181 $ 742 $ 3,386 $ 1,238 $20,482
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid............................ $ 6 $ 42 $ 123 $ 44 $ --
======= ======= ======= ======= =======
Income taxes paid........................ $ 409 $ 3,511 $ 6,390 $ 5,480 $ 3,925
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 68
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Inet Technologies, Inc. (the "Company") provides solutions that enable
telecommunications carriers to more effectively design, deploy, diagnose,
monitor and manage communications networks that carry signaling information used
to manage telephone calls. The Company's products also address the fundamental
business needs of telecommunications carriers, such as improved billing,
targeted sales and marketing, fraud prevention and enhanced call routing. The
Company provides these comprehensive solutions primarily through its GeoProbe
and Spectra product offerings.
In connection with its planned initial public offering, in July 1998 the
Company changed its state of incorporation from Texas to Delaware (the
"Reincorporation"), also changing its name from Inet, Inc. to Inet Technologies,
Inc. With the Reincorporation, the Company effected a change in par value of the
Company's common stock from no par value to $.001 par value, an increase in
authorized common stock from 25,000,000 to 175,000,000 shares and created a
preferred class of stock with 25,000,000 authorized shares. Also in July 1998,
the Company's Board of Directors approved a ten-for-one split of the Company's
common stock to be paid as a stock dividend on July 23, 1998, to shareholders of
record on July 23, 1998. The accompanying financial statements have been
retroactively restated to reflect these actions including the effect of the
stock split on all applicable share and per share amounts. In connection with
these actions the treasury shares held at June 30, 1998 will be retired.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements as of
June 30, 1998 and for the six months ended June 30, 1997 and 1998 have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Rule 10-01 of Securities and Exchange Commission
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. They do reflect all adjustments (consisting only of normal
recurring entries) which, in the opinion of the Company's management, are
necessary for a fair presentation of the results for the interim periods
presented.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for any other interim
period or for the full year.
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.
F-7
<PAGE> 69
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of standard cost, which approximates
actual cost determined on a first-in, first-out basis, or market. Inventories
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Raw materials............................................ $3,603 $3,401 $2,969
Work-in-process.......................................... 2,077 1,940 2,355
Finished goods........................................... 833 1,622 1,955
------ ------ ------
$6,513 $6,963 $7,279
====== ====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization and are depreciated on a straight-line basis over their estimated
useful lives, as follows:
<TABLE>
<S> <C>
Computers and other equipment....................... 3-5 Years
Software............................................ 3 Years
Office furniture and fixtures....................... 7 Years
Leasehold improvements.............................. Term of lease
</TABLE>
DEFERRED REVENUE
Deferred revenue primarily represents amounts billed to customers under
terms specified in contracts in which completion of contractual terms or
delivery of the product has not occurred and revenue is not yet recognized.
RESEARCH AND DEVELOPMENT EXPENDITURES
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility has been established, at which time subsequent costs are capitalized
until the product is available for general release to customers. To date, either
the establishment of technological feasibility of the Company's products and
their general release have substantially coincided 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 the Company has not capitalized any software development
costs. Research and development expenditures are charged to expense in the
period incurred.
REVENUE RECOGNITION
Revenue is generally recognized in the period the Company has completed
substantially all manufacturing and/or software development to customer
specifications, factory testing has been completed, and the product has been
shipped. However, when the Company has significant obligations subsequent to
shipment (i.e., installation and system integration), revenue is recognized when
the system has been delivered, installed at the customer's premises, and there
are no remaining significant obligations. Unbilled receivables represent revenue
recognized but not billable pursuant to the individual contract until formal
customer acceptance. Formal customer acceptance generally has been received
within 60 days of installation.
F-8
<PAGE> 70
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Position (SOP) 97-2, Software Revenue Recognition, which did not require a
significant change to the Company's revenue recognition policies.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for its
employee stock options. Under APB 25, if the exercise price of an employee's
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade accounts receivable. The
Company sells products and services to customers associated with the
telecommunications industry, both within the United States and internationally.
The Company continually evaluates the creditworthiness of its customers'
financial condition and generally does not require collateral. The Company has
not experienced significant losses on uncollectible accounts.
RISKS AND UNCERTAINTIES
The Company's future results of operations and financial condition could be
impacted by the following factors, among others: timely introduction of new
products by the Company, market acceptance of new products introduced by the
Company, trends in the telecommunications industry, intense customer
competition, and changes in the terms and conditions of its customer sales
contracts.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
Statement 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements, and was effective for the Company beginning January 1,
1998. For all periods presented, the Company had no components of comprehensive
income other than net income.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
In 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
F-9
<PAGE> 71
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reports issued to shareholders. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and will be
adopted by the Company in connection with its 1998 annual financial statements.
The adoption of Statement 131 will have no impact on the Company's consolidated
results of operations, financial condition, or cash flows. The Company operates
in a single business segment and has no significant long-lived assets deployed
outside the United States. As a result, Company disclosures required in the
future will consist of that portion of its revenues attributed to foreign
countries.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
Computer and other equipment............................ $4,019 $5,664 $ 7,052
Software................................................ 624 2,049 2,683
Office furniture, fixtures, and leasehold
improvements.......................................... 641 1,311 1,460
------ ------ -------
5,284 9,024 11,195
Less accumulated depreciation and amortization.......... 2,391 3,862 5,001
------ ------ -------
$2,893 $5,162 $ 6,194
====== ====== =======
</TABLE>
3. NOTE PAYABLE
The Company has had available a line of credit facility with a bank
providing for borrowings of up to $10,000,000. This line of credit facility was
renewed effective June 15, 1998, and extended through June 15, 2000. In
connection with the renewal and extension, the per annum useage fee on unused
portions of the line was reduced from 1/4% to 1/8%. At December 31, 1997,
$369,646 was used to support letters of credit under this line. Borrowings under
this facility bear interest payable quarterly at LIBOR plus 1.5% (7.47% at
December 31, 1997) and are collateralized by the Company's accounts receivable,
inventories, and property and equipment. The credit facility includes covenants
requiring the Company to maintain certain financial ratios and restricts the
payment of cash dividends without the bank's consent. At June 30, 1998, no
amounts were outstanding under the credit facility, and the amount available to
the Company, after considering outstanding letters of credit, was $9.4 million.
An additional $563,172 of letters of credit were outstanding at another
bank at December 31, 1997, which are collateralized by an equal amount of the
Company's cash balances.
F-10
<PAGE> 72
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1995 1996 1997 1997 1998
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Current federal provision................ $556 $3,222 $5,706 $2,256 $4,431
Current state provision.................. 75 245 616 244 285
Deferred federal expense (benefit)....... 13 857 (82) (32) (698)
Current foreign provision................ -- -- 13 5 --
Deferred state expense................... -- -- 145 57 (151)
---- ------ ------ ------ ------
Total income tax provision..... $644 $4,324 $6,398 $2,530 $3,867
==== ====== ====== ====== ======
</TABLE>
The provision for income taxes is reconciled with the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- -----------------
1995 1996 1997 1997 1998
----- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Provision computed at federal statutory
rate................................. $ 783 $4,508 $6,689 $2,646 $3,890
Utilization of research and development
tax credits.......................... (186) (63) (305) (121) (46)
Foreign Sales Corporation income
exemption............................ (43) (287) (500) (198) (329)
State income taxes, net of federal tax
effect............................... 50 162 481 190 282
Other.................................. 40 4 33 13 70
----- ------ ------ ------ ------
$ 644 $4,324 $6,398 $2,530 $3,867
===== ====== ====== ====== ======
</TABLE>
The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1996 1997 1998
----- ------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred revenue....................................... $(869) $(1,524) $ (951)
Depreciation........................................... (34) (62) (46)
Other, net............................................. (49) (49) (49)
----- ------- ------
Total deferred tax liabilities................. (952) (1,635) (1,046)
Deferred tax assets:
Reserves and other accrued expenses not currently
deductible for tax purposes......................... 145 765 1,024
----- ------- ------
Total deferred tax assets...................... 145 765 1,024
----- ------- ------
Deferred income tax liabilities, net of deferred income
tax assets............................................. $(807) $ (870) $ (22)
===== ======= ======
</TABLE>
F-11
<PAGE> 73
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases its corporate office facility as well as certain
equipment under noncancelable operating lease agreements. Rental expense for
these operating leases was $470,517, $586,588, and $867,893 in 1995, 1996, and
1997, respectively.
At December 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 772
1999........................................................ 575
2000........................................................ 4
------
$1,351
======
</TABLE>
6. STOCK OPTIONS
The Company has had an Employee Stock Option Plan (the "1995 Plan" or the
"Predecessor Plan" -- see below ) which provides for incentive options and
nonqualified options that may be granted to key employees, officers, directors,
and consultants of the Company. At December 31, 1997, the Company had reserved
6,000,000 shares of its common stock for issuance in connection with the 1995
Plan, which is administered by the Stock Option Committee of the Company's Board
of Directors (the "Committee"). Options have been granted generally at prices
not less than the fair value of the Company's common stock as determined by the
Committee at the dates of grant based upon consideration of several factors,
including valuation studies, the historical financial performance of the Company
and the industry in which it operates, the anticipated future financial
performance of the Company and the industry in which it operates, and the
historical and future anticipated market for the Company's common stock. Options
granted under the 1995 Plan vest at rates established by the Committee and
expire ten years after the date of grant. The exercisability of options granted
under the 1995 plan is also subject to various conditions as determined by the
Committee including, among other things, an initial public offering of the
Company's stock. Options granted in the first quarter of 1998 at $4.20 per share
had a fair market value of $5.57 per share, which will result in a total of
$692,000 compensation expense which will be recognized ratably over the vesting
period of three years beginning in the first quarter.
F-12
<PAGE> 74
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions for the years ended December 31, 1995, 1996, and
1997 and the six months ended June 30, 1998, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------------------------------------- JUNE 30,
1995 1996 1997 1998
--------------------- ---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ----------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period:.............. 1,620,000 $0.003 2,914,000 $ 0.27 1,220,000 $ 0.64 1,531,750 $0.80
Granted................... 1,435,000 0.60 145,000 0.96 381,750 1.31 506,000 4.20
Exercised................. -- -- (1,600,000) 0.003 -- -- -- --
Forfeited................. (141,000) 0.52 (239,000) 0.60 (70,000) 0.86 (46,750) 1.10
---------- ----------- ---------- ----------
Outstanding at end of
period.................. 2,914,000 0.27 1,220,000 0.64 1,531,750 0.80 1,991,000 1.66
========== =========== ========== ==========
Exercisable at end of
period.................. 1,600,000 0.003 -- -- -- -- -- --
========== =========== ========== ==========
Weighted-average fair
value of options granted
during the period....... $ 0.14 $ 0.19 $ 0.26 $ 2.12
========== =========== ========== ==========
</TABLE>
At December 31, 1997, 4,468,250 shares were available for future grants to
employees under the 1995 Plan.
Information related to options outstanding at December 31, 1997, is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED AVERAGE
OUTSTANDING AT REMAINING
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE
--------------- ----------------- ----------------
<S> <C> <C>
$0.60............................. 1,088,000 7.5
1.15............................. 423,750 9.0
4.20............................. 20,000 9.5
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994, under the
fair value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
no volatility and the following weighted-average assumptions for 1995, 1996 and
1997, respectively: risk-free interest rates of 7.79%, 6.33%, and 6.29%; no
dividends; and an expected life of 3.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. In addition,
because options vest over several years and additional option grants are
expected, the
F-13
<PAGE> 75
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effects of these hypothetical calculations are not likely to be representative
of similar future calculations.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for per share information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Pro forma net income.................................. $1,613 $8,863 $12,609
Pro forma net income per common share................. $ 0.04 $ 0.22 $ 0.31
Pro forma net income per common share -- assuming
dilution............................................ $ 0.04 $ 0.21 $ 0.30
</TABLE>
The Company's 1998 Stock Option/Stock Issuance Plan (the "1998 Plan") is
intended to serve as the successor equity incentive program to the Company's
existing 1995 Employee Stock Option Plan (the "Predecessor Plan"). The 1998 Plan
became effective on July 23, 1998 upon adoption by the Board of Directors and
was subsequently approved by the stockholders on July 23, 1998. Common Stock has
initially been authorized for issuance under the 1998 Plan in the amount of
6,750,000 shares. In addition, the share reserve will automatically be increased
on the last trading day of January each calendar year, beginning in January
2000, by a number of shares equal to one percent (1%) of the total number of
shares of Common Stock outstanding on the last trading day of the immediately
preceding calendar year, but no such annual increase shall exceed 500,000
shares. However, in no event may any one participant in the 1998 Plan receive
option grants or direct stock issuances for more than 1,000,000 shares in the
aggregate per calendar year.
Outstanding options under the Predecessor Plan will be incorporated into
the 1998 Plan upon the date of the offerings, and no further option grants will
be made under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, unless the Plan Administrator elects to extend
one or more features of the 1998 Plan to those options. However, except as
otherwise noted below, the outstanding options under the Predecessor Plan
contain substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the 1998 Plan.
The 1998 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price determined by
the Plan Administrator, (ii) the Stock Issuance Program under which such
individuals may, in the Plan Administrator's discretion, be issued shares of
Common Stock directly, through the purchase of such shares at a price determined
by the Plan Administrator or as a bonus tied to the performance of services and
(iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100% of
the fair market value of those shares on the grant date.
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on July 23, 1998 and approved by the
stockholders on July 23, 1998. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic
F-14
<PAGE> 76
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payroll deductions under the Purchase Plan. A reserve of 750,000 shares of
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the Underwriting Agreement is executed in
connection with the offerings and will end on the last business day in July
2000. The next offering period will commence on the first business day in August
2000, and subsequent offering periods will commence as designated by the Plan
Administrator.
7. OPERATIONS
The Company operates in a single industry segment and markets its products
through its sales personnel and certain foreign distributors. The distribution
of the Company's revenues as a percent of total revenues is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
United States........................... 67.7% 50.6% 47.4% 45.0% 50.5%
Export:
Asia-Pacific Region................... 16.4 15.7 17.4 10.3 9.1
Europe................................ 10.0 29.5 31.0 41.5 34.9
Other................................. 5.9 4.2 4.2 3.2 5.5
----- ----- ----- ----- -----
Total export sales............ 32.3 49.4 52.6 55.0 49.5
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
In 1995 and 1997, MCI and British Telecom individually accounted for
approximately 10% and 14%, respectively, of total revenues. No individual
customer accounted for 10% or more of total revenues in 1996. Sales to customers
in the United Kingdom accounted for 12.2% and 13.6% of total revenues during
1996 and 1997, respectively.
8. EMPLOYEE BENEFIT PROGRAM
The Company has a retirement savings plan structured under Section 401(k)
of the Internal Revenue Code (the "Code"). The plan covers substantially all
employees meeting minimum service requirements. Under the plan, employees may
elect to reduce their current compensation by up to 15%, subject to certain
maximum dollar limitations prescribed by the "Code", and have the amount
contributed to the plan as salary deferral contributions. The Company may make
contributions to the plan at the discretion of the Board of Directors. The
Company accrued a discretionary contribution to the plan totaling $233,242,
$700,291, and $1,040,164 in 1995, 1996, and 1997, respectively.
F-15
<PAGE> 77
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income for basic and
diluted earnings per
share...................... $ 1,659 $ 8,936 $ 12,714 $ 5,027 $ 7,248
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic
earnings per share --
weighted average shares.... 39,600,000 40,997,800 41,243,610 41,237,290 41,256,300
Effect of dilutive
securities:
Employee stock options..... 1,607,410 453,550 866,330 529,550 1,408,320
----------- ----------- ----------- ----------- -----------
Dilutive potential common
shares..................... 1,607,410 453,550 866,330 529,550 1,408,320
----------- ----------- ----------- ----------- -----------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed
conversion................. 41,207,410 41,451,350 42,109,940 41,766,840 42,664,620
=========== =========== =========== =========== ===========
Net income per common share.... $ 0.04 $ 0.22 $ 0.31 $ 0.12 $ 0.18
=========== =========== =========== =========== ===========
Net income per common
share -- assuming dilution... $ 0.04 $ 0.22 $ 0.30 $ 0.12 $ 0.17
=========== =========== =========== =========== ===========
</TABLE>
For additional disclosures regarding the employee stock options, see Note 6.
F-16
<PAGE> 78
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below, and each of such U.S. Underwriters, for whom Goldman,
Sachs & Co., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
("Dain Rauscher Wessels"), and Hambrecht & Quist LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Dain Rauscher Wessels.......................................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 4,600,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 1,150,000 shares of Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two offerings
are identical. The closing of the offering made hereby is a condition to the
closing of the international offering, and vice versa. The representatives of
the International Underwriters are Goldman Sachs International, Dain Rauscher
Wessels, and Hambrecht & Quist LLC.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell
U-1
<PAGE> 79
or deliver shares of Common Stock (a) in the United States or to any U.S.
persons or (b) to any person who it believes intends to reoffer, resell or
deliver the shares in the United States or to any U.S. Persons, and (ii) cause
any dealer to whom it may sell such shares at any concession to agree to observe
a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of the Prospectus to purchase up to an aggregate of 690,000
shares of Common Stock to cover over-allotments, if any. If the U.S.
Underwriters exercise their over-allotment option, the U.S. Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of the
U.S. Underwriters shown in the foregoing table bears to the 4,600,000 shares of
Common Stock offered. The Company has granted the International Underwriters a
similar option to purchase up to an aggregate of 172,500 additional shares of
Common Stock.
The Company and its stockholders have agreed, during the period beginning
from the date of this Prospectus and continuing to and including the date 180
days after the date of this Prospectus, not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities of the Company
(other than pursuant to employee stock incentive plans existing, or on the
conversion or exchange of convertible or exercisable securities outstanding, on
the date hereof) which are substantially similar to the shares of Common Stock
or which are convertible or exchangeable into shares of Common Stock or any
securities which are substantially similar to the shares of Common Stock,
without the prior written consent of Goldman, Sachs & Co. on behalf of the
Underwriters, except for the shares of Common Stock offered in connection with
the concurrent U.S. and international offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters have discretionary
authority to exceed five percent of the total number of shares of Common Stock
offered by them.
Prior to the offerings, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company, the Selling Stockholders and the representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price of the Common Stock, in addition to prevailing market conditions, are the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
In connection with the offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the offerings.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company and the Selling Stockholders in the offerings. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to broker-
dealers in respect of the securities sold in the offering may be reclaimed by
the Underwriters if such shares of Common Stock are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
U-2
<PAGE> 80
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "INTI", subject to official notice of issuance.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-3
<PAGE> 81
DESCRIPTION OF ARTWORK ON INSIDE BACK COVER
[Picture of an individual dressed in a business suit looking through a
free-standing, binocular viewer. In the upper left corner is the Company's
logo.]
Text:
Text at Upper Right Corner, Flush Right: "Inet's hardware and software solutions
help local, long distance and wireless telecommunications carriers worldwide
develop, deploy and optimize their intelligent networks and advanced services.
These solutions can
improve efficiency, increase profitability, manage fraud, test services and
evaluate network elements in the growing telecommunications market. Inet's
products help carriers and manufacturers see how operational changes impact
their customers. So they can manage their networks and their business better."
Text superimposed over middle of picture: "An eye for surveillance, a mind for
business"
<PAGE> 82
------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR THE SOLICITATION OF ANY OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 5
Use of Proceeds............................ 15
Dividend Policy............................ 15
Dilution................................... 16
Capitalization............................. 17
Selected Consolidated Financial Data....... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 28
Management................................. 44
Certain Transactions....................... 50
Principal and Selling Stockholders......... 51
Description of Capital Stock............... 52
Shares Eligible for Future Sale............ 55
Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders of
Common Stock............................. 57
Legal Matters.............................. 59
Experts.................................... 59
Additional Information..................... 59
Index to Consolidated Financial
Statements............................... F-1
Underwriting............................... U-1
</TABLE>
---------------------
UNTIL , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
5,750,000 SHARES
INET TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------------
[INET LOGO]
---------------------
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
------------------------------------------------------
------------------------------------------------------
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meaning assigned to them in the Prospectus which forms
a part of this Registration Statement.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 33,162
NASD filing fee............................................. 11,742
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 190,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 15,000
Miscellaneous............................................... 12,596
--------
Total............................................. $740,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 ("Section 145") of the DGCL empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made
with respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
such action, suit or proceeding referred
II-1
<PAGE> 84
to in subsections (a) and (b) of Section 145 or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that the indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights which the indemnified party may be
entitled; that indemnification provided by Section 145 shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of the director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Article VI of the registrant's Charter provides that, to the fullest extent
permitted by the DGCL as the same exists or as it may hereafter be amended, no
director of the registrant shall be personally liable to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 11.1 of the registrant's Bylaws further provides that the
registrant shall, to the maximum extent and in the manner permitted by the DGCL,
indemnify each of its directors and officers against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the registrant.
Prior to consummation of the offerings, the registrant will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the DGCL.
Prior to consummation of the offerings, the registrant intends to obtain
officers' and directors' liability insurance.
Reference is made to Section 9 of the Underwriting Agreements filed as
Exhibits 1.1 and 1.2 hereto, indemnifying the officers and directors of the
registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 1, 1995, the registrant has issued and sold or otherwise
transferred the below listed unregistered securities. These issuances were
deemed exempt from registration under the Securities Act in reliance on Rule 701
promulgated under the Securities Act or Section 4(2) of the Securities Act.
1. In March 1996, the registrant issued and sold 1,600,000 shares (net of
repurchases) of its Common Stock to employees for an aggregate purchase
price of $4,000 pursuant to exercises of options granted by the
registrant.
2. In February 1997, the registrant issued 50,000 shares of its Common
Stock to William H. Mina as a bonus in connection with the commencement
of his employment with the Company.
II-2
<PAGE> 85
3. The Company has from time to time granted stock options to employees.
The following table sets forth certain information regarding such
grants:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
July 1, 1995 through June 30, 1996.................... 50,000 $0.60
July 1, 1996 through June 30, 1997.................... 456,750 1.15
July 1, 1997 through the date hereof.................. 526,000 4.20
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Bylaws.
4.1 Specimen Common Stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and Bylaws of the registrant defining the
rights of holders of Common Stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Lease dated as of May 1, 1996 by and among Pitman Partners,
Ltd., Rosewood Property Company and the registrant.
10.2* Loan Agreement dated as of June 26, 1997 by and between
NationsBank of Texas, N.A. and the registrant.
10.3* Inet Technologies, Inc. 1998 Stock Option/Stock Issuance
Plan.
10.4* Form of Indemnification Agreement between the registrant and
each of its directors and executive officers.
10.5* Form of Registration Rights Agreement, dated as of July 17,
1998 by and among the registrant, Samuel S. Simonian, Elie
S. Akilian and Mark A. Weinzierl.
10.6* Renewal, Extension and First Amendment to Loan Agreement
entered into to be effective as of June 15, 1998 between the
Company and NationsBank, N.A.
10.7* Fourth Amendment to Office lease dated as of July 15, 1998
by and among Pitman Partners, Ltd., Rosewood Property
Company and the registrant.
10.8 Assumption and Modification Agreement, dated effective as of
July 16, 1998, between the registrant and NationsBank, N.A.
21.1* Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of attorney pursuant to which amendments to this
registration statement may be filed (included on the
signature page in Part II hereof).
27.1* Financial data schedule for the period ended June 30, 1998.
27.2* Financial data schedule for the period ended June 30, 1997.
27.3* Financial data schedule for the period ended December 31,
1997.
27.4* Financial data schedule for the period ended December 31,
1996.
27.5* Financial data schedule for the period ended December 31,
1995.
99.1* Consent of Robert G. Mechaley, Jr.
</TABLE>
- ---------------
* Previously filed.
II-3
<PAGE> 86
(b) Financial Statement Schedules:
The following financial statement schedule of the Company is included in
Part II of this registration statement:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors on Financial Statement
Schedule.................................................. S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or the Notes thereto.
ITEM 17. UNDERTAKINGS.
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the DGCL, the Certificate of Incorporation or the Bylaws
of the registrant, the Underwriting Agreement, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Plano,
State of Texas, on this 30th day of September, 1998.
INET TECHNOLOGIES, INC.
By: /s/ WILLIAM H. MINA
------------------------------------
William H. Mina
Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
SAMUEL S. SIMONIAN* President, Chief Executive September 30, 1998
- ----------------------------------------------------- Officer and Director
Samuel S. Simonian (principal executive
officer)
ELIE S. AKILIAN* Executive Vice President September 30, 1998
- ----------------------------------------------------- and Director
Elie S. Akilian
MARK A. WEINZIERL* Executive Vice President September 30, 1998
- ----------------------------------------------------- and Director
Mark A. Weinzierl
/s/ WILLIAM H. MINA Senior Vice President, September 30, 1998
- ----------------------------------------------------- Chief Financial Officer
William H. Mina and Director (principal
financial and accounting
officer)
</TABLE>
*By: /s/ WILLIAM H. MINA
-------------------------------
William H. Mina
Attorney-in-Fact
II-5
<PAGE> 88
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Inet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Inet
Technologies, Inc. (the Company) as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated February 17, 1998, except for Note 1, as to
which the date is July 23, 1998, (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
------------------------------------
Dallas, Texas
February 17, 1998
except for Note 1,
as to which the
date is July 23, 1998
S-1
<PAGE> 89
INET TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) YEAR
----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts --
Allowance for doubtful accounts............ $50 $ 58 $63 $ 45
=== ==== === ====
Year ended December 31, 1996:
Deducted from asset accounts --
Allowance for doubtful accounts............ $45 $ 12 $ 7 $ 50
=== ==== === ====
Year ended December 31, 1997:
Deducted from asset accounts --
Allowance for doubtful accounts............ $50 $452 $ 2 $500
=== ==== === ====
</TABLE>
- ---------------
(1) Activity includes uncollectible accounts written off, net of recoveries.
S-2
<PAGE> 90
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Bylaws.
4.1 Specimen Common Stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and Bylaws of the registrant defining the
rights of holders of Common Stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Lease dated as of May 1, 1996 by and among Pitman Partners,
Ltd., Rosewood Property Company and the registrant.
10.2* Loan Agreement dated as of June 26, 1997 by and between
NationsBank of Texas, N.A. and the registrant.
10.3* Inet Technologies, Inc. 1998 Stock Option/Stock Issuance
Plan.
10.4* Form of Indemnification Agreement between the registrant and
each of its directors and executive officers.
10.5* Form of Registration Rights Agreement, dated as of July 17,
1998 by and among the registrant, Samuel S. Simonian, Elie
S. Akilian and Mark A. Weinzierl.
10.6* Renewal, Extension and First Amendment to Loan Agreement
entered into to be effective as of June 15, 1998 between the
Company and NationsBank, N.A.
10.7* Fourth Amendment to office lease dated as of July 15, 1998
by and among Pitman Partners, Ltd., Rosewood Property
Company and the registrant.
10.8 Assumption and Modification Agreement, dated effective as of
July 16, 1998, between the registrant and NationsBank, N.A.
21.1* Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1* Power of attorney pursuant to which amendments to this
registration statement may be filed (included on the
signature page in Part II hereof).
27.1* Financial data schedule for the period ended June 30, 1998.
27.2* Financial data schedule for the period ended June 30, 1997.
27.3* Financial data schedule for the period ended December 31,
1997.
27.4* Financial data schedule for the period ended December 31,
1996.
27.5* Financial data schedule for the period ended December 31,
1995.
99.1* Consent of Robert G. Mechaley, Jr.
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 1.1
INET TECHNOLOGIES, INC.
COMMON STOCK, PAR VALUE $.001 PER SHARE
UNDERWRITING AGREEMENT
(U.S. VERSION)
_______________ ___, 1998
Goldman, Sachs & Co.,
Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated
Hambrecht & Quist LLC,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Inet Technologies, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of ______ shares and, at the election of the Underwriters, up to
________ additional shares of Common Stock, par value $.001 per share ("Stock"),
of the Company and the stockholders of the Company named in Schedule II hereto
(the "Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of ______ shares of Stock. The
aggregate of ________ shares to be sold by the Company and the Selling
Stockholders is herein called the "Firm Shares" and the ________ additional
shares to be sold by the Company are herein called the "Optional Shares." The
Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are herein collectively called the "Shares."
It is understood and agreed to by all parties that the Company and the
Selling Stockholders are concurrently entering into an agreement (the
"International Underwriting Agreement") providing for the sale by the Company
and the Selling Stockholders of up to a total of _______ shares of Stock (the
"International Shares"), including the overallotment option thereunder, through
arrangements with certain underwriters outside the United States (the
"International Underwriters"), for whom Goldman Sachs International is acting as
lead manager. Anything herein or therein to the contrary notwithstanding, the
respective closings under this Agreement and the International Underwriting
Agreement are hereby expressly made conditional on one another. The Underwriters
hereunder and the International Underwriters are simultaneously entering into an
Agreement between U.S. and International Underwriting Syndicates (the "Agreement
between Syndicates") which provides, among other things, for the transfer of
shares of Stock between the two syndicates. Two forms of prospectus are to be
used in connection with the offering and sale of shares of Stock contemplated by
the foregoing, one relating to the Shares hereunder and the other relating to
the International Shares. The latter form of prospectus will be identical to the
former except for certain substitute pages. Except as used in Sections 2, 3, 4,
9 and 11 herein, and except as the context may otherwise require, references
hereinafter to the Shares shall include all the shares of Stock which may be
sold pursuant to either this Agreement or the International Underwriting
Agreement, and references herein
<PAGE> 2
to any prospectus whether in preliminary or final form, and whether as amended
or supplemented, shall include both the U.S. and the international versions
thereof.
1. (a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-________)
(the "Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, for each of
the other Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission, except for the
registration statement on Form 8-A filed pursuant to the Securities Exchange Act
of 1934, as amended; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding for
that purpose has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary Prospectus"; the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and
deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective or such part of the
Rule 462(b) Registration Statement, if any, became or hereafter becomes
effective, each as amended at the time such part of the Initial Registration
Statement became effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein or by a
Selling Stockholder expressly for use in the preparation of the answers therein
to Items 7 and 11(m) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by a Selling Stockholder expressly for use in the preparation of the
answers therein to Items 7 and 11(m) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business
-2-
<PAGE> 3
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus; and,
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the capital stock
or stock options (other than exercises of stock options outstanding and grants
of stock options authorized under the employee stock plans described in the
Prospectus) of the Company or any of its subsidiaries or in the consolidated
long-term debt of the Company and its subsidiaries, taken as a whole, or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or contemplated in
the Prospectus;
(v) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(vi) The Company and each of its subsidiaries own or possess or, in
the case of business proposed to be conducted by the Company, can acquire on
commercially reasonable terms adequate licenses or other rights to use all
patents, patent rights, inventions, trade secrets, copyrights, trademarks,
service marks, trade names, technology and know-how currently employed or
proposed to be employed by them in connection with their business as described
in the Prospectus; the Company is not obligated to pay a royalty, grant a
license, or provide other consideration to any third party in connection with
its patents, copyrights, trademarks, service marks, trade names, technology or
know-how other than pursuant to the Binary Development and Distribution
Agreement with SunSoft, Inc. dated January 30, 1998 and the Program License
Agreement with Vertel Corporation dated December 23, 1997 and as otherwise
disclosed in the Prospectus, and, except as disclosed in the Prospectus, neither
the Company nor any of its subsidiaries has received any notice of infringement
or conflict with (and neither the Company nor any of its subsidiaries knows of
any infringement or conflict with) rights of others with respect to any patents,
patent rights, inventions, trade secrets, copyrights, trademarks, service marks,
trade names, technology or know-how which could reasonably be expected to result
in any material adverse effect upon the Company and its subsidiaries, taken as a
whole; and, except as disclosed in the Prospectus, the discoveries, inventions,
products or processes of the Company and its subsidiaries referred to in the
Prospectus do not, to the best knowledge of the Company or any of its
subsidiaries, infringe or conflict with any right or patent of any third party,
or any discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company or any of its
subsidiaries, which could have a material adverse effect on the Company and its
subsidiaries, taken as a whole; and no third party, including any academic or
governmental organization, possesses rights to the Company's patents,
copyrights, trademarks, service marks, trade names, technology or know-how
which, if exercised, could enable such third party to develop products
competitive to those of the Company or could have a material adverse effect on
the ability of the Company to conduct its business in the manner described in
the Prospectus;
(vii) The Company and its subsidiaries possess all consents,
licenses, certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have a
materially adverse effect on or constitute a material adverse change, or
constitute a development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position, stockholders'
equity or results
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<PAGE> 4
of operations of the Company and its subsidiaries, taken as whole, otherwise
than as set forth or contemplated in the Prospectus;
(viii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification,
or is subject to no material liability or disability by reason of the failure to
be so qualified in any such jurisdiction; and each subsidiary of the Company has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(ix) The execution and delivery of the Agreement and Plan of Merger
effective as of July __, 1998 (the "Merger Agreement") between INET, Inc., a
Texas corporation (the "Texas Corporation"), and the Company, effecting the
reincorporation of the Texas Corporation under the laws of the State of
Delaware, was duly authorized by all necessary corporate action on the part of
each of the Texas Corporation and the Company; and each of the Texas Corporation
and the Company had all corporate power and authority to execute and deliver the
Merger Agreement and the Certificate of Merger and Articles of Merger attached
as exhibits thereto which they are a party, to file such Certificate of Merger
with the Secretary of State of State of Delaware, to file such Articles of
Merger with the Secretary of the State of Texas and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger Agreement
at the time of execution and immediately prior to the effectiveness of the
Merger constituted a valid and binding obligation of each of the Texas
Corporation and the Company, subject to the effect of (x) applicable bankruptcy,
insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors and (y) general principles of equity;
(x) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or claims
except those created by the Company's credit facility described in the
Prospectus;
(xi) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder and under the International Underwriting Agreement have
been duly and validly authorized and, when issued and delivered against payment
therefor as provided herein and therein, will be duly and validly issued and
fully paid and non-assessable and will conform to the description of the Stock
contained in the Prospectus;
(xii) The issue and sale of the Shares to be sold by the Company
hereunder and under the International Underwriting Agreement and the compliance
by the Company with all of the provisions of this Agreement and the
International Underwriting Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated
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<PAGE> 5
by this Agreement and the International Underwriting Agreement, except the
registration under the Act and the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") and under state or
foreign securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters and the International
Underwriters;
(xiii) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement
lease or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(xiv) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock are accurate, complete and fair;
(xv) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the Company or any
of its subsidiaries, would individually or in the aggregate have a material
adverse effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(xvi) Except for the Shares, the holders of all outstanding shares
of Stock, and all securities convertible into or exercisable or exchangeable for
Stock, have delivered agreements (collectively, the "Lock-up Agreements") that
restrict the holders thereof from, among other things, selling, granting any
option for the purchase of, pledging, or otherwise transferring or disposing of,
any of such shares of Stock, or any such securities convertible into or
exercisable or exchangeable for Stock, for a period of 180 days after the date
of the Prospectus without the prior written consent of Goldman, Sachs & Co.; and
the Company has no reason to believe any Lock-up Agreement is not a valid and
binding obligation of each party thereto other than the Underwriters;
(xvii) The Company has imposed a stop-transfer instruction with the
Company's transfer agent in order to enforce the Lock-up Agreements;
(xviii) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xix) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes; and
(xx) Ernst & Young LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement, the
International Underwriting Agreement, the Power of
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<PAGE> 6
Attorney and the Custody Agreement hereinafter referred to, and for the sale and
delivery of the Shares to be sold by such Selling Stockholder hereunder and
under the International Underwriting Agreement, have been obtained; and such
Selling Stockholder has full right, power and authority to enter into this
Agreement, the International Underwriting Agreement, the Power of Attorney and
the Custody Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder hereunder and under the International
Underwriting Agreement;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and under the International Underwriting Agreement and the compliance
by such Selling Stockholder with all of the provisions of this Agreement, the
International Underwriting Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which such Selling Stockholder is a party or by which such Selling
Stockholder is bound, or to which any of the property or assets of such Selling
Stockholder is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the Partnership
Agreement of such Selling Stockholder if such Selling Stockholder is a
partnership or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over such Selling Stockholder or
the property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to First
Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder will
have, good and valid title to the Shares to be sold by such Selling Stockholder
hereunder and under the International Underwriting Agreement, free and clear of
all liens, encumbrances, equities or claims other than as created pursuant to
this Agreement, the International Underwriting Agreement, the Custody Agreement
and the Power of Attorney; and, upon delivery of such Shares and payment
therefor pursuant hereto and pursuant to the International Underwriting
Agreement, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters or the
International Underwriters, as the case may be;
(iv) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, without the
prior written consent of Goldman, Sachs & Co. on behalf of the Underwriters, it
will not, (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Stock or any securities convertible into or
exercisable or exchangeable for Stock or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (a)
the sale of the Shares to the Underwriters pursuant to this Agreement or the
International Underwriting Agreement, or (b) transactions relating to Stock or
other securities acquired in open market transactions after the completion of
the First Time of Delivery (as hereinafter defined). Notwithstanding the
foregoing restrictions on transfer, such Selling Stockholder shall be permitted
to make the following transfers: (x) transfers made by a bona fide gift, will or
intestacy, provided the donee or other transferee thereof agrees in writing to
be bound by the terms hereof, and (y) to any trust, partnership, limited
partnership or similar entity for the direct or indirect benefit of such Selling
Stockholder or the immediate family of such Selling Stockholder, provided that
the trustee of the trust agrees to be bound by the terms hereof, and provided
further that any such transfer shall not involve a disposition for value. For
purposes hereof, "immediate family" shall mean any relationship by blood
marriage or adoption, not more remote than first cousin;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result
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<PAGE> 7
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
expressly for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus, when they become effective or are
filed with the Commission, as the case may be, will conform in all material
respects to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, such Selling
Stockholder will deliver to you prior to or at the First Time of Delivery (as
hereinafter defined) a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder and under the
International Underwriting Agreement have been placed in custody under a Custody
Agreement, in the form heretofore furnished to you (the "Custody Agreement"),
duly executed and delivered by such Selling Stockholder to ________________, as
custodian (the "Custodian"), and such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you (the
"Power of Attorney"), appointing the persons indicated in Schedule II hereto,
and each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement and
the International Underwriting Agreement on behalf of such Selling Stockholder,
to determine the purchase price to be paid by the Underwriters and the
International Underwriters to the Selling Stockholders as provided in Section 2
hereof, to authorize the delivery of the Shares to be sold by such Selling
Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder
in connection with the transactions contemplated by this Agreement, the
International Underwriting Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder and the International Underwriters under
the International Underwriting Agreement; the arrangements made by such Selling
Stockholder for such custody, and the appointment by such Selling Stockholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable;
the obligations of the Selling Stockholders hereunder shall not be terminated by
operation of law, whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or incapacity of
any executor or trustee or the termination of such estate or trust, or in the
case of a partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event; if any individual Selling
Stockholder or any such executor or trustee should die or become incapacitated,
or if any such estate or trust should be terminated, or if any such partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement, of the International
Underwriting Agreement and of the Custody Agreements; and actions taken by the
Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if
such death, incapacity, termination, dissolution or other event had not
occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or
any of them, shall have received notice of such death, incapacity, termination,
dissolution or other event.
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<PAGE> 8
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $__________, the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Firm Shares to be sold by the Company and each of the
Selling Stockholders as set forth opposite their respective names in Schedule II
hereto by a fraction, the numerator of which is the aggregate number of Firm
Shares to be purchased by such Underwriter as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all of the Underwriters from
the Company and all of the Selling Stockholders hereunder and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company, as and to the extent indicated in Schedule II hereto,
hereby grants, to the Underwriters the right to purchase at their election up to
________ Optional Shares, at the purchase price per share set forth in the
paragraph above, for the sole purpose of covering overallotments in the sale of
the Firm Shares. Any such election to purchase Optional Shares may be exercised
only by written notice from you to the Company, given within a period of 30
calendar days after the date of this Agreement and setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4 hereof) or, unless you and
the Company otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of The Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company and the Custodian to Goldman, Sachs & Co. at
least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on ___________ ___, 1998 or
such other time and date as Goldman, Sachs & Co. and the Company may agree upon
in writing, and, with respect to the Optional Shares, 9:30 a.m., New York City
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
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<PAGE> 9
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(m) hereof, will be delivered at the offices
of the Company at 1255 West 15th Street, Suite 600, Plano, Texas 75075 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at each Time of Delivery. A meeting will be held at the Closing Location at
6:00 p.m., New York City time, on the New York Business Day next preceding each
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may reasonably request and to comply with such laws so
as to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such
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<PAGE> 10
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, directly or indirectly, except
as provided hereunder and under the International Underwriting Agreement, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to stock option plans and
the employee stock purchase plan existing on, or upon the conversion or exchange
of convertible or exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the International Underwriting Agreement in the
manner specified in the Prospectus under the caption "Use of Proceeds;"
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act;
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act;
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<PAGE> 11
(l) The Company will (i) cooperate with the Underwriters to enforce the
terms of each Lock-up Agreement (as defined in Section 1 (a) (xvi)), (ii) issue
stop-transfer instructions to the transfer agent for the Stock with respect to
any transaction or contemplated transaction that would constitute a breach of or
default under the applicable Lock-up Agreement (iii) will require as a condition
to the issuance of any Stock upon exercise of options under employee stock plans
that the holders of such options execute and deliver a Lock-up Agreement to the
Company and Goldman, Sachs & Co. and (iv) upon written request of Goldman, Sachs
& Co., release from the Lock-up Agreements those shares of Stock held by those
holders set forth in such request. In addition, except with the prior written
consent of Goldman, Sachs & Co., the Company agrees not to amend or terminate,
waive any right under, or consent to any transaction that would otherwise be
prohibited under, any Lock-up Agreement, or take any other action that would
directly or indirectly have the same effect as such an amendment, termination,
waiver or consent; and
(m) The Company will place a restrictive legend on any shares of Stock
acquired pursuant to the exercise, after the date hereof and prior to the
expiration of the 180-day period after the date of the Prospectus, of any option
granted under the stock plans discussed in the Prospectus (the "Plans"), which
legend shall restrict the transfer of such shares prior to the expiration of
such 180-day period. In addition, the Company agrees that, without the prior
written consent of Goldman, Sachs & Co., it will not release any stockholder or
option holder from the market standoff provision agreed to between such
stockholder or option holder and the Company (or, if allowed, imposed by the
Company) pursuant to the terms of the Plans earlier than 180 days after the date
of the Prospectus.
6. The Company and each of the Selling Stockholders covenant and agree with
one another and with the several Underwriters that (a) the Company will pay or
cause to be paid the following: (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the
International Underwriting Agreement, the Agreement between Syndicates, the
Selling Agreements, the Blue Sky Memorandum, closing documents (including any
compilations thereof) and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection with
the qualification of the Shares for offering and sale under state securities
laws as provided in Section 5(b) hereof, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey; (iv) all fees and expenses in connection
with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the
fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the NASD of the terms of the sale of the Shares;
(vi) the cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar; (viii) the fees and expenses of the
Attorneys-in-Fact and the Custodian; (ix) the costs and expenses of travel,
lodging and meals of the Company's employees in connection with the "roadshow"
and any other meeting with prospective investors in the Shares (other than as
shall have been specifically approved by the Representatives to be paid for by
the Underwriters); and (x) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section; and (b) each Selling Stockholder will pay or cause
to be paid all costs and expenses incident to the performance of such Selling
Stockholder's obligations hereunder which are not otherwise specifically
provided for in this Section, including (i) any fees and expenses of counsel for
such Selling Stockholder (if other than the Company's counsel) and (ii) all
expenses and taxes incident to the sale and delivery of the Shares to be sold by
such Selling Stockholder to the Underwriters hereunder. In connection with
Clause (b) (ii) of the preceding sentence, Goldman, Sachs & Co. agrees to pay
New York State stock transfer tax, and the Selling Stockholder agrees to
reimburse Goldman, Sachs & Co. for associated carrying costs if such tax payment
is not rebated on the day of payment and for any portion of such tax payment not
rebated. It is understood, however, that the Company shall bear, and the Selling
Stockholders shall not be required to pay or to reimburse the Company for, the
cost of any other matters not directly relating to the sale and purchase of the
Shares
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<PAGE> 12
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery as to the Company and at the First Time of
Delivery as to the Selling Stockholders, shall be subject, in their discretion,
to the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
shall have furnished to you such written opinion or opinions, dated such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii), (x),
(xiv) and (xvi) of subsection (c) below as well as such other related matters as
you may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Brobeck, Phleger & Harrison LLP, counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been duly
and validly authorized and issued and to such counsel's knowledge, are fully
paid and non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) Except as set forth in the Prospectus, (i) the Company does
not have outstanding any statutory preemptive rights, and (ii) to such counsel's
knowledge, the Company does not have outstanding any options to purchase, or any
contractual preemptive rights, or other rights to subscribe for or to purchase,
any securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations;
(iv) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of failure to be so qualified in any such
jurisdiction;
(v) Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued shares
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<PAGE> 13
of capital stock of each such subsidiary have been duly and validly authorized
and issued, are to the knowledge of such counsel, fully paid and non-assessable,
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, to the knowledge of such counsel, free and clear of all liens,
encumbrances, equities or claims except those created by the Company's credit
facility described in the Prospectus;
(vi) The execution and delivery of the Merger Agreement, effecting
the reincorporation of the Texas Corporation under the laws of the State of
Delaware, was duly authorized by all necessary corporate action on the part of
each of the Texas Corporation and the Company;
(vii) Each of the Texas Corporation and the Company had all full
corporate power and authority necessary to execute and deliver the Merger
Agreement, to execute and file the Articles of Merger with the Secretary of
State of the State of Texas and the Certificate of Merger with the Secretary of
the State of Delaware and to consummate the reincorporation contemplated by the
Merger Agreement, and the Merger Agreement at the time of execution and
immediately prior to the effectiveness of the Merger constituted a valid and
binding obligation of each of the Texas Corporation and the Company, subject to
the effect of (x) applicable bankruptcy, insolvency, reorganization, moratorium
or other similar federal or state laws affecting the rights of creditors and (y)
to general principles of equity;
(viii) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property of
the Company or any of its subsidiaries is the subject which is required to be
described in the Prospectus and is not so described in the Prospectus; and, to
such counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(ix) This Agreement and the International Underwriting Agreement
have been duly authorized, executed and delivered by the Company;
(x) The issue and sale of the Shares being delivered at such Time of
Delivery to be sold by the Company and the compliance by the Company with all of
the provisions of this Agreement and the International Underwriting Agreement
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument filed as an exhibit to
the Registration Statement, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties;
(xi) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement and the International
Underwriting Agreement, except the registration under the Act and the Exchange
Act of the Shares, and such consents, approvals, authorizations, registrations
or qualifications as may be required by the NASD and under state or foreign
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters and the International Underwriters;
(xii) To such counsel's knowledge, the Company is not in violation
of its Certificate of Incorporation or By-laws;
(xiii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock are accurate, complete and fair;
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<PAGE> 14
(xiv) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act;
(xv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules and other
financial data therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Act and the
rules and regulations thereunder; although they do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to in the
opinion in subsection (xiii) of this Section 7(c), they have no reason to
believe that, as of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other financial
data therein, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that, as of its date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial data therein, as
to which such counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial data therein, as
to which such counsel need express no opinion) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus which are not filed
or described as required.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the federal securities
laws of the United States, the Delaware General Corporation Law and the laws of
the States of Texas, California, New York and Colorado;
(d) Each of Samra & Associates, special counsel for the Company, and
Fulbright & Jaworski LLP, special counsel for the Company, shall have furnished
to you its written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) the statements set forth under the headings "Risk Factors --
Proprietary Rights" and "Business -- Proprietary Rights" in the Registration
Statement and the Prospectus (the "Statements"), insofar as such statements
constitute a summary of legal matters in which counsel has represented the
Company or a summary of documents reviewed by counsel in the course of such
representation, have been reviewed by such counsel and fairly summarize such
legal matters and documents in all material respects, and such counsel has no
reason to believe that such Statements, (i) as of the effective date of the
Registration Statement, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make such Statements not misleading and (ii) as of the date of such opinion,
included or includes any untrue statement of material fact or omitted or omits
to state a material fact necessary in order to make such Statements, in light of
the circumstances in which they were made, not misleading.
(e) Brobeck, Phleger & Harrison LLP, special counsel for each of the
Selling Stockholders, shall have furnished to you its written opinion with
respect to each of the Selling Stockholders for whom they are acting as counsel,
dated such Time of Delivery, in form and substance satisfactory to you, to the
effect that:
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<PAGE> 15
(i) A Power of Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute valid and
binding agreements of such Selling Stockholder in accordance with their terms;
(ii) This Agreement and the International Underwriting Agreement
have been duly executed and delivered by or on behalf of such Selling
Stockholder; and the sale of the Shares to be sold by such Selling Stockholder
hereunder and thereunder and the compliance by such Selling Stockholder with all
of the provisions of this Agreement and the International Underwriting
Agreement, the Power of Attorney and the Custody Agreement and the consummation
of the transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any terms or provisions of, or constitute a
default under, any statute, or material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which such
Selling Stockholder is a party or by which such Selling Stockholder is bound, or
to which any of the property or assets of such Selling Stockholder is subject,
nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of such Selling Stockholder if such
Selling Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) To such counsel's knowledge, no consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation of the transactions contemplated by this Agreement and the
International Underwriting Agreement in connection with the Shares to be sold by
such Selling Stockholder hereunder or thereunder, except such as have been
obtained under the Act and the Exchange Act and such as may be required by the
NASD and under state or foreign securities or Blue Sky laws in connection with
the purchase and distribution of such Shares by the Underwriters or the
International Underwriters;
(iv) Immediately prior to the consummation of the sale of Shares by
each Selling Stockholder as contemplated by this Agreement and the International
Underwriting Agreement, such Selling Stockholder was the sole registered owner
of the Shares to be sold by such Selling Stockholder under this Agreement and
the International Underwriting Agreement, and, to the knowledge of such counsel,
there are no facts or circumstances that would lead such counsel to believe
that, as of the First Time of Delivery, any Selling Stockholder is in breach of
the warranties described in Section 8.108 of the Texas Uniform Commercial Code;
and
(v) The laws of the State of Texas govern the delivery of the
certificates evidencing the Shares to be sold by the Selling Stockholders to the
Underwriters and payment by the Underwriters of the purchase price for such
Shares, and upon such delivery and payment the Underwriters will acquire such
Shares free of all adverse claims (as such term is defined in Section 8.102 of
the Texas Uniform Commercial Code), assuming that the Underwriters do not have
notice of any adverse claim (as such terms is defined in Section 8.102 of the
Texas Uniform Commercial Code).
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the federal securities
laws of the United States, the Delaware General Corporation Law and the laws of
the State of Texas. With respect to the opinions set forth in subparagraphs (i),
(ii) and (iii) above, to the extent that such opinions address questions of law
not involving the federal securities laws of the United States, the Delaware
General Corporation Law or laws of the State of Texas, such counsel may deliver
opinions of local counsel as to such matters. In addition, in rendering the
opinion in subparagraph (iv) above, such counsel may rely upon a certificate of
such Selling Stockholder in respect of matters of fact as to ownership of, and
liens, encumbrances, equities or claims on the Shares sold by such Selling
Stockholder, provided that such counsel shall state that they believe that both
you and they are justified in relying upon such certificate;
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<PAGE> 16
(f) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Ernst & Young LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock, stock options (other than exercises of stock
options outstanding and grants of stock options authorized under the employee
stock plans described in the Prospectus) or long-term debt of the Company or any
of its subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(h) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities or preferred stock by any
"nationally recognized statistical rating organization," as that term is defined
by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities or preferred stock;
(i) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or Texas State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if the effect of any such event specified in
this Clause (iv) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(j) The Shares to be sold by the Company and the Selling Stockholders at
such Time of Delivery shall have been duly listed for quotation on NASDAQ;
(k) The Company shall have obtained and delivered to the Underwriters
executed copies of an agreement from each stockholder and optionholder of the
Company, substantially to the effect set forth in Subsections 1(a)(xvi) and
1(b)(iv) hereof in form and substance satisfactory to you;
(l) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(m) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Stockholders,
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<PAGE> 17
respectively, satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Stockholders, respectively, herein at
and as of such Time of Delivery, as to the performance by the Company and the
Selling Stockholders of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other matters as
you may reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (g) of
this Section, and as to such other matters as you may reasonably request.
8. (a) The Company and each of Samuel S. Simonian, Elie S. Akilian, Mark A.
Weinzierl and William H. Mina (collectively, the "Management Selling
Stockholders"), jointly and severally, will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company and the Management
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; provided further, that the liability of each
Management Selling Stockholder pursuant to this subsection (a) shall not exceed
the product of the number of Shares sold by such Management Selling Stockholder
and the public offering price of the Shares as set forth in the Prospectus.
(b) Each of the Selling Stockholders (other than the Management Selling
Stockholders) will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Selling
Stockholder expressly for use therein; and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that such Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein; provided, further, that the liability of a Selling
Stockholder pursuant to this subsection (b) shall not exceed the product of the
number of Shares sold by such Selling Stockholder and the public offering price
of the Shares as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
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<PAGE> 18
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against an indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (which shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares purchased under this Agreement,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other
-18-
<PAGE> 19
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, each of the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection (e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Stockholders shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company and the
Selling Stockholders that you have so arranged for the purchase of such Shares,
or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all of the Shares to be purchased at such Time of
Delivery, then the Company and the Selling Stockholders shall have the right to
require each non-defaulting Underwriter to purchase the number of Shares which
such Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each
-19-
<PAGE> 20
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and, if the
Company fails to do so, each of the Selling Stockholders pro rata (based on the
number of Shares to be sold by the Company and such Selling Stockholder
hereunder), will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company and
the Selling Stockholders shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to such Selling Stockholder at their respective
address as set forth in Schedule III hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Chief Financial
Officer; provided, however, that any notice to an Underwriter pursuant to
Section 8 (c)
-20-
<PAGE> 21
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire or
telex constituting such Questionnaire, which address will be supplied to the
Company or the Selling Stockholders by you upon request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us seven counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters (U.S. Version), the form of
which shall be submitted to the Company and the Selling Stockholders for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
-21-
<PAGE> 22
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
INET TECHNOLOGIES, INC.
By:
----------------------------------
Name:
Title:
SAMUEL S. SIMONIAN
ELIE S. AKILIAN
MARK A. WEINZIERL
WILLIAM H. MINA
BRANDENBURG LIFE FOUNDATION
PIERCE BROCKMAN
CHAD HARPER
ROY HENKE
STEVE HOLCOMB
MIKE REIMAN
GARY RUWALDT
GEORGE ZAHAR
By:
----------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Stockholders named
in Schedule II to this Agreement.
Accepted as of the date hereof:
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS, A DIVISION
OF DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST LLC
By:
-----------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-22-
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
TOTAL NUMBER NUMBER OF OPTIONAL
OF FIRM SHARES SHARES TO BE PURCHASED IF
TO BE MAXIMUM OPTION
UNDERWRITER PURCHASED EXERCISED
- ------------------------------------------------------------------- -------------------- ---------------------------------
<S> <C> <C>
Goldman, Sachs & Co..............................................
Dain Rauscher Wessels............................................
Hambrecht & Quist LLC............................................
Total
</TABLE>
<PAGE> 24
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
TOTAL NUMBER OF SHARES TO BE SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
-------------------------------- ----------------------------------
<S> <C> <C>
The Company .......................................... 3,841,870 862,500
The Selling Stockholders:
Samuel S. Simonian........................... 500,000 --
Elie S. Akilian.............................. 500,000 --
Mark A. Weinzierl............................ 500,000 --
William H. Mina.............................. 50,000 --
Brandenburg Life Foundation.................. 1,000 --
Pierce Brockman.............................. 120,000 --
Chad Harper.................................. 20,000 --
Roy Henke.................................... 25,000 --
Steve Holcomb................................ 29,000 --
Mike Reiman.................................. 120,000 --
Gary Ruwaldt................................. 13,130 --
George Zahar................................. 30,000 --
----------- ------------
Total 5,750,000 862,500
</TABLE>
Each of the Selling Stockholders has appointed William H. Mina and Mark A.
Weinzierl, and each of them, as his Attorneys-in-Fact.
<PAGE> 25
SCHEDULE III
SELLING STOCKHOLDERS
Samuel S. Simonian
Elie S. Akilian
Mark A. Weinzierl
William H. Mina
Brandenburg Life Foundation
Pierce Brockman
Chad Harper
Roy Henke
Steve Holcomb
Mike Reiman
Gary Ruwaldt
George Zahar
<PAGE> 26
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations thereunder; and,
if applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected
financial data, pro forma financial information, financial forecasts
and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as
indicated in their reports thereon, copies of which have been separately
furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives; and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility
for financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in
the audited consolidated financial statements for such five fiscal years
which were included;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE> 27
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications should be made
to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in
the unaudited consolidated financial statements from which such data and
items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to
in Clause (B) were not determined on a basis substantially consistent
with the basis for the audited consolidated financial statements
included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options
and stock appreciation rights, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or
-2-
<PAGE> 28
any decreases in consolidated net current assets or stockholders' equity
or other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause
(E) there were any decreases in consolidated net revenues or operating
profit or the total or per share amounts of consolidated net income or
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
the comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each
case for decreases or increases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified procedures,
not constituting an examination in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives, which are derived
from the general accounting records of the Company and its subsidiaries,
which appear in the Prospectus, or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives,
and have compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
-3-
<PAGE> 1
EXHIBIT 1.2
INET TECHNOLOGIES, INC.
COMMON STOCK, PAR VALUE $.001 PER SHARE
UNDERWRITING AGREEMENT
(INTERNATIONAL VERSION)
1998
--------------,
Goldman Sachs International,
Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International,
Peterborough Court,
133 Fleet Street,
London EC4A 2BB, England
Ladies and Gentlemen:
Inet Technologies, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of___________ shares and, at the election of the Underwriters, up to __________
additional shares of Common Stock, par value $.001 per share ("Stock"), of the
Company and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of ___________ shares of Stock.
The aggregate of___________ shares to be sold by the Company and the Selling
Stockholders is herein called the "Firm Shares" and __________ additional shares
to be sold by the Company are herein called the "Optional Shares." The Firm
Shares and the Optional Shares which the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called, the "Shares."
It is understood and agreed to by all parties that the Company and the
Selling Stockholders are concurrently entering into an agreement, a copy of
which is attached hereto (the "U.S. Underwriting Agreement"), providing for the
sale by the Company and the Selling Stockholders of up to a total of ___________
shares of Stock (the "U.S. Shares"), including the overallotment option
thereunder, through arrangements with certain underwriters in the United States
(the "U.S. Underwriters"), for whom Goldman, Sachs & Co., Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated and Hambrecht & Quist LLC are acting as
representatives. Anything herein or therein to the contrary notwithstanding, the
respective closings under this Agreement and the U.S. Underwriting Agreement are
hereby expressly made conditional on one another. The Underwriters hereunder and
the U.S. Underwriters are simultaneously entering into an Agreement between U.S.
and International Underwriting Syndicates (the "Agreement between Syndicates")
which provides, among other things, for the transfer of shares of Stock between
the two syndicates and for consultation by the Lead Manager hereunder with
Goldman, Sachs & Co. prior to exercising the rights of the Underwriters under
Section 7 hereof. Two forms of prospectus are to be used in connection with the
offering and sale of shares of
<PAGE> 2
Stock contemplated by the foregoing, one relating to the Shares hereunder and
the other relating to the U.S. Shares. The latter form of prospectus will be
identical to the former except for certain substitute pages. Except as used in
Sections 2, 3, 4, 9 and 11 herein, and except as context may otherwise require,
references hereinafter to the Shares shall include all of the shares of Stock
which may be sold pursuant to either this Agreement or the U.S. Underwriting
Agreement, and references herein to any prospectus whether in preliminary or
final form, and whether as amended or supplemented, shall include both the U.S.
and the international versions thereof.
In addition, this Agreement incorporates by reference certain
provisions from the U.S. Underwriting Agreement (including the related
definitions of terms, which are also used elsewhere herein) and, for purposes
of applying the same, references (whether in these precise words or their
equivalent) in the incorporated provisions to the "Underwriters" shall be to
the Underwriters hereunder, to the "Shares" shall be to the Shares hereunder as
just defined, to "this Agreement" (meaning therein the U.S. Underwriting
Agreement) shall be to this Agreement (except where this Agreement is already
referred to or as the context may otherwise require) and to the representatives
of the Underwriters or to Goldman, Sachs & Co. shall be to the addressees of
this Agreement and to Goldman Sachs International ("GSI"), and, in general, all
such provisions and defined terms shall be applied mutatis mutandis as if the
incorporated provisions were set forth in full herein having regard to their
context in this Agreement as opposed to the U.S. Underwriting Agreement.
1. The Company and each of the several Selling Stockholders hereby
make to the Underwriters the same respective representations, warranties and
agreements as are set forth in Section 1 of the U.S. Underwriting Agreement,
which Section is incorporated herein by this reference.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $_________ the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Firm Shares to be sold by the Company
and each of the Selling Stockholders as set forth opposite their respective
names in Schedule II hereto by a fraction, the numerator of which is the
aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all the Underwriters from the Company and all the Selling Stockholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the
Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company, as and to the extent indicated in Schedule II hereto,
hereby grants to the Underwriters the right to purchase at their election up
to____________ Optional Shares, at the purchase price per share set forth in the
paragraph above, for the sole purpose of covering overallotments in the sale of
the Firm Shares. Any such election to purchase Optional Shares may be exercised
only by written notice from you to the Company, given within a period of 30
calendar days after the date of this Agreement and setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4 hereof) or, unless you and
2
<PAGE> 3
the Company otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by GSI of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus and in the forms of Agreement
among Underwriters (International Version) and Selling Agreements, which have
been previously submitted to the Company by you. Each Underwriter hereby makes
to and with the Company and the Selling Stockholders the representations and
agreements of such Underwriter as a member of the selling group contained in
Sections 3(d) and 3(e) of the form of Selling Agreements.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company and the Selling Stockholders shall be delivered by
or on behalf of the Company and the Selling Stockholders to Goldman, Sachs &
Co., through the facilities of The Depository Trust Company ("DTC"), for the
account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company and the Custodian to
Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to the Time of Delivery
(as defined below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City
time, on _________,1998 or such other time and date as Goldman, Sachs & Co.
and the Company may agree upon in writing, and, with respect to the Optional
Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co.
in the written notice given by Goldman, Sachs & Co. of the Underwriters'
election to purchase such Optional Shares, or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and
each such time and date for delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 of the U.S.
Underwriting Agreement, including the cross-receipt for the Shares and any
additional documents requested by the Underwriters pursuant to Section 7(m) of
the U.S. Underwriting Agreement, will be delivered at the offices of the
Company at 1255 West Street, Suite 600, Plano, Texas 75075 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
each Time of Delivery. A meeting will be held at the Closing Location at 6:00
p.m., New York City time, on the New York Business Day next preceding each Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on
which banking institutions in New York are generally authorized or obligated by
law or executive order to close.
5. The Company hereby makes with the Underwriters the same
agreements as are set forth in Section 5 of the U.S. Underwriting Agreement,
which Section is incorporated herein by this reference.
6. The Company, each of the Selling Stockholders, and the
Underwriters hereby agree with respect to certain expenses on the same terms as
are set forth in Section 6 of the U.S. Underwriting Agreement, which Section is
incorporated herein by this reference.
7. Subject to the provisions of the Agreement between Syndicates,
the obligations of the Underwriters hereunder shall be subject, in their
discretion, at each Time of Delivery to the condition that all representations
and warranties and other statements of the Company, and the Selling Stockholders
herein are,
3
<PAGE> 4
at and as of such Time of Delivery, true and correct, the condition that the
Company and the Selling Stockholders shall have performed all of their
respective obligations hereunder theretofore to be performed, and additional
conditions identical to those set forth in Section 7 of the U.S. Underwriting
Agreement, which Section is incorporated herein by this reference.
8. (a) The Company and each of Samuel S. Simonian, Elie S. Akilian,
Mark A. Weinzierl and William H. Mina (collectively, the "Management Selling
Stockholders"), jointly and severally, will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company and the Management
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through GSI expressly
for use therein; provided further, that the liability of each Management Selling
Stockholder pursuant to this subsection (a) shall not exceed the product of the
number of Shares sold by such Management Selling Stockholder and the public
offering price of the Shares as set forth in the Prospectus.
(b) Each of the Selling Stockholders (other than the Management
Selling Stockholders) will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Selling
Stockholder expressly for use therein; and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that such Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein; provided, further, that the liability of a Selling
Stockholder pursuant to this subsection (b) shall not exceed the product of the
number of Shares sold by such Selling Stockholder and the public offering price
of the Shares as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company
and each Selling Stockholder against any losses, claims, damages or liabilities
to which the Company or such Selling Stockholder may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material
4
<PAGE> 5
fact contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through GSI expressly
for use therein; and will reimburse the Company and each Selling Stockholder for
any legal or other expenses reasonably incurred by the Company or such Selling
Stockholder in connection with investigating or defending any such action or
claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Selling Stockholders on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (before deducting expenses) received by
the Company and the Selling Stockholders bear to the total underwriting
5
<PAGE> 6
discounts and commissions received by the Underwriters with respect to the
Shares purchased under this Agreement, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, each of the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section 8 shall be in addition to any liability which
the Company and the respective Selling Stockholders may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company
(including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company) and to
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company and the Selling Stockholders shall
be entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Company and the Selling Stockholders that you have so arranged for
the purchase of such Shares, or the Company and the Selling Stockholders notify
you that they have so arranged for the purchase of such Shares, you or the
Company and the Selling Stockholders shall have the right to postpone such Time
of Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholders as provided in subsection (a) above,
the aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the
6
<PAGE> 7
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter or any controlling
person of any Underwriter, or the Company or any of the Selling Stockholders,
or any officer or director or controlling person of the Company or any
controlling person of any Selling Stockholders, and shall survive delivery of
and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholders shall then be under
any liability to any Underwriter except as provided in Section 6 and Section 8
hereof; but, if for any other reason, any Shares are not delivered by or on
behalf of the Company and the Selling Stockholders as provided herein, the
Company and, if the Company fails to do so, each of the Selling Stockholders
pro rata (based on the number of Shares to be sold by the Company and such
Selling Stockholder hereunder), will reimburse the Underwriters through GSI for
all out-of-pocket expenses approved in writing by GSI, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company and the Selling Stockholders shall then be under no
further liability to any Underwriter in respect of the Shares not so delivered
except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by GSI on behalf of you as the representatives of the
Underwriters; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to the Underwriters in care of GSI, Peterborough
Court, 133 Fleet Street, London EC4A 2BB, England, Attention: Equity Capital
Markets, Telex
7
<PAGE> 8
No. 94012165, facsimile transmission No. (071) 774-1550; if to any Selling
Stockholder shall be delivered or sent by mail, telex or facsimile transmission
to such Selling Stockholder at its address set forth in Schedule III hereto; and
if to the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Chief Financial Officer; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Stockholders by GSI upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us seven counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters, the
Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters
(International Version), the form of which shall be furnished to the Company
and the Selling Stockholders for examination upon request, but without warranty
on your part as to the authority of the signers thereof.
8
<PAGE> 9
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly
appointed as Attorney-in-Fact by such Selling Stockholder pursuant to a validly
existing and binding Power of Attorney which authorizes such Attorney-in-Fact
to take such action.
Very truly yours,
INET TECHNOLOGIES, INC.
By:
-----------------------------
Name
Title:
SAMUEL S. SIMONIAN
ELIE S. AKILIAN
MARK A. WEINZIERL
WILLIAM H. MINA
BRANDENBURG LIFE FOUNDATION
PIERCE BROCKMAN
CHAD HARPER
ROY HENKE
STEVE HOLCOMB
MIKE REIMAN
GARY RUWALDT
GEORGE ZAHAR
By:
-----------------------------
Name:
Title:
As Attorney-in-Fact acting on
behalf of each of the Selling
Stockholders named in Schedule
II to this Agreement.
Accepted as of the date hereof:
GOLDMAN SACHS INTERNATIONAL
DAIN RAUSCHER WESSELS, A DIVISION OF
DAIN RAUSCHER INCORPORATED,
HAMBRECHT & QUIST LLC
BY: GOLDMAN SACHS INTERNATIONAL
By:
-----------------------------
(Attorney-in-fact)
On behalf of each of the Underwriters
9
<PAGE> 10
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
- --------------------------------- ----------------- ------------------
Goldman, Sachs & Co..............
Dain Rauscher Wessels............
Hambrecht & Quist LLC............
Total
<PAGE> 11
SCHEDULE II
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
--------------- ------------------
The Company............................
The Selling Stockholders:
Samuel S. Simonian................
Elie S Akilian....................
Mark A. Weinzierl.................
William H. Mina...................
Brandenburg Life Foundation.......
Pierce Brockman...................
Chad Harper.......................
Roy Henke.........................
Steve Holcomb.....................
Mike Reiman.......................
Gary Ruwaldt......................
George Zahar......................
Total
Each of the Selling Stockholders has appointed William H. Mina and
Mark A. Weinzierl, and each of them, as his Attorneys-in-Fact.
<PAGE> 12
SCHEDULE III
SELLING STOCKHOLDERS
Samuel S. Simonian
Elie S. Akilian
Mark A. Weinzierl
William H. Mina
Brandenburg Life Foundation
Pierce Brockman
<PAGE> 13
Chad Harper
Roy Henke
Steve Holcomb
Mike Reiman
Gary Ruwaldt
George Zahar
<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
[LOGO]
Inet(TM)
INET TECHNOLOGIES, INC.
NUMBER SHARES
C
COMMON STOCK CUSIP 45662V 10 5
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
NEW YORK, NY AND RIDGEFIELD PARK, NJ
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF $0.001
PER SHARE, OF
INET TECHNOLOGIES, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
[SEAL] Dated:
COUNTERSIGNED AND REGISTERED:
/s/ Elie S. Akilian CHASEMELLON SHAREHOLDER SERVICES, LLC.
Executive Vice President TRANSFER AGENT AND REGISTRAR
BY
/s/ Mark A. Weinzierl
Secretary AUTHORIZED SIGNATURE
<PAGE> 2
INET TECHNOLOGIES, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE
CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____Custodian______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act______________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE OF
ASSIGNEE
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated
----------------------------
X
--------------------------------
(SIGNATURE)
NOTICE: THE SIGNATURE(S) TO
THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY X
PARTICULAR WITHOUT --------------------------------
ALTERATION OR EN- (SIGNATURE)
LARGEMENT OR ANY
CHANGE WHATEVER.
--------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
--------------------------------------------
SIGNATURE(S) GUARANTEED BY:
<PAGE> 1
EXHIBIT 10.8
ASSUMPTION AND MODIFICATION AGREEMENT
ASSUMPTION AND MODIFICATION AGREEMENT (this "AGREEMENT") is entered
into on September 18, 1998, to be effective as of July 16, 1998, between INET
TECHNOLOGIES, INC., a Delaware corporation ("BORROWER"), successor by merger to
INET, Inc., a Texas corporation ("OLD INET"), and NATIONSBANK, N.A., a national
banking association, successor in interest by merger to NationsBank of Texas,
N.A. ("LENDER").
R E C I T A L S
1. Old INET and Lender are parties to that certain Loan Agreement (as
modified, amended, renewed, extended, and restated from time to time, the "LOAN
AGREEMENT") dated as of June 26, 1997 providing for a revolving credit and
letter of credit facility in the amount of $10,000,000.00.
2. The obligations of Old INET pursuant to the Loan Agreement are
evidenced by a Renewal Promissory Note dated as of June 15, 1998, executed by
Old INET and payable the order of Lender in the original principal amount of
$10,000,000.00 (the "INET NOTE").
3. Effective as of July 16, 1998, Old INET and Borrower merged with
Borrower being the surviving entity (the "INET MERGER").
3. Borrower has requested that Lender consent to the INET Merger,
provided that Borrower assumes and confirms the obligations, rights, liens, and
security interests created under the Loan Agreement, the INET Note, and the
other Loan Documents (as defined in the Loan Agreement).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this Agreement (a)
terms defined in the Loan Agreement have the same meanings when used in this
Agreement, and (b) references to "Sections" are to the Loan Agreement's
sections.
2. CONSENT. Subject to the terms and conditions contained herein,
Lender hereby consents to the INET Merger.
3. ASSUMPTION. Borrower hereby assumes all of the debts, obligations,
and liabilities of Old INET under or pursuant to the Loan Documents.
4. SUBSTITUTE NOTE; SECURITY AGREEMENT, AND FINANCING STATEMENTS.
Contemporaneously with the execution hereof, Borrower shall execute and deliver
to Lender the following documents (such documents, together with this Agreement
being the "ASSUMPTION DOCUMENTS"):
(a) a Substitute Renewal Promissory Note dated effective as of July 16,
1998, and payable to the order of Lender in the original principal amount of
$10,000,000.00 (the "SUBSTITUTE NOTE"), which Substitute Note is in substitution
and replacement of the INET Note;
(b) a Security Agreement executed by Borrower in favor of Lender; and
(c) Uniform Commercial Code Financing Statements executed by Borrower.
<PAGE> 2
5. AMENDMENTS.
(a) All references in the Loan Documents to Old INET shall be to
Borrower.
(b) All references in the Loan Documents to the INET Note shall
henceforth include references to the Substitute Note as such note may, from time
to time, be amended, modified, extended, renewed, and/or increased.
(c) Any and all of the terms and provisions of the Loan Documents are
hereby amended and modified wherever necessary, even though not specifically
addressed herein, so as to conform to the amendments and modifications set forth
herein.
6. RATIFICATIONS. Borrower (a) ratifies and confirms all provisions of
the Loan Documents as amended by the Assumption Documents, (b) ratifies and
confirms that all guaranties, assurances, and liens granted, conveyed, or
assigned to Lender under the Loan Documents are not released, reduced, or
otherwise adversely affected by the Assumption Documents and continue to
guarantee, assure, and secure full payment and performance of the present and
future Loans, and (c) agrees to perform such acts and duly authorize, execute,
acknowledge, deliver, file, and record such additional documents, and
certificates as Lender may request in order to create, perfect, preserve, and
protect those guaranties, assurances, and liens.
7. REPRESENTATIONS. Borrower represents and warrants to Lender that as
of the date of this Agreement: (a) the Assumption Documents have been duly
authorized, executed, and delivered by Borrower and each Guarantor; (b) no
action of, or filing with, any governmental authority is required to authorize,
or is otherwise required in connection with, the execution, delivery, and
performance by Borrower or the Guarantors of the Assumption Documents; (c) the
Loan Documents, as amended by the Assumption Documents, are valid and binding
upon Borrower and each Guarantor and are enforceable against Borrower and each
Guarantor in accordance with their respective terms; (d) the execution,
delivery, and performance by Borrower and each Guarantor of the Assumption
Documents do not require the consent of any other person and do not and will not
constitute a violation of any laws, agreements, or understandings to which
Borrower or any Guarantor is a party or by which Borrower or any Guarantor is
bound; (e) all representations and warranties in the Loan Documents are true and
correct in all material respects except to the extent that (i) any of them speak
to a different specific date, or (ii) the facts on which any of them were based
have been changed by transactions contemplated or permitted by the Loan
Agreement; and (f) after giving effect to the Assumption Documents, no Potential
Default or Event of Default exists.
8. CONTINUED EFFECT. Except to the extent amended hereby, all terms,
provisions and conditions of the Loan Agreement and the other Loan Documents,
and all documents executed in connection therewith, shall continue in full force
and effect and shall remain enforceable and binding in accordance with their
respective terms.
9. CONDITIONS PRECEDENT. This Agreement shall not be effective unless
and until: (a) Lender receives executed counterparts of the Assumption Documents
and the documents listed on EXHIBIT A attached hereto; and (b) the
representations and warranties in this Agreement are true and correct in all
material respects on and as of the date of this Agreement.
10. MISCELLANEOUS. Unless stated otherwise (a) the singular number
includes the plural and vice versa and words of any gender include each other
gender, in each case, as appropriate, (b) headings and captions may not be
construed in interpreting provisions, (c) this Agreement must be construed --
and its performance enforced -- under Texas law, (d) if any part of this
Agreement is for any reason found to be unenforceable, all other portions of it
nevertheless remain enforceable, and (e) this Agreement may be executed in any
number of counterparts with the same
- 2 -
<PAGE> 3
effect as if all signatories had signed the same document, and all of those
counterparts must be construed together to constitute the same document.
11. ENTIRETIES. THE LOAN AGREEMENT AS AMENDED BY THIS AGREEMENT
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF
THE LOAN AGREEMENT AS AMENDED BY THIS AGREEMENT AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
12. PARTIES. This Agreement binds and inures to Borrower and Lender,
and their respective successors and permitted assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW]
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<PAGE> 4
EXECUTED as of the date first stated above.
BORROWER:
INET TECHNOLOGIES, INC., a Delaware corporation
By: /s/ WILLIAM MINA
-------------------------------------------
William Mina
Senior Vice President
LENDER:
NATIONSBANK, N.A., a national banking
association, successor in interest by merger to
NationsBank of Texas, N.A.
By: /s/ RUSSELL P. HARTSFIELD
-------------------------------------------
Russell P. Hartsfield
Senior Vice President
- 4 -
<PAGE> 5
To induce Lender to enter into the Assumption Documents, each of the
undersigned jointly and severally (a) consent and agree to the INET Merger and
the Assumption Documents' execution and delivery, (b) ratify and confirm that
all guaranties, assurances, and liens granted, conveyed, or assigned to Lender
under the Loan Documents are not released, diminished, impaired, reduced, or
otherwise adversely affected by the INET Merger or the Assumption Documents and
continue to guarantee, assure, and secure the full payment and performance of
all present and future Loans, (c) agree to perform such acts and duly authorize,
execute, acknowledge, deliver, file, and record such additional guaranties,
assignments, security agreements, deeds of trust, mortgages, and other
agreements, documents, instruments, and certificates as Lender may reasonably
deem necessary or appropriate in order to create, perfect, preserve, and protect
those guaranties, assurances, and liens, (d) waive notice of acceptance of this
consent and agreement, which consent and agreement binds the undersigned and
their successors and permitted assigns and inures to Lender and their respective
successors and permitted assigns, and (e) ratifies and confirms that the
guaranty executed by such Person guarantees the obligations of Borrower, as
successor by merger to Old INET.
INET FOREIGN SALES CORPORATION, a
corporation organized under the law of
Barbados
By: /s/ MARK A. WEINZIERL
-------------------------------------
Name: Mark A. Weinzierl
-----------------------------------
Title: Director
----------------------------------
INET GLOBAL, LTD., a corporation organized
under the law of Barbados
By: /s/ MARK A. WEINZIERL
-------------------------------------
Name: Mark A. Weinzierl
-----------------------------------
Title: Director
----------------------------------
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<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 17, 1998 (except for Note 1, as to which the date is July 23, 1998) in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-59753) and
related Prospectus of Inet Technologies, Inc. for the registration of 5,750,000
shares of its common stock.
Dallas, Texas
September 28, 1998
