<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 0-24707
INET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2269056
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1255 West 15th Street, Suite 600
Plano, Texas 75075
(Address of principal executive offices)
(Zip code)
(972) 578-6100
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Number of shares of common stock of registrant outstanding at August 10, 1999:
45,169,309
Page 1 of 24
<PAGE> 2
INET TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets ................................................... 3
Consolidated Statements of Income ............................................. 5
Consolidated Statements of Stockholders' Equity................................ 6
Consolidated Statements of Cash Flows.......................................... 7
Notes to Consolidated Financial Statements .................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 12
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ..................................... 23
Item 4. Submissions of Matters to a Vote of Security Holders .......................... 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
Signatures ...................................................................................... 24
Exhibit 27 Financial Data Schedules (for SEC information only)
</TABLE>
Page 2 of 24
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $107,878 $ 21,914
Trade accounts receivable (net of allowance
for doubtful accounts of $898 and $659
at June 30, 1999 and December 31, 1998,
respectively) 14,303 22,073
Unbilled receivables 2,347 1,602
Income tax receivable 1,229 --
Inventories 7,375 7,592
Deferred income taxes 957 2,568
Other current assets 1,505 1,248
-------- --------
Total current assets 135,594 56,997
Property and equipment, net 8,953 8,394
Other assets 270 117
-------- --------
$144,817 $ 65,508
======== ========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 24
<PAGE> 4
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value and number of shares)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,736 $ 1,858
Accrued compensation and benefits 2,715 2,159
Deferred revenue 26,671 13,073
Income tax payable -- 878
Other accrued liabilities 847 716
--------- ---------
Total current liabilities 31,969 18,684
Deferred tax liabilities -- 11
Commitments
Stockholders' equity
Common stock, $.001 par value:
Authorized shares - 175,000,000
Issued shares - 44,941,009 at June 30, 1999 and
40,934,422 at December 31, 1998 45 41
Additional paid-in capital 57,089 1,236
Unearned compensation (350) (464)
Retained earnings 56,064 46,217
Treasury stock, no common shares at June 30,
1999, and 38,842 at December 31, 1998, at cost -- (217)
--------- ---------
Total stockholders' equity 112,848 46,813
--------- ---------
$ 144,817 $ 65,508
========= =========
</TABLE>
See accompanying notes to financial statements.
Page 4 of 24
<PAGE> 5
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $25,776 $18,653 $49,015 $34,165
Cost of revenues 7,639 5,067 14,764 9,613
------- ------- ------- -------
Gross profit 18,137 13,586 34,251 24,552
Operating expenses:
Selling and marketing 2,835 2,118 5,793 3,792
General and administrative 2,123 1,613 4,153 3,257
Research and development 5,531 3,511 10,383 6,710
------- ------- ------- -------
10,489 7,242 20,329 13,759
------- ------- ------- -------
Income from operations 7,648 6,344 13,922 10,793
Other income 674 197 997 322
------- ------- ------- -------
Income before provision for income taxes 8,322 6,541 14,919 11,115
Provision for income taxes 2,829 2,330 5,072 3,867
------- ------- ------- -------
Net income $ 5,493 $ 4,211 $ 9,847 $ 7,248
======= ======= ======= =======
Basic net income per common share $ 0.13 $ 0.10 $ 0.24 $ 0.18
======= ======= ======= =======
Diluted net income per common share $ 0.12 $ 0.10 $ 0.23 $ 0.17
======= ======= ======= =======
Weighted average shares outstanding
Basic 42,389 40,874 41,646 40,868
======= ======= ======= =======
Diluted 44,126 42,277 43,401 42,276
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
Page 5 of 24
<PAGE> 6
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Total
---------------------- Paid-in Unearned Retained --------------------- Stockholders'
Shares Amount Capital Compensation Earnings Shares Amount Equity
---------- ---------- ---------- ------------ ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ... 40,934,422 $ 41 $ 1,236 $ (464) $ 46,217 38,842 $ (217) $ 46,813
Issuance of common stock
for cash in initial
public offering, net of
offering expenses of
$1,211 ....................... 3,802,637 4 55,731 -- -- (38,842) 217 55,952
Issuance of common stock
upon exercise of employee
stock options ................ 203,950 -- 122 -- -- -- -- 122
Net income and
comprehensive income ......... -- -- -- -- 9,847 -- -- 9,847
Stock option compensation .... -- -- -- 114 -- -- -- 114
---------- ---------- ---------- --------- ---------- --------- ---------- ----------
Balance at June 30, 1999 ....... 44,941,009 $ 45 $ 57,089 $ (350) $ 56,064 -- $ -- $ 112,848
========== ========== ========== ========= ========== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 6 of 24
<PAGE> 7
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,847 $ 7,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,941 1,139
Deferred income taxes 1,508 (848)
Stock option compensation expense 114 112
Changes in assets and liabilities:
Decrease in trade accounts receivable 7,770 4,394
(Increase) decrease in unbilled receivables (745) 3,147
Increase in taxes receivable (1,229) --
(Increase) decrease in inventories 217 (316)
(Increase) decrease in other assets (318) 640
Increase (decrease) in accounts payable (122) 485
Increase (decrease) in accrued
compensation and benefits 556 (195)
Decrease in taxes payable (878) (681)
Increase in deferred revenue 13,598 3,241
Increase in accrued liabilities 131 795
--------- ---------
Net cash provided by operations 32,390 19,161
Cash flows from investing activities:
Purchases of property and equipment (2,500) (2,171)
--------- ---------
Net cash used by investing activities (2,500) (2,171)
Cash flows from financing activities:
Proceeds from issuance of common stock in
initial public offering, net 55,952 --
Proceeds from issuance of common stock
upon exercise of stock options 122 --
Proceeds from issuance of common stock -- 106
--------- ---------
Net cash provided by financing activities 56,074 106
--------- ---------
Net increase in cash and cash equivalents 85,964 17,096
Cash and cash equivalents at beginning of period 21,914 3,386
--------- ---------
Cash and cash equivalents at end of period $ 107,878 $ 20,482
========= =========
Supplemental disclosures:
Taxes paid $ 6,087 $ 4,320
</TABLE>
See accompanying notes to financial statements.
Page 7 of 24
<PAGE> 8
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
The Company
Inet Technologies, Inc. (the "Company" or "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. 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.
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 consolidated financial statements have
been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments)
necessary for a fair statement of the results for the interim
periods presented have been included. These financial statements
should be read in conjunction with the audited financial statements
and related notes for the three years ended December 31, 1998,
included in the Form S-1 registration statement (Reg. No.
333-59753). Operating results for the three- and six-month periods
ended June 30, 1999 are not necessarily indicative of the results
that may be expected for any other interim period or for the year
ending December 31, 1999.
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. At June
30, 1999 and December 31, 1998, all cash equivalents were invested
with a nationally recognized financial institution.
Inventories
Inventories are valued at the lower of standard cost, which
approximates actual cost determined on a first-in, first-out basis,
or market. At June 30, 1999 and December 31, 1998, inventories
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- -------------
(in thousands)
<S> <C> <C>
Raw materials.............................................. $ 2,306 $ 1,895
Work-in progress........................................... 996 2,289
Finished goods............................................. 4,073 3,408
-------------- -------------
$ 7,375 $ 7,592
============== =============
</TABLE>
Page 8 of 24
<PAGE> 9
Revenue Recognition
Effective January 1, 1998, the Company adopted Statement of
Position ("SOP") 97-2, Software Revenue Recognition, as amended by
SOP 98-4, Deferral of the Effective Date of Certain Provisions of
SOP 97-2, which did not require a significant change to the
Company's revenue recognition policies.
The Company derives revenues from the sale of products and related
product installation, integration and post-contract support
services to the telecommunications industry. Product revenues are
generally recognized in the period the Company has completed all
hardware manufacturing and/or software development to contractual
specifications, factory testing has been completed, the product has
been shipped to the customer, the fee is fixed and determinable and
collection is considered probable by the Company's management. When
the Company has significant obligations subsequent to shipment
(e.g., installation and system integration), revenues are not
recognized prior to the time the system has been delivered and
installed at the customer's premises and there are no significant
unfulfilled obligations. Revenues from arrangements that include
significant acceptance terms are not recognized until acceptance
has occurred.
The Company provides its customers with post-contract support
services, which generally consist of bug fixing and telephone
access to the Company's technical personnel, but may also include
the right to receive unspecified product updates, upgrades, and
enhancements. Revenue from these services, including product
support services included in initial licensing fees, is recognized
ratably over the contract period. Post-contract support services
included in the initial licensing fee are allocated from the total
contract amount based on the relative fair value determined using
vendor-specific objective evidence ("VSOE").
Deferred revenue primarily represents amounts billed to customers
pursuant to terms specified in contracts but for which revenue has
not been recognized.
In December 1998, SOP 98-9, Modification of SOP 97-2, `Software
Revenue Recognition' with Respect to Certain Transactions, was
released. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is VSOE of the fair values of all
of the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not
exist for one or more of the delivered elements, and (3) all
revenue recognition criteria of SOP 97-2 (other than the
requirement for VSOE of the fair value of each delivered element)
are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain
passages of SOP 97-2 became effective December 15, 1998. All other
provisions of SOP 98-9 will be effective for the Company's fiscal
year beginning January 1, 2000. Retroactive application is
prohibited. The Company is evaluating the requirements of SOP 98-9
and the effects, if any, on the Company's current revenue
recognition policies.
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.
Note 2 - Initial Public Offering
In June 1999, the Company completed the initial public offering of
its Common Stock. The Company issued 3,841,479 shares of its Common
Stock at an initial public offering price of $16.00 per share. Net
proceeds to the Company, after deduction of the underwriting
discount and estimated expenses, were approximately $55.9 million.
Page 9 of 24
<PAGE> 10
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 5,493 $ 4,211 $ 9,847 $ 7,248
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
weighted average share 42,389 40,874 41,646 40,868
Effect of dilutive securities:
Employee stock options 1,737 1,403 1,755 1,408
------- ------- ------- -------
Denominator for diluted earnings per
share-adjusted weighted-average shares
for assumed conversion 44,126 42,277 43,401 42,276
======= ======= ======= =======
Basic earnings per share $ 0.13 $ 0.10 $ 0.24 $ 0.18
======= ======= ======= =======
Diluted earnings per share $ 0.12 $ 0.10 $ 0.23 $ 0.17
======= ======= ======= =======
</TABLE>
Note 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 130, Reporting Comprehensive Income. FASB
Statement No. 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.
Note 5 - Segment Information
The Company operates in a single industry segment, providing
telecommunications equipment, software, and associated services,
and markets its products through its sales personnel and certain
foreign distributors. As a result, the financial information
disclosed herein represents all material financial information
related to the Company's principal operating segment. The
distribution of the Company's revenues as a percent of total
revenues is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
United States 45.1% 62.3% 48.6% 50.5%
Export:
Asia Pacific Region 3.0 11.3 3.9 9.1
Europe 47.3 23.5 42.8 34.9
Other 4.6 2.9 4.7 5.5
------ ------ ------ ------
Total export sales 54.9 37.7 51.4 49.5
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
The Company has no significant long-lived assets deployed outside of
the United States.
Page 10 of 24
<PAGE> 11
Note 6 - New Accounting Standards
In June 1998, the FASB issued Statement No.133, Accounting for
Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The provisions of
Statement of Financial Accounting Standards ("SFAS") No. 133, as
amended, are effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 2000,
although early adoption is allowed. The Company has chosen not to
adopt the provisions of this SFAS prior to its effective date. The
adoption of SFAS No. 133 is not expected to have a material impact
on the Company's consolidated financial statements and related
disclosures.
Page 11 of 24
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27(A) of the Securities
Act of 1933, as amended, and Section 21(E) of the Securities
Exchange Act of 1934, as amended. All statements other than
historical or current facts, including, without limitation,
statements about the business, financial condition, business
strategy, plans and objectives of management, and prospects of the
Company are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, such forward-looking statements are
subject to risks and uncertainties that could cause actual results
to differ materially from these expectations. Such risks and
uncertainties include, without limitation, changes in product
demand, the availability of products, changes in competition,
foreign risks, economic conditions, risks associated with Year 2000
issues, changes in tax risks, and other risks indicated in the
Company's filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company
to control, and in many cases, the Company cannot predict the risks
and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements.
When used in this Quarterly Report, the words "believes," "plans,"
"estimates," "expects," "anticipates," "intends," "continue,"
"may," "will," "should" or the negative of such terms and similar
expressions as they relate to the Company or its management are
intended to identify forward-looking statements.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements
and notes thereto included in Item 1 of this Quarterly Report and
the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1998,
contained in the Company's Prospectus filed May 26, 1999.
Historical results and percentage relationships among any amounts
in the financial statements are not necessarily indicative of
trends in operating results for any future periods.
OVERVIEW
Inet 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 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
Page 12 of 24
<PAGE> 13
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 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
data derived from the Company's unaudited consolidated statements
of income as a percentage of revenues. The operating results for
the three and six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for any future
periods.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 29.6 27.2 30.1 28.1
----- ----- ----- -----
Gross profit 70.4 72.8 69.9 71.9
----- ----- ----- -----
Operating expenses:
Sales and marketing 11.0 11.4 11.8 11.1
General and administrative 8.2 8.6 8.5 9.5
Research and development 21.5 18.8 21.2 19.7
----- ----- ----- -----
Total operating expenses 40.7 38.8 41.5 40.3
----- ----- ----- -----
Income from operations 29.7 34.0 28.4 31.6
Other income 2.6 1.1 2.0 0.9
----- ----- ----- -----
Income before provision for income taxes 32.3 35.1 30.4 32.5
Provision for income taxes 11.0 12.5 10.3 11.3
----- ----- ----- -----
Net income 21.3% 22.6% 20.1% 21.2%
===== ===== ===== =====
</TABLE>
REVENUES
The Company's revenues were $25.8 million for the three months
ended June 30, 1999, an increase of 38.2% over the $18.7 million
reported for the three months ended June 30, 1998. For the six
months ended June 30, 1999, revenues increased 43.5% to $49.0
million from $34.2 million reported for the six months ended June
30, 1998. The growth in revenues is primarily due to an increase in
unit sales during the three- and six-months ended June 30, 1999.
For the six months ended June 30, 1999 international revenues
accounted for 51.4% of total revenues compared to 49.5% for the six
months ended June 30, 1998. Revenues from sales other than Spectra
and GeoProbe collectively accounted for less than 10% of total
revenues in these periods. The Company anticipates revenues from
GeoProbe and Spectra will comprise the majority of revenues for the
remainder of 1999. The Company anticipates that in the future,
individual, large sales may represent a large percentage of total
revenues. Accordingly, the deferral or loss of one or more
significant sales could materially adversely affect operating
results in a period, particularly if there are significant sales
and marketing expenses associated with the deferred or lost sales.
Page 13 of 24
<PAGE> 14
COST OF REVENUES
Cost of revenues consists primarily of hardware expenses and
personnel costs related to the manufacturing, installation, and
support of the Company's products. For the three months ended June
30, 1999, cost of revenues increased 50.8% to $7.6 million from
$5.1 million for the three months ended June 30, 1998. The increase
in dollars resulted primarily from additional hardware of $700,000
due to increased units sold, related installation expenses of
$500,000 and additional support expenses of $700,000 related to
servicing the Company's growing installed customer base. Cost of
revenues represented 29.6% and 27.2% of revenues in the three
months ended June 30, 1999 and 1998, respectively. The increase in
cost of revenues as a percent of revenues was primarily due to the
increase in support services expense.
Cost of revenues of $14.8 million for the six months ended June 30,
1999 increased 53.6% in comparison to $9.6 million for the six
months ended June 30, 1998. The increase in dollars resulted
primarily from additional hardware of $2.9 million due to increased
units sold, related installation expenses of $500,000, and
additional support expenses of $1.4 million. Costs of revenues
represented 30.1% and 28.1% of revenues for the six months ended
June 30, 1999 and 1998, respectively. The increase in cost of
revenues as a percent of net revenues was primarily due to the
increase in support services expense. The Company believes that for
at least the remainder of 1999, cost of revenues should not vary
significantly as a percentage of revenues from the level
experienced in the six months ended June 30, 1999.
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 increased 33.8% to $2.8 million in the three months ended
June 30, 1999 from $2.1 million in the three months ended June 30,
1998. The increase in dollars was primarily related to increased
staffing and related costs of approximately $500,000. Sales and
marketing expenses as a percentage of revenues were 11.0% and 11.4%
in the three months ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, sales and marketing
expenses were $5.8 million, an increase of 52.8% from $3.8 million
for the comparable prior year period. The increase in dollars was
primarily related to increased staffing and related costs of
approximately $1.0 million and expenses of approximately $400,000
associated with the expansion of international sales activities.
Sales and marketing expenses as a percentage of revenues were 11.8%
and 11.1% in the six months ended June 30, 1999 and 1998,
respectively. The Company believes that sales and marketing
expenses will increase in dollars for the remainder of 1999 due to
planned expansion of its domestic and international sales efforts
and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel,
facilities and other costs of the finance, administrative and
executive departments of the Company as well as fees and expenses
associated with legal and accounting requirements. Such expenses
increased 31.6% to $2.1 million for the three months ended June 30,
1999 from $1.6 million for the three months ended June 30, 1998.
The increase in dollars was primarily related to increased staffing
and related costs of approximately $600,000 associated with the
growth of the Company's business. General and administrative
expenses as a percentage of revenues were 8.2% and 8.6% in the
three months ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, general and administrative
expenses were $4.2 million, an increase of 27.5% from $3.3 million
for the comparable prior year period. The increase in dollars was
primarily related to increased staffing and related costs of
approximately $900,000. General and administrative expenses as a
percentage of revenues were 8.5% and 9.5% in the six months ended
June
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<PAGE> 15
30, 1999 and 1998, respectively. The Company anticipates that
general and administrative expenses will continue to increase in
absolute dollars as the Company continues to accommodate its growth
and adds related infrastructure.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and
other compensation expenses associated with the Company's research
and development activities. Such expenses increased 57.5% to $5.5
million for the three months ended June 30, 1999 from $3.5 million
for the three months ended June 30, 1998. The increase in dollars
was primarily due to additional staffing and related personnel
costs of $1.9 million. Research and development expenses as a
percentage of revenues were 21.5% and 18.8% in the three months
ended June 30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, research and development
expenses were $10.4 million, an increase of 54.7% from $6.7 million
for the comparable prior year period. The increase in dollars was
primarily due to additional staffing and related personnel costs of
$3.6 million. Research and development expenses as a percentage of
revenues were 21.2% and 19.7% in the six months ended June 30, 1999
and 1998, respectively. 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 SFAS 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.
OTHER INCOME (EXPENSE)
Other income increased to $674,000 for the three months ended June
30, 1999 from $197,000 for the three months ended June 30, 1998.
Other income increased to $997,000 for the six months ended June
30, 1999 from $322,000 for the six months ended June 30, 1998. For
both the three and six months ended June 30, 1999, the increase
resulted from increased interest earned on higher balances of cash
and cash equivalents resulting from increased cash flows from
operations and the proceeds from the Company's initial public
offering completed in June 1999. Proceeds from the offering were
approximately $55.9 million in cash, net of underwriting discounts,
commissions and other offering costs.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $2.8 million and $2.3
million in the three months ended June 30, 1999 and 1998,
respectively. The Company's effective income tax rates were 34.0%
and 35.6% for the three months ended June 30, 1999 and 1998,
respectively. The Company recorded income tax expense of $5.1
million and $3.9 million in the six months ended June 30, 1999 and
1998, respectively. The Company's effective income tax rates were
34.0% and 34.8% for the six months ended June 30, 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and met its
capital expenditure requirements primarily through cash flows from
operations and bank borrowings. In June 1999, the Company completed
its initial public offering and issued 3,841,479 shares of its
Common Stock at a price of $16.00 per share. The Company received
approximately $55.9 million in cash, net of underwriting discounts,
commissions, and other offering costs. The Company had working
capital of $103.6 million at June 30, 1999, compared with $38.3
million at December 31, 1998. At June 30, 1999, the Company had
$107.9
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<PAGE> 16
million in cash and cash equivalents, an increase of $86.0 million
from $21.9 million in cash and cash equivalents at December 31,
1998.
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,
inventory, property, equipment, and investments and contains
customary restrictive covenants, including covenants requiring the
Company to maintain certain financial ratios. The credit facility
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, 1999, no amounts were
outstanding under the credit facility, and the amounts available to
the Company, after considering outstanding letters of credit, were
$9.97 million.
Net cash provided by operating activities was $32.4 million for the
six months ended June 30, 1999, compared to $19.2 million during
the same period of 1998. Net cash provided by operating activities
resulted primarily from increased levels of income from operations,
decreased trade accounts receivable, and increased levels of
deferred revenue due to amounts billed to customers pursuant to
terms specified in the contracts but for which revenues have not
been recognized.
Net cash used by investing activities was $2.5 million for the six
months ended June 30, 1999, compared to $2.2 million during the
same period of 1998. Net cash used by investing activities was
primarily related to purchases of property and equipment.
Net cash provided by financing activities was $56.1 million for the
six months ended June 30, 1999, compared to $106,000 during the
same period of 1998. The increase in net cash provided by financing
activities resulted primarily from proceeds from the Company's
initial public offering of 3,841,479 shares of its Common Stock for
which the Company received approximately $55.9 million in cash, net
of underwriting discounts, commissions and other offering costs.
At June 30, 1999, 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. Absent any acquisitions, the Company
anticipates that current cash balances, potential cash flows from
operations and available borrowings under the 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 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 customers and potential customers may also defer
installing or purchasing Year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potential
deferred sales. Conversely, Year 2000 issues may cause other
companies to accelerate installations or purchases, thereby causing
an increase in short-term revenues and a consequent decrease in
long-term revenues from 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
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<PAGE> 17
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 is communicating 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 believes that the aggregate incremental
costs related to the Year 2000 project have not been, and are not
expected to be, material to the Company's results of operations,
financial position and cash flows. The Company does not separately
track internal costs incurred for the Year 2000 project. Such costs
are principally for software upgrades, and are being funded through
operating cash flows. 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.
RISK FACTORS
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; in limited circumstances, customer product acceptance; 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
Page 17 of 24
<PAGE> 18
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 and salaries, 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 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. The Company
expects that in future periods this seasonal trend may cause first
quarter revenues to remain consistent with, or decrease from, the
level achieved in the preceding quarter.
As a result of all of the foregoing, the Company believes that
future operating results are likely to vary significantly from
quarter to quarter, and historical operating results should not be
relied 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.
Dependence on Telecommunications Industry
The Company has derived primarily 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.
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. Any invalidation, repeal or modification of the
requirements imposed by the Telecommunications Act of 1996 or the
local telephone competition rules adopted by the U.S. Federal
Communications Commission to implement that Act could have a
material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the
Page 18 of 24
<PAGE> 19
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.
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 quarter, particularly if there are
significant sales and marketing expenses associated with the
deferred or lost sales.
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, 1998 and the six months ended June 30, 1999 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 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.
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 Agilent Technologies, a
subsidiary of Hewlett-Packard Company. Spectra principally competes
with products offered by Agilent Technologies, 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.
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 $17.5 million in 1995 to $77.4 million in 1998 and to $49.0
million in the six months ended June 30, 1999. The number of its
employees has increased from 116 at December 31, 1995 to 358 at
December 31, 1998 and to 420 at June 30, 1999. 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
Page 19 of 24
<PAGE> 20
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 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 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.
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, none of whom is bound by an employment agreement. Each
of the Company's three founders 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
Company is also searching for a chief financial officer. 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.
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.
International Operations
Revenues from customers located outside of the U.S. represented
49.4%, 52.6%, 52.2% and 51.4% of the Company's total revenues in
1996, 1997, 1998 and the six months ended June 30, 1999,
respectively. Inet
Page 20 of 24
<PAGE> 21
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; 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.
To date, 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, the Company expects that
in future periods a 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 the Company would be successful in
avoiding exchange-related losses.
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
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<PAGE> 22
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. 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.
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.
Potential Effect of Shares Eligible for Future Sale
Sales of a substantial number of shares of Common Stock into the
public market 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. At June 30, 1999, the
Company had outstanding 44,941,009 shares of Common Stock. Of these
shares, approximately 39 million shares of Common Stock are
"restricted securities" as that term is defined in Rule 144 of the
Securities Act "Rule 144".
Upon the expiration of lock-up agreements between the Company's
stockholders and the Underwriters (the "Lock-Up Agreements"),
beginning November 16, 1999, approximately 38 million 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 approximately 1 million 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, 1999,
there were outstanding options to purchase an aggregate 1,912,200
shares of Common Stock. Approximately 1 million shares underlying
such options will become eligible for sale pursuant to Rule 701
under the Securities Act beginning November 16, 1999, and the
remaining 812,000 shares underlying such options will become
eligible for sale pursuant to Rule 701 from time to time after
November 16, 1999 as such options vest.
Page 22 of 24
<PAGE> 23
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) From April 1 through June 30, 1999, the Company issued
approximately 200,000 shares of its common stock to employees
pursuant to exercises of stock options (with exercise prices
of $0.60 per share) under the Company's stock plans. These
issuances were deemed exempt from registration under Section 5
of the Securities Act of 1933 in reliance upon Rule 701
thereunder.
(d) The Company's registration statement (Registration No.
333-59753) under the Securities Act of 1933, as amended, for
its initial public offering became effective on May 26, 1999.
A total of 6,612,500 shares of Common Stock were registered
and 3,841,479 shares of the Company's Common Stock were sold
by the Company to an underwriting syndicate. Goldman, Sachs &
Co., Dain Rauscher Wessels, and Hambrecht & Quist LLC were the
managing underwriters of the offering. An additional 1,983,130
shares of Common Stock were sold on behalf of selling
stockholders as part of the same offering. All shares were
sold to the public at a price of $16.00 per share. In
connection with the offering, the Company paid approximately
$4.3 million in underwriting discounts and commissions to the
underwriters. Offering proceeds, net of aggregate expenses to
the Company of approximately $1.2 million, were approximately
$55.9 million. As of June 30, 1999, the Company has used all
of the net offering proceeds for the purchase of temporary
investments consisting of cash, cash equivalents, and
short-term investments. The Company has not used any of the
net offering proceeds for construction of facilities,
purchases of real estate, or acquisition of other businesses.
None of the Company's net proceeds of the offering were paid
directly or indirectly to any director, officer of the Company
or their associates, persons owning 10% or more of any class
of equity securities of the Company, or an affiliate of the
Company. The Company currently intends to use the net proceeds
of the offering 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
offering to acquire businesses, products and technologies, or
enter into joint venture arrangements, that are complementary
to the Company's business and product offerings.
Item 4. Submission of Matters to a Vote of Security Holders
On May 26, 1999 by written consent in lieu of a meeting,
stockholders holding an aggregate of 38,859,800 shares of the
Company's common stock approved an amendment and restatement of the
Company's Bylaws.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
27.1 Financial Data Schedule (for SEC information only)
27.2 Amended Financial Data Schedule (for SEC information only)
</TABLE>
(b) There were no reports filed on Form 8-K during the second
quarter of 1999.
Item 3 of Part I and Items 1, 3, and 5 of Part II were not applicable and have
been omitted.
Page 23 of 24
<PAGE> 24
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INET TECHNOLGIES, INC.
By: /s/ ELIE S. AKILIAN
--------------------------------------------------
Elie S. Akilian
President, Chief Executive Officer and Director
(principal executive officer)
By: /s/ WILLIAM H. MINA
--------------------------------------------------
William H. Mina
Senior Vice President - Finance and Administration
and Director (chief accounting officer)
Date: August 12, 1999
Page 24 of 24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule (for SEC information only)
27.2 Amended Financial Data Schedule (for SEC information only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 107,878
<SECURITIES> 0
<RECEIVABLES> 17,548
<ALLOWANCES> 898
<INVENTORY> 7,375
<CURRENT-ASSETS> 135,594
<PP&E> 16,749
<DEPRECIATION> 7,796
<TOTAL-ASSETS> 144,817
<CURRENT-LIABILITIES> 31,969
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 112,803
<TOTAL-LIABILITY-AND-EQUITY> 144,817
<SALES> 49,015
<TOTAL-REVENUES> 49,015
<CGS> 14,764
<TOTAL-COSTS> 20,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,919
<INCOME-TAX> 5,072
<INCOME-CONTINUING> 9,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,847
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,482
<SECURITIES> 0
<RECEIVABLES> 14,309
<ALLOWANCES> 663
<INVENTORY> 7,279
<CURRENT-ASSETS> 42,915
<PP&E> 11,195
<DEPRECIATION> 5,001
<TOTAL-ASSETS> 49,183
<CURRENT-LIABILITIES> 12,236
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 36,761
<TOTAL-LIABILITY-AND-EQUITY> 49,183
<SALES> 34,165
<TOTAL-REVENUES> 34,165
<CGS> 9,613
<TOTAL-COSTS> 13,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,115
<INCOME-TAX> 3,867
<INCOME-CONTINUING> 7,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,248
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.17
</TABLE>
