<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 September 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant outstanding at November 8, 1999:
45,294,759
Page 1 of 25
<PAGE> 2
INET TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <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 ..................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................... 24
Signatures ............................................................................... 25
Exhibit 27 Financial Data Schedule (for SEC information only)
</TABLE>
Page 2 of 25
<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>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $121,792 $ 21,914
Trade accounts receivable (net of allowance for doubtful accounts of $889
and $659 at September 30, 1999 and December 31, 1998,
respectively) 13,270 22,073
Unbilled receivables 2,656 1,602
Inventories 6,082 7,592
Deferred income taxes 774 2,568
Other current assets 1,834 1,248
-------- --------
Total current assets 146,408 56,997
Property and equipment, net 8,480 8,394
Other assets 316 117
-------- --------
Total assets $155,204 $ 65,508
======== ========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 25
<PAGE> 4
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value and number of shares)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,429 $ 1,858
Accrued compensation and benefits 4,250 2,159
Deferred revenue 22,908 13,073
Income tax payable 1,333 878
Other accrued liabilities 883 716
--------- ---------
Total current liabilities 30,803 18,684
Deferred tax liabilities -- 11
Commitments
Stockholders' equity
Common stock, $.001 par value:
Authorized shares - 175,000,000
Issued shares - 45,265,009 at September 30, 1999
and 40,934,422 at December 31, 1998 45 41
Additional paid-in capital 57,609 1,236
Unearned compensation (291) (464)
Retained earnings 67,038 46,217
Treasury stock, no common shares at September 30,
1999, and 38,842 at December 31, 1998, at cost -- (217)
--------- ---------
Total stockholders' equity 124,401 46,813
--------- ---------
Total liabilities and stockholders' equity $ 155,204 $ 65,508
========= =========
</TABLE>
See accompanying notes to financial statements.
Page 4 of 25
<PAGE> 5
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 29,010 $ 20,470 $ 78,025 $ 54,635
Cost of revenues 8,354 5,959 23,118 15,572
-------- -------- -------- --------
Gross profit 20,656 14,511 54,907 39,063
Operating expenses:
Selling and marketing 3,001 2,439 8,794 6,231
General and administrative 2,376 1,650 6,529 4,907
Research and development 5,805 4,341 16,188 11,051
-------- -------- -------- --------
11,182 8,430 31,511 22,189
-------- -------- -------- --------
Income from operations 9,474 6,081 23,396 16,874
Gain (loss) on sale of assets 5,985 -- 5,960 (4)
Other income 1,362 266 2,384 592
-------- -------- -------- --------
7,347 266 8,344 588
-------- -------- -------- --------
Income before provision for income taxes 16,821 6,347 31,740 17,462
Provision for income taxes 5,847 1,844 10,919 5,711
-------- -------- -------- --------
Net income $ 10,974 $ 4,503 $ 20,821 $ 11,751
======== ======== ======== ========
Basic net income per common share $ 0.24 $ 0.11 $ 0.49 $ 0.29
======== ======== ======== ========
Diluted net income per common share $ 0.24 $ 0.11 $ 0.47 $ 0.28
======== ======== ======== ========
Weighted average shares outstanding
Basic 45,146 40,886 42,826 40,874
======== ======== ======== ========
Diluted 46,589 42,614 44,473 42,389
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
Page 5 of 25
<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
$1,464 ...................... 3,802,637 4 55,478 -- -- (38,842) 217 55,699
Issuance of common stock
upon exercise of
employee stock options ...... 527,950 -- 342 -- -- -- -- 342
Net income and
comprehensive income ........ -- -- -- -- 20,821 -- -- 20,821
Stock option compensation ..... -- -- 553 173 -- -- -- 726
---------- ------- ---------- ---------- ---------- -------- ------- ----------
Balance at September 30, 1999 .... 45,265,009 $ 45 $ 57,609 $ (291) $ 67,038 -- $ -- $ 124,401
========== ======= ========== ========== ========== ======== ======= ==========
</TABLE>
See accompanying notes to financial statements.
Page 6 of 25
<PAGE> 7
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,821 $ 11,751
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,985 1,822
(Gain) loss on sale or disposal of assets (5,960) 4
Deferred income taxes 1,646 (1,187)
Stock option compensation expense 173 170
Changes in assets and liabilities:
Decrease in trade accounts receivable 8,630 5,239
(Increase) decrease in unbilled receivables (1,054) 2,313
Decrease in taxes receivable -- 816
(Increase) decrease in inventories 1,483 (1,637)
Increase in other assets (659) (344)
Increase (decrease) in accounts payable (429) 727
Increase in accrued compensation and benefits 2,091 791
Increase in taxes payable 455 183
Increase (decrease) in deferred revenue 9,835 (1,843)
Increase in accrued liabilities 167 982
--------- ---------
Net cash provided by (used by) operations 40,184 19,787
Cash flows from investing activities:
Purchases of property and equipment (3,347) (4,154)
Proceeds from sale of assets 7,000 --
--------- ---------
Net cash provided by investing activities 3,653 (4,154)
Cash flows from financing activities:
Proceeds from issuance of common stock in
initial public offering, net 55,699 --
Proceeds from issuance of common stock
upon exercise of stock options 342 9
Proceeds from issuance of common stock -- 106
--------- ---------
Net cash provided by financing activities 56,041 115
--------- ---------
Net increase in cash and cash equivalents 99,878 15,748
Cash and cash equivalents at beginning of period 21,914 3,386
--------- ---------
Cash and cash equivalents at end of period $ 121,792 $ 19,134
========= =========
Supplemental disclosures:
Taxes paid $ 8,840 $ 5,900
</TABLE>
See accompanying notes to financial statements.
Page 7 of 25
<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 currently 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
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 Company's Form S-1 registration statement (Reg. No.
333-59753) filed with the Securities and Exchange Commission.
Operating results for the three- and nine-month periods ended
September 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
September 30, 1999 and December 31, 1998, all cash equivalents were
invested with nationally recognized financial institutions.
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 September 30, 1999 and December 31, 1998, inventories
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(in thousands)
<S> <C> <C>
Raw materials.............. $ 2,171 $ 1,895
Work-in progress........... 912 2,289
Finished goods............. 2,999 3,408
-------------- -------------
$ 6,082 $ 7,592
============== =============
</TABLE>
Page 8 of 25
<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 service
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 include the correction of software problems,
telephone access to the Company's technical personnel and the right
to receive unspecified product updates, upgrades and enhancements.
Revenues from these services, including product support services
included in initial licensing fees, are recognized ratably over the
contract period. Post-contract support services included in the
initial licensing fee are allocated from the total contract amount
based on the relative fair value of these services determined using
vendor-specific objective evidence ("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 $55.7 million.
Page 9 of 25
<PAGE> 10
Note 3 - Sale of Wireless Data Assets
In September 1999, the Company sold its wireless data product line
and related assets to Nextcell, Inc., an entity controlled by a
related party, for a cash purchase price of $7.0 million. The
Company recorded a pre-tax gain of $6.0 million for the three and
nine months ended September 30, 1999.
Note 4 - 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 Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $10,974 $ 4,503 $20,821 $11,751
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
weighted average share 45,146 40,886 42,826 40,874
Effect of dilutive securities:
Employee stock options 1,443 1,728 1,647 1,515
------- ------- ------- -------
Denominator for diluted earnings per
share-adjusted weighted-average shares
for assumed conversion 46,589 42,614 44,473 42,389
======= ======= ======= =======
Basic earnings per share $ 0.24 $ 0.11 $ 0.49 $ 0.29
======= ======= ======= =======
Diluted earnings per share $ 0.24 $ 0.11 $ 0.47 $ 0.28
======= ======= ======= =======
</TABLE>
Note 5 - Comprehensive Income
In September 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.
Page 10 of 25
<PAGE> 11
Note 6 - 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 Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
----- ------ ----- -----
<S> <C> <C> <C> <C>
United States 49.8% 49.8% 49.0% 50.2%
Export:
Asia Pacific Region 11.9 6.1 6.9 8.0
Europe 18.4 29.7 33.8 33.0
Other 19.9 14.4 10.3 8.8
----- ----- ----- -----
Total export sales 50.2 50.2 51.0 49.8
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The Company has no significant long-lived assets deployed outside
of the United States.
Note 7 - New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") 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 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 25
<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 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. All statements other than historical or
current facts, including, without limitation, statements about 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 below under the
captions "Year 2000 Compliance" and "Risk Factors" and in the
Company's other 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," "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 with the Securities and
Exchange Commission on 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 currently 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, troubleshooting and fraud
detection. GeoProbe's associated IT:seven business applications
provide 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 25
<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, as
well as management applications to address interoperability between
SS7 and internet protocol networks.
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 and the
nine months ended September 30, 1999. 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 and associated IT:seven business
applications. 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 nine-months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for any
future periods.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ----- ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 28.8 29.1 29.6 28.5
----- ----- ----- -----
Gross profit 71.2 70.9 70.4 71.5
----- ----- ----- -----
Operating expenses:
Sales and marketing 10.3 11.9 11.3 11.4
General and administrative 8.2 8.1 8.4 9.0
Research and development 20.0 21.2 20.7 20.2
----- ----- ----- -----
Total operating expenses 38.5 41.2 40.4 40.6
----- ----- ----- -----
Income from operations 32.7 29.7 30.0 30.9
Other income 25.3* 1.3 10.7* 1.1
----- ----- ----- -----
Income before provision for income taxes 58.0 31.0 40.7 32.0
Provision for income taxes 20.2 9.0 14.0 10.5
----- ----- ----- -----
Net income 37.8% 22.0% 26.7% 21.5%
==== ==== ==== ====
</TABLE>
* includes one-time gain from sale of wireless data assets
REVENUES
The Company's revenues were $29.0 million for the three months
ended September 30, 1999, an increase of 41.7% over the $20.5
million reported for the three months ended September 30, 1998. For
the nine months ended September 30, 1999, revenues increased 42.8%
to $78.0 million from $54.6 million reported for the nine months
ended September 30, 1998. The growth in revenues is primarily due
to an increase in unit sales during the three- and nine-months
ended September 30, 1999. For the nine months ended September 30,
1999, international revenues accounted for 51.0% of total revenues
compared to 49.8% for the nine months ended September 30, 1998.
Revenues from sources other than Spectra and GeoProbe collectively
accounted for less than 10% of total revenues in these periods.
Revenues from the wireless data product line were approximately
$200,000 and $1.7 million for the three- and nine-month periods
ended September 30, 1999, respectively. In the three months ended
September 30, 1999, one individual sale represented 16.3% of
revenues. The Company anticipates that in the future, individual,
large sales may represent a large percentage of total revenues.
Accordingly, the
Page 13 of 25
<PAGE> 14
deferral or loss of one or more significant sales could materially
adversely affect operating results in a period.
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
September 30, 1999, cost of revenues increased 40.2% to $8.4
million from $6.0 million for the three months ended September 30,
1998. The increase in dollars resulted primarily from additional
hardware of $800,000 due to increased units sold, related
installation expenses of $500,000 and additional support expenses
of $500,000 related to servicing the Company's growing installed
customer base. Cost of revenues represented 28.8% and 29.1% of
revenues in the three months ended September 30, 1999 and 1998,
respectively.
Cost of revenues of $23.1 million for the nine months ended
September 30, 1999 increased 48.5% in comparison to $15.6 million
for the nine months ended September 30, 1998. The increase in
dollars resulted primarily from additional hardware of $2.8 million
due to increased units sold, related installation expenses of $1.4
million, related integration expenses of $600,000, and additional
support expenses of $1.9 million. Costs of revenues represented
29.6% and 28.5% of revenues for the nine months ended September 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 nine months ended September 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 23.0% to $3.0 million in the three months ended
September 30, 1999 from $2.4 million in the three months ended
September 30, 1998. The increase in dollars was primarily related
to increased staffing and related costs of approximately $600,000.
Sales and marketing expenses as a percentage of revenues were 10.3%
and 11.9% in the three months ended September 30, 1999 and 1998,
respectively.
For the nine months ended September 30, 1999, sales and marketing
expenses were $8.8 million, an increase of 41.1% from $6.2 million
for the comparable prior year period. The increase in dollars was
primarily related to increased staffing and related costs of
approximately $1.8 million and expenses of approximately $600,000
associated with the expansion of international sales activities.
Sales and marketing expenses as a percentage of revenues were 11.3%
and 11.4% in the nine months ended September 30, 1999 and 1998,
respectively. The Company believes that sales and marketing
expenses will continue to increase in absolute dollars at least
through 2000 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 44.0% to $2.4 million for the three months ended
September 30, 1999 from $1.7 million for the three months ended
September 30, 1998. The increase in dollars was primarily related
to increased staffing and related costs of approximately $700,000
associated with the growth of the Company's business. General and
administrative expenses as a percentage of revenues were 8.2% and
8.1% in the three months ended September 30, 1999 and 1998,
respectively.
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<PAGE> 15
For the nine months ended September 30, 1999, general and
administrative expenses were $6.5 million, an increase of 33.0%
from $4.9 million for the comparable prior year period. The
increase in dollars was primarily related to increased staffing and
related costs of approximately $1.5 million. General and
administrative expenses as a percentage of revenues were 8.4% and
9.0% in the nine months ended September 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 33.7% to $5.8
million for the three months ended September 30, 1999 from $4.3
million for the three months ended September 30, 1998. The increase
in dollars was primarily due to additional staffing and related
personnel costs of $1.5 million. Research and development expenses
as a percentage of revenues were 20.0% and 21.2% in the three
months ended September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1999, research and
development expenses were $16.2 million, an increase of 46.5% from
$11.1 million for the comparable prior year period. The increase in
dollars was primarily due to additional staffing and related
personnel costs of $5.2 million, off-set by slight decreases in
other expenses. Research and development expenses as a percentage
of revenues were 20.7% and 20.2% in the nine months ended September
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
Other income was $7.3 million for the three months ended September
30, 1999 compared to $300,000 for the three months ended September
30, 1998. Other income was $8.3 million for the nine months ended
September 30, 1999 compared to $600,000 for the nine months ended
September 30, 1998. For both the three and nine months ended
September 30, 1999, the increase resulted from a $6.0 million gain
on the sale of the Company's wireless data assets and from
increased interest earned on higher balances of cash and cash
equivalents resulting from increased cash flows from operations and
proceeds from the Company's initial public offering completed in
June 1999. Proceeds from the offering were approximately $55.7
million in cash, net of underwriting discounts, commissions and
other offering costs.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $5.8 million and $1.8
million in the three months ended September 30, 1999 and 1998,
respectively. The Company's effective income tax rates were 34.8%
and 29.1% for the three months ended September 30, 1999 and 1998,
respectively. The Company recorded income tax expense of $10.9
million and $5.7 million in the nine months ended September 30,
1999 and 1998, respectively. The Company's effective income tax
rates were 34.4% and 32.7% for the nine months ended September 30,
1999 and 1998, respectively. The higher effective income tax rates
in 1999 were attributable to higher levels of net income combined
with state tax benefits and research and development tax credits
which lowered the 1998 effective income tax rates.
Page 15 of 25
<PAGE> 16
SALE OF WIRELESS DATA ASSETS
In September 1999, the Company sold its wireless data product line
and related assets to Nextcell, Inc., an entity controlled by a
related party, for a cash purchase price of $7.0 million. The
Company recorded a pre-tax gain of $6.0 million and an after-tax
gain of $3.9 million, or $0.09 per share on a diluted basis, for
the three and nine months ended September 30, 1999. Without the
gain on the sale of the wireless data assets, the Company's diluted
net income per common share was $0.15 and $0.38 for the three and
nine months ended September 30, 1999 compared to $0.11 and $0.28
for the three and nine months ended September 30, 1998. Revenues
for the wireless data product line were approximately $200,000 and
$1.7 million for the three and nine months ended September 30,
1999. The Company does not anticipate diluted net income per common
share to be adversely affected in future periods as a result of
this sale.
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 to the public of $16.00 per share. The
Company received approximately $55.7 million in cash, net of
underwriting discounts, commissions and other offering costs. In
September 1999, the Company sold its wireless data product line and
related assets for a cash purchase price of $7.0 million. The
Company had working capital of $115.6 million at September 30,
1999, compared with $38.3 million at December 31, 1998. At
September 30, 1999, the Company had $121.8 million in cash and cash
equivalents, an increase of $99.9 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
Page 16 of 25
<PAGE> 17
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 September 30, 1999, no amounts
were outstanding under the credit facility, and the amounts
available to the Company, after considering outstanding letters of
credit, were $9.99 million.
Net cash provided by operating activities was $40.2 million for the
nine months ended September 30, 1999, compared to $19.8 million
during the same period in 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.
Net cash provided by investing activities was $3.7 million for the
nine months ended September 30, 1999, compared to net cash used by
investing activities of $4.2 million during the same period in
1998. Net cash provided by investing activities in the nine months
ended September 30, 1999 resulted from proceeds from the sale of
the Company's wireless data assets of $7.0 million less cash used
to purchase property and equipment of $3.3 million. Net cash used
by investing activities in the nine months ended September 30, 1998
was primarily related to purchases of property and equipment.
Net cash provided by financing activities was $56.0 million for the
nine months ended September 30, 1999, compared to $115,000 during
the same period in 1998. The increase in net cash provided by
financing activities resulted primarily from the net proceeds from
the Company's initial public offering of $55.7 million.
At September 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 such
acquisitions and joint ventures, 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 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
Page 17 of 25
<PAGE> 18
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 hardware or
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 was performed, and the Company determined
that it would be required to upgrade certain portions of its
computer hardware and software tools so that they would be Year
2000 compliant. These upgrades were made in conjunction with the
Company's overall information systems initiatives. In addition, the
Company has contacted significant 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 which have been 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 has
communicated 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 its Year 2000 project have not been, and are not
expected to be, material to the Company's results of operations,
financial position or 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
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
Page 18 of 25
<PAGE> 19
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.
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 substantially 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 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.
Page 19 of 25
<PAGE> 20
Lengthy Sales Cycle
The sales cycle for the Company's products is long, typically
ranging from 6 to 12 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 1997, 1998
and the nine months ended September 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
and the convergence of the internet protocol ("IP") network and
public switched telephone network ("PSTN"). The Company's business,
financial condition and results of operations would be materially
adversely affected if the market for SS7 and converging 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. 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 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 $78.0 million in
the nine months ended September 30, 1999. The number of employees
has increased from 116 at December 31, 1995 to 358 at December 31,
1998 and to 427 at September 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 20 of 25
<PAGE> 21
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 and IP 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 personnel, 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 and IP 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
52.6%, 52.2% and 51.0% of the Company's total revenues in 1997,
1998 and the nine months ended September 30, 1999, respectively.
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<PAGE> 22
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; 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 revenues 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 and joint ventures 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 acquisition 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> 23
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
intended 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 September 30, 1999, the
Company had outstanding 44,265,009 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 certain of the
Company's stockholders and the underwriters of the Company's
initial public offering (the "Lock-Up Agreements"), beginning
November 22, 1999, approximately 38 million shares held by various
stockholders of the Company will become eligible for sale pursuant
to the volume, manner of sale and notice requirements of Rule 144
and approximately one million shares held by various 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 September 30, 1999,
there were outstanding options to purchase an aggregate 1,814,300
shares of common stock. Approximately 700,000 shares underlying
such options will become eligible for sale pursuant to Rule 701
under the Securities Act beginning November 22, 1999, and the
remaining 1.1 million shares underlying such options will become
eligible for sale pursuant to Rule 701 from time to time after
November 22, 1999 as such options vest.
Page 23 of 25
<PAGE> 24
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) From July 1 through September 30, 1999, the Company issued
approximately 328,000 shares of its common stock to employees
and former employees pursuant to exercises of stock options
(with exercise prices ranging from $0.60 to $16.00 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 $1.5 million, were approximately
$55.7 million. As of September 30, 1999, the Company has used
all of the net offering proceeds for the purchase of temporary
investments consisting of cash and cash equivalents. The
Company has not used any of the net offering proceeds for
construction of facilities, purchases of real estate or
acquisitions of other businesses. None of the Company's net
proceeds of the offering were paid directly or indirectly to
any director or officer of the Company or their associates,
person owning 10% or more of any class of equity securities of
the Company, or 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
27 Financial Data Schedule (for SEC information only)
</TABLE>
(b) There were no reports filed on Form 8-K during the third
quarter of 1999.
Page 24 of 25
<PAGE> 25
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 TECHNOLOGIES, 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: November 12, 1999
Page 25 of 25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule (for SEC information only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 121,792
<SECURITIES> 0
<RECEIVABLES> 16,815
<ALLOWANCES> 889
<INVENTORY> 6,082
<CURRENT-ASSETS> 146,408
<PP&E> 17,033
<DEPRECIATION> 8,553
<TOTAL-ASSETS> 155,204
<CURRENT-LIABILITIES> 30,803
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 124,356
<TOTAL-LIABILITY-AND-EQUITY> 155,204
<SALES> 78,025
<TOTAL-REVENUES> 78,025
<CGS> 23,118
<TOTAL-COSTS> 31,511
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,740
<INCOME-TAX> 10,919
<INCOME-CONTINUING> 20,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,821
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.47
</TABLE>
