<PAGE>
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, 2000
OR
( ) TRANSITION REPORT PURSUANT 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.)
1500 North Greenville Avenue
Richardson, Texas 75081
(Address of principal executive offices, including zip code)
(469) 330-4000
(Registrant's telephone number, including area code)
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 outstanding at November 6, 2000: 46,313,008
Page 1 of 24
<PAGE>
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 ............................................. 4
Consolidated Statement of Stockholders' Equity................................. 5
Consolidated Statements of Cash Flows.......................................... 6
Notes to Consolidated Financial Statements .................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 23
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ..................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
Signatures ............................................................................... 24
</TABLE>
Page 2 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 142,442 $ 127,903
Trade accounts receivable, net of allowance for doubtful accounts of $932 and $938 at
September 30, 2000 and December 31, 1999, respectively.............................. 25,889 20,781
Unbilled receivables.................................................................. 3,294 2,196
Inventories........................................................................... 9,549 5,893
Deferred income taxes................................................................. 2,022 2,318
Other current assets.................................................................. 4,315 1,312
------------ -----------
Total current assets.......................................................... 187,511 160,403
Property and equipment, net............................................................. 15,449 9,324
Deferred income taxes................................................................... 35 6
Other assets............................................................................ 282 184
------------ -----------
Total assets.................................................................. $ 203,277 $ 169,917
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 4,479 $ 2,599
Accrued compensation and benefits..................................................... 7,141 5,252
Deferred revenue...................................................................... 22,323 26,432
Taxes payable......................................................................... -- 213
Other accrued liabilities............................................................. 4,027 1,998
------------ -----------
Total current liabilities..................................................... 37,970 36,494
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 25,000,000
Issued shares -- None.............................................................. -- --
Common stock, $.001 par value:
Authorized shares -- 175,000,000
Issued shares -- 46,266,708 at September 30, 2000
and 45,312,759 at December 31, 1999.............................................. 46 45
Additional paid-in capital............................................................ 61,024 57,693
Unearned compensation................................................................. (60) (233)
Retained earnings..................................................................... 104,297 75,918
------------ -----------
Total stockholders' equity.................................................... 165,307 133,423
------------ -----------
Total liabilities and stockholders' equity.................................... $ 203,277 $ 169,917
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 24
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Product and license fees........................ $ 36,410 $ 26,375 $ 98,893 $ 70,770
Services........................................ 5,015 2,635 12,321 7,255
---------- ---------- ---------- ----------
Total revenues............................. 41,425 29,010 111,214 78,025
Cost of revenues:
Product and license fees........................ 8,017 6,450 21,537 18,066
Services........................................ 2,429 1,904 6,300 5,052
---------- ---------- ---------- ----------
Total cost of revenues..................... 10,446 8,354 27,837 23,118
---------- ---------- ---------- ----------
Gross profit........................... 30,979 20,656 83,377 54,907
Operating expenses:
Research and development........................ 9,194 5,805 24,115 16,188
Sales and marketing............................. 5,420 3,001 13,634 8,794
General and administrative...................... 3,356 2,376 8,847 6,529
---------- ---------- ---------- ----------
17,970 11,182 46,596 31,511
---------- ---------- ---------- ----------
Income from operations.................. 13,009 9,474 36,781 23,396
Other income (expense):
Gain on sale of assets.......................... 15 5,985 -- 5,960
Interest income................................. 2,157 1,363 6,043 2,390
Other expense................................... (48) (1) (55) (6)
---------- ---------- ---------- ----------
2,124 7,347 5,988 8,344
---------- ---------- ---------- ----------
Income before provision for income
taxes................................. 15,133 16,821 42,769 31,740
Provision for income taxes........................ 4,994 5,847 14,390 10,919
---------- ---------- ---------- ----------
Net income.............................. $ 10,139 $ 10,974 $ 28,379 $ 20,821
========== ========== ========== ==========
Earnings per common share:
Basic................................... $ 0.22 $ 0.24 $ 0.62 $ 0.49
========== ========== ========== ==========
Diluted................................. $ 0.22 $ 0.24 $ 0.61 $ 0.47
========== ========== ========== ==========
Weighted-average shares outstanding:
Basic................................... 46,205 45,146 46,063 42,826
========== ========== ========== ==========
Diluted................................. 46,864 46,589 46,840 44,473
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 24
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN UNEARNED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
---------- ------ ---------- ------------ -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999... 45,312,759 $ 45 $57,693 $ (233) $ 75,918 $133,423
Issuance of common stock under
stock option and stock 953,949 1 3,331 -- -- 3,332
purchase plans.............
Net income................... -- -- -- -- 28,379 28,379
Stock option compensation.... -- -- -- 173 -- 173
---------- ---- ------- ------ -------- --------
Balance at September 30, 2000.. 46,266,708 $ 46 $61,024 $ (60) $104,297 $165,307
========== ==== ======= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 24
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 28,379 $ 20,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 3,615 2,985
Gain on sale of assets............................ -- (5,960)
Deferred income taxes............................. 267 1,646
Issuance of common stock and stock options charged
to expense....................................... 173 173
Change in operating assets and liabilities:
Decrease (increase) in trade accounts receivable (5,108) 8,630
Increase in unbilled receivables............... (1,098) (1,054)
Increase in tax refunds receivable............. (847) --
Decrease (increase) in inventories............. (3,656) 1,483
Increase in other assets....................... (2,254) (659)
Increase (decrease) in accounts payable........ 1,880 (429)
Increase (decrease) in taxes payable........... (213) 2,091
Increase in accrued compensation and benefits.. 1,889 455
Increase (decrease) in deferred revenue........ (4,109) 9,835
Increase in other accrued liabilities.......... 2,029 167
---------- ---------
Net cash provided by operating activities........... 20,947 40,184
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (9,740) (3,347)
Proceeds from sale of assets........................ -- 7,000
---------- ---------
Net cash provided by (used in) investing activities. (9,740) 3,653
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 and purchases under employee stock
purchase plan.................................... 3,332 342
---------- ---------
Net cash provided by financing activities........... 3,332 56,041
---------- ---------
Net increase in cash and cash equivalents........... 14,539 99,878
Cash and cash equivalents at beginning of period.... 127,903 21,914
---------- ---------
Cash and cash equivalents at end of period.......... $ 142,442 $ 121,792
========== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................... $ -- $ --
========== =========
Income taxes paid................................ $ 15,172 $ 8,840
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 24
<PAGE>
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
We provide communications software solutions that enable carriers
to more effectively design, deploy, diagnose, monitor and manage
communications networks that carry signaling information used to
manage communications sessions which include phone calls, dial-up
Internet access, and other service transactions. Our products also
address the fundamental business needs of communications carriers,
such as improved billing, targeted sales and marketing, fraud
prevention and enhanced routing. We currently provide these
comprehensive solutions primarily through our GeoProbe and Spectra
product offerings.
CONSOLIDATION
The consolidated financial statements include the accounts of our
wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
We have prepared the accompanying unaudited consolidated financial
statements in accordance with generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In our opinion, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair statement of the
results for the interim periods presented have been included. These
financial statements should be read in conjunction with the audited
financial statements and related notes for the three years ended
December 31, 1999, included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, or SEC, on March 3,
2000. Operating results for the three- and nine-month periods ended
September 30, 2000 are not necessarily indicative of the results
that may be expected for any other interim period or for the year
ending December 31, 2000.
CASH AND CASH EQUIVALENTS
All highly liquid securities with original maturities of three
months or less are classified as cash equivalents. The carrying
value of cash equivalents approximates fair market value.
INVENTORIES
Inventories are valued at the lower of standard cost, which
approximates actual cost determined on a first-in, first-out basis,
or market. At September 30, 2000 and December 31, 1999, inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ ---------------
<S> <C> <C>
Raw materials.................... $ 3,227 $ 1,791
Work-in-process.................. 469 241
Finished goods................... 5,853 3,861
---------------- ---------------
$ 9,549 $ 5,893
================ ===============
</TABLE>
Page 7 of 24
<PAGE>
REVENUE RECOGNITION
Effective January 1, 2000, we adopted Statement of Position, or
SOP, 98-9, MODIFICATION OF SOP 97-2, `SOFTWARE REVENUE RECOGNITION'
WITH RESPECT TO CERTAIN TRANSACTIONS, which did not require a
significant change to our revenue recognition policies. In December
1999, the SEC issued Staff Accounting Bulletin, or SAB, No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which will be
effective in the fourth quarter of this fiscal year. We believe our
revenue recognition policies are in compliance with SAB 101.
We derive revenues primarily from the sale of products, software
license fees, and services, which include product installation,
product integration, training and product support services.
Except as otherwise discussed below, revenues from product and
license fees are recognized in the period we have completed all
hardware manufacturing and/or software development to contractual
specifications, factory testing has been completed, the product has
been shipped to the customer, the fee is fixed and determinable and
collection is considered probable. When we have significant
obligations subsequent to shipment (for example, installation and
system integration), revenues are recognized when there are no
significant unfulfilled obligations. Revenues from arrangements
that include significant acceptance terms are recognized when
acceptance has occurred.
Revenues for fixed-priced contracts that require significant
software development and are generally in duration in excess of
nine months are recognized on a percentage-of-completion method.
Revenues from these contracts are recognized upon attainment of
scheduled performance milestones. Anticipated losses on
fixed-priced contracts are recognized when estimable.
Revenues from product installation, product integration and other
services, excluding product support services, are recognized when
the services have been completed.
We offer our customers product support services, which include the
correction of software problems, telephone access to our technical
personnel and the right to receive unspecified product updates,
upgrades and enhancements, when and if they become available.
Revenues from these services, including product support services
included in initial licensing fees, are recognized ratably over the
contract period. Product support services included in the initial
licensing fee are allocated from the total contract amount based on
the relative fair value of these services determined using
vendor-specific objective evidence, or VSOE.
Deferred revenue represents amounts billed to customers, but not
yet recognized as revenue. Unbilled receivables represent amounts
recognized as revenue, but not yet billed to customers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from these estimates.
NOTE 2 - RELATED PARTY TRANSACTION
On January 1, 2000, we sold our membership interest in Inet Global
Research, L.L.C., to an entity controlled by a related party for a
cash purchase price of $82,000. No gain or loss was recorded for
the sale. This entity is currently performing services for us.
Page 8 of 24
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
2000 1999 2000 1999
------------ ---------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and diluted
earnings per share................... $ 10,139 $ 10,974 $ 28,379 $ 20,821
============ ========== ========= =========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares..... 46,205 45,146 46,063 42,826
Effect of dilutive securities:
Employee stock options and purchase
rights............................. 659 1,443 777 1,647
------------ ---------- --------- ---------
Potentially dilutive common shares..... 659 1,443 777 1,647
------------ ---------- --------- ---------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares.............. 46,864 46,589 46,840 44,473
============ ========== ========= =========
Basic earnings per common share........... $ 0.22 $ 0.24 $ 0.62 $ 0.49
============ ========== ========= =========
Diluted earnings per common share......... $ 0.22 $ 0.24 $ 0.61 $ 0.47
============ ========== ========= =========
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
For all periods presented, we had no material components of
comprehensive income other than net income.
NOTE 5 - SEGMENT INFORMATION
We operate in a single industry segment, providing communications
software solutions and associated services to our customers through
our sales personnel and certain foreign distributors. As a result,
the financial information disclosed in this report represents all
material financial information related to our sole operating
segment. The geographic distribution of our revenues as a
percentage of total revenues is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
2000 1999 2000 1999
------------ ---------- --------- ---------
<S> <C> <C> <C> <C>
United States............................ 48.3% 49.8% 48.0% 49.0%
Export:
Asia/Pacific........................... 3.7 11.9 5.4 6.9
Europe, Middle East and Africa......... 40.4 18.4 41.4 33.8
Other.................................. 7.6 19.9 5.2 10.3
------ ------ ------ ------
Total export revenue 51.7 50.2 52.0 51.0
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
We have no significant long-lived assets deployed outside of the
United States.
Page 9 of 24
<PAGE>
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires
that all derivatives be recognized at fair value on the balance
sheet, and that the corresponding gains or losses be included in
comprehensive income, depending on the type of hedging relationship
that exists. SFAS 133 will be effective for fiscal years beginning
after June 15, 2000. Currently, we believe that SFAS 133 will not
have a material effect on our financial position and results of
operations when adopted.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN HISTORICAL OR
CURRENT FACTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS ABOUT OUR
BUSINESS, FINANCIAL CONDITION, BUSINESS STRATEGY, PLANS AND
OBJECTIVES OF MANAGEMENT AND OUR FUTURE PROSPECTS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THESE EXPECTATIONS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, WITHOUT LIMITATION THE FOLLOWING:
- OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT AND
ARE LIKELY TO VARY SIGNIFICANTLY FROM QUARTER TO
QUARTER IN THE FUTURE
- WE COULD BE MATERIALLY AND ADVERSELY AFFECTED IN THE
EVENT OF A REVERSAL OR SLOWDOWN IN THE PACE OF THE
PRIVATIZATION, RESTRUCTURING OR DEREGULATION OF THE
TELECOMMUNICATIONS INDUSTRY, A SIGNIFICANT SLOWDOWN
IN THE GROWTH OF THAT INDUSTRY OR CONSOLIDATIONS
INVOLVING OUR CURRENT OR PROSPECTIVE CUSTOMERS;
- ANY REDUCTION IN DEMAND FOR OUR GEOPROBE OR SPECTRA
PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON US;
- WE COULD BE MATERIALLY AND ADVERSELY AFFECTED IF THE
MARKET FOR SS7 AND CONVERGING NETWORK SOLUTIONS FAILS
TO GROW AS WE CURRENTLY ANTICIPATE;
- EXPECTED INCREASED COMPETITION IS LIKELY TO RESULT IN
PRICE REDUCTIONS, REDUCED MARGINS AND LOSS OF MARKET
SHARE; AND
OTHER RISKS INDICATED BELOW UNDER THE CAPTION "RISK FACTORS" AND IN
OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE RISKS AND UNCERTAINTIES ARE BEYOND OUR CONTROL AND, IN MANY
CASES, WE CANNOT PREDICT THE RISKS AND UNCERTAINTIES THAT COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED
BY THE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS QUARTERLY
REPORT, THE WORDS "BELIEVES," "PLANS," "EXPECTS," "ANTICIPATES,"
"INTENDS," "CONTINUE," "MAY," "WILL," "SHOULD" OR THE NEGATIVE OF
SUCH TERMS AND SIMILAR EXPRESSIONS AS THEY RELATE TO US OR OUR
MANAGEMENT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000. HISTORICAL
RESULTS AND PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS IN THE
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN
OPERATING RESULTS FOR ANY FUTURE PERIODS.
Page 10 of 24
<PAGE>
OVERVIEW
We were founded in 1989, and during the early stages of our
operations we focused primarily on developing and selling
diagnostic tools for a predecessor to the Signaling System #7, or
SS7, signaling protocol. As the telecommunications industry
increasingly adopted SS7, we shifted our focus to developing and
deploying SS7-based solutions as well as broadening our product
offerings. Our diagnostic tool, Spectra, was first introduced in
December 1990 and is currently in its tenth generation release.
Beginning in 1993, we focused a significant portion of our product
development efforts on developing a complete monitoring and
surveillance solution for SS7 networks, culminating in the
introduction of our GeoProbe product in late 1995. In 1999 and
2000, we introduced our IT:seven suite of business applications.
These applications enable carriers to protect and generate
additional revenue within their networks and at interconnection
boundaries. We continue to focus significant resources on the
development of enhancements to Spectra, enhancements and add-on
applications to GeoProbe, and IT:seven and new products focused on
network optimization and interoperability for next-generation
networks.
Historically, we have generated substantially all of our revenues
from Spectra and GeoProbe. Revenues attributable to GeoProbe have
represented a majority of our total revenues since 1998. Although
we expect Spectra revenues to continue to represent a significant
portion of total revenues for the foreseeable future, Spectra
revenues are expected to continue to decline as a percentage of
total revenues as a result of higher growth rates for the GeoProbe
and IT:seven products and revenues from the introduction of new
products. Our remaining revenues are derived from services relating
to these and other products. These services include product
installation, product integration, training, warranty and product
support.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
data derived from our unaudited consolidated statements of income
as a percentage of total revenues. The operating results for the
three and nine months ended September 30, 2000 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,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product and license fees 87.9% 90.9% 88.9% 90.7%
Services 12.1 9.1 11.1 9.3
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product and license fees 19.3 22.2 19.4 23.1
Services 5.9 6.6 5.6 6.5
------ ------ ------ ------
Total cost of revenues 25.2 28.8 25.0 29.6
------ ------ ------ ------
Gross profit 74.8 71.2 75.0 70.4
Operating expenses:
Research and development 22.2 20.0 21.7 20.7
Sales and marketing 13.1 10.3 12.3 11.3
General and administrative 8.1 8.2 7.9 8.4
------ ------ ------ ------
Total operating expenses 43.4 38.5 41.9 40.4
------- ------- ------- -------
Income from operations 31.4 32.7 33.1 30.0
Other income 5.1 25.3* 5.4 10.7*
------- ------- ------- -------
Income before provision for income taxes 36.5 58.0 38.5 40.7
Provision for income taxes 12.0 20.2 13.0 14.0
------- ------- ------- -------
Net income 24.5% 37.8% 25.5% 26.7%
======= ======= ======== =======
* includes one-time gain from sale of wireless data assets in September 1999
</TABLE>
Page 11 of 24
<PAGE>
REVENUES
PRODUCT AND LICENSE FEES. Revenues from product and license fees
increased 38.0% to $36.4 million for the three months ended
September 30, 2000 from $26.4 million for the three months ended
September 30, 1999. For the nine months ended September 30, 2000,
revenues from product and license fees increased 39.7% to $98.9
million from $70.8 million for the nine months ended September 30,
1999. The growth in revenues from product and license fees is
primarily due to an increase in unit sales during the three and
nine months ended September 30, 2000.
SERVICES. Revenues from services increased 90.3% to $5.0 million
for the three months ended September 30, 2000 from $2.6 million for
the three months ended September 30, 1999. For the nine months
ended September 30, 2000, revenues from services increased 69.8% to
$12.3 million from $7.3 million for the nine months ended September
30, 1999. The increase in services revenues is primarily related to
product support services associated with a larger installed
customer base.
CONCENTRATION OF REVENUES. For the three months ended September 30,
2000, we had one customer that accounted for more than 10% of total
revenues. For the nine months ended September 30, 2000, we had two
customers that each accounted for more than 10% of total revenues.
INTERNATIONAL REVENUES. For the three months ended September 30,
2000, international revenues accounted for 51.7% of total revenues
compared to 50.2% of total revenues for the three months ended
September 30, 1999. For the nine months ended September 30, 2000,
international revenues accounted for 52.0% of total revenues
compared to 51.0% of total revenues for the nine months ended
September 30, 1999.
COST OF REVENUES
PRODUCT AND LICENSE FEES. Cost of product and license fees consists
primarily of hardware expenses and personnel costs related to the
manufacturing, integration and installation of our products. Cost
of product and license fees was $8.0 million and $6.5 million,
representing 22.0% and 24.5% of product and license fee revenues,
for the three months ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000 and
1999, cost of product and license fees was $21.5 million and $18.1
million, representing 21.8% and 25.5% of product and license fee
revenues, respectively. The increase in dollar amounts for both the
three and nine months ended September 30, 2000 resulted primarily
from additional material costs associated with higher unit sales.
The decrease as a percentage of product and license fee revenues
was primarily attributable to a higher percentage of revenues being
derived from more profitable expansions of existing systems versus
new system installations, as well as scale efficiencies achieved in
production and implementation activities.
SERVICES. Cost of services consists of expenses, primarily
personnel costs, related to product support, training, and warranty
and non-warranty work. Cost of services was $2.4 million and $1.9
million, representing 48.4% and 72.3% of services revenues, for the
three months ended September 30, 2000 and 1999, respectively. For
the nine months ended September 30, 2000 and 1999, cost of services
was $6.3 million and $5.1 million, representing 51.1% and 69.6% of
services revenues, respectively.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel
costs, including contract labor, travel and facilities expenses,
and other compensation expenses associated with our research and
development activities. These expenses increased to $9.2 million
for the three months ended September 30, 2000 from $5.8 million for
the three months ended September 30, 1999. The increase was
primarily due to increased staffing dedicated to research and
development activities. Research and development expenses as a
percentage of total revenues were 22.2% and 20.0% for the three
months ended September 30, 2000 and 1999, respectively.
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For the nine months ended September 30, 2000, research and
development expenses increased to $24.1 million from $16.2 million
for the comparable prior-year period, primarily due to additional
staffing and related personnel costs. Research and development
expenses as a percentage of total revenues were 21.7% and 20.7% for
the nine months ended September 30, 2000 and 1999, respectively.
Software development costs are expensed as incurred until
technological feasibility has been established, at which time
subsequent costs are permitted to be capitalized until the product
is available for general release to customers. To date, either the
establishment of technological feasibility of our products has
substantially coincided with their general release, or costs
incurred subsequent to the achievement of technological feasibility
have not been material. As a result, software development costs
qualifying for capitalization have been insignificant, and we have
not capitalized any software development costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel, travel
and facilities expenses related to sales and marketing activities,
distributor commissions, and expenses for trade shows and
advertising. These expenses increased to $5.4 million for the three
months ended September 30, 2000 from $3.0 million for the three
months ended September 30, 1999. The increase was primarily related
to continued expansion of our direct sales force, increased
commissions and increased international sales activities. Sales and
marketing expenses as a percentage of total revenues were 13.1% and
10.3% for the three months ended September 30, 2000 and 1999,
respectively.
Sales and marketing expenses increased to $13.6 million for the
nine months ended September 30, 2000 from $8.8 million for the nine
months ended September 30, 1999. The increase was primarily related
to the expansion of our direct sales force, increased commissions
and increased international sales activities. Sales and marketing
expenses as a percentage of total revenues were 12.3% and 11.3% for
the nine months ended September 30, 2000 and 1999, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel,
facilities and other costs of our finance, administrative and
executive departments, as well as fees and expenses associated with
legal and accounting requirements. These expenses increased to $3.4
million for the three months ended September 30, 2000 from $2.4
million for the three months ended September 30, 1999. The increase
was primarily related to increased staffing levels and facilities
expansion efforts associated with the growth of our business.
General and administrative expenses as a percentage of total
revenues were 8.1% and 8.2% for the three months ended September
30, 2000 and 1999, respectively.
General and administrative expenses increased to $8.8 million for
the nine months ended September 30, 2000 from $6.5 million for the
nine months ended September 30, 1999. The increase was primarily
related to increased staffing levels and facilities expansion
efforts associated with the growth of our business, and increased
administrative costs related to being a public company. General and
administrative expenses as a percentage of total revenues were 7.9%
and 8.4% for the nine months ended September 30, 2000 and 1999,
respectively.
OTHER INCOME
Other income is primarily interest income earned on our cash and
cash equivalents. Other income was $2.1 million for the three
months ended September 30, 2000 compared to $7.3 million for the
three months ended September 30, 1999. Other income was $6.0
million for the nine months ended September 30, 2000 compared to
$8.3 million for the nine months ended September 30, 1999. For both
the three and nine months ended September 30, 2000, the decrease
resulted from a $6.0 million gain on the sale of our wireless data
assets realized in the third quarter of 1999. Excluding this
one-time gain, the increase in other income for the three months
ended September 30, 2000, was from increased interest earned on
higher balances of cash and cash equivalents, which resulted from
proceeds from the issuance of stock under our employee stock option
and stock purchase plans and increased income from operations.
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Excluding this one-time gain, the increase in other income for the
nine months ended September 30, 2000, was from increased interest
earned on higher balances of cash and cash equivalents, which
resulted from proceeds from our initial public offering completed
in June 1999, proceeds from issuance of stock under our employee
stock option and stock purchase plans and increased income from
operations.
PROVISION FOR INCOME TAXES
The effective income tax rate for the three months ended September
30, 2000 was 33.0% compared to 34.8% for the three months ended
September 30, 1999. The effective income tax rate for the nine
months ended September 30, 2000 was 33.7% compared to 34.4% for the
nine months ended September 30, 1999. The slight decrease in our
effective tax rate was due to changes in the estimated impact on
our effective rate of the major components of our tax provision,
including the benefits we receive from our foreign sales
corporation and research and development credits, and the impact of
state income and other tax items.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily through cash flows from
operations and bank borrowings. We had working capital of $149.5
million at September 30, 2000, compared with $123.9 million at
December 31, 1999. At September 30, 2000, we had $142.4 million in
cash and cash equivalents, an increase of $14.5 million from $127.9
million in cash and cash equivalents at December 31, 1999. The
increase in cash and cash equivalents is attributable to higher
levels of income from operations and proceeds from the issuance of
common stock upon the exercise of stock options and purchases under
our employee stock purchase plan.
We have a credit facility with a bank providing for borrowings of
up to $10.0 million. This credit facility will expire on June 15,
2001. Up to $5.0 million may be utilized to support letters of
credit. The per annum usage fee on unused portions of the line is
0.125%. Borrowings under this facility are collateralized by our
accounts receivable, inventories and property and equipment and
bear interest payable quarterly at LIBOR plus a margin, determined
by our level of indebtedness, ranging from 0.25% to 0.5% for United
States dollar borrowings and 1.25% to 1.5% for Eurodollar
borrowings. The credit facility includes covenants requiring us to
maintain certain financial ratios and restricts the payment of cash
dividends without the bank's consent. At September 30, 2000, no
amounts were outstanding under the credit facility, and the amount
available to us, after considering outstanding letters of credit,
was $9.8 million.
Net cash provided by operating activities was $20.9 million for the
nine months ended September 30, 2000, compared to $40.2 million
during the same period in 1999. Net cash provided by operating
activities resulted primarily from net income and changes in
components of working capital. The decline in cash provided by
operating activities for the nine months ended September 30, 2000,
compared to the nine months ended September 30, 1999, was
attributable to changes in working capital accounts, including the
increase in accounts receivable, the increase in inventory and the
decrease in deferred revenue. The increase in accounts receivable
is due to the overall growth in the business and is reflected by
the increased revenues. The increase in inventory also reflects the
higher level of business. The change in deferred revenue is a
function of the timing of and the magnitude of the billing
milestones on specific contracts.
Net cash used in investing activities was $9.7 million for the nine
months ended September 30, 2000 compared to net cash provided by
investing activities of $3.7 million during the same period in
1999. Net cash used in investing activities for the nine months
ended September 30, 2000 related to purchases of property and
equipment. Net cash provided by investing activities for the nine
months ended September 30, 1999 resulted from proceeds from the
sale of our wireless data assets of $7.0 million less cash used to
purchase property and equipment of $3.3 million.
Net cash provided by financing activities was $3.3 million for the
nine months ended September 30, 2000, resulting from proceeds from
the issuance of common stock upon the exercise of stock options and
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purchases under our employee stock purchase plan. Net cash provided
by financing activities was $56.0 for the same period in 1999,
resulting from proceeds from the issuance of common stock in our
initial public offering and from proceeds from the issuance of
common stock upon the exercise of stock options.
In January 2000, we signed a ten-year lease agreement for our
primary company facilities in Richardson, Texas. We estimate that
our remaining commitment for leasehold improvements for this office
space, as well as new expansions to additional floors, is between
$5.0 million and $6.0 million. Our current cash balances are
sufficient to cover these estimated capital expenditures.
Any material acquisition or joint venture could result in a
decrease in our working capital, depending on the amount, timing
and nature of the consideration to be paid. Absent any such
acquisition or joint venture, we anticipate that current cash
balances, potential cash flows from operations and available
borrowings under our revolving credit facility will be sufficient
to meet our anticipated cash needs for working capital, capital
expenditures and other activities for at least the next 12 months.
Thereafter, if current sources are not sufficient to meet our
needs, we may seek additional equity or debt financing. In
addition, any material acquisition of complementary businesses,
products or technologies or material joint venture could require us
to obtain additional equity or debt financing. There can be no
assurance that additional financing would be available on
acceptable terms, if at all.
RISK FACTORS
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO
PREDICT.
Since our future operating results are likely to vary significantly
from quarter to quarter, you should not rely on our results of
operations during any particular quarter as an indication of our
future performance in any fiscal year or quarterly period. Our
quarterly operating results have varied significantly in the past
and are likely to vary significantly from quarter to quarter in the
future based on a number of factors, many of which are outside of
our control. Such factors include:
- the size and timing of specific orders by customers;
- competition;
- the degree of market acceptance of new products and
technologies introduced by us and our competitors;
- the mix of products and services sold by us;
- the timing of product shipments and product
installations by us;
- in limited circumstances, the timing of customer
acceptance of products we deliver to them;
- the capital spending patterns of our customers;
- the mix of domestic and international sales;
- the mix of new installations and system expansions;
- changes in the timing of and level of expenses;
- the relative percentages of products sold through our
direct and indirect sales channels;
- customer order deferrals in anticipation of
enhancements or new products;
- the timing of and level of investments in research
and development activities by us;
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- changes in, and our ability to implement, our
strategy;
- changes in the availability or cost of materials
needed to produce our products;
- the progress and timing of the privatization and
restructuring of telecommunications markets and the
worldwide deregulation of the international
telecommunications industry;
- defects and product quality problems;
- intellectual property disputes;
- expansion of and risks associated with our
international operations; and
- changes in general economic conditions.
Furthermore, a large portion of our operating expenses, including
rent and salaries, is largely fixed in nature. Accordingly, if
revenues are below expectations, our operating results are likely
to be adversely and disproportionately affected because these
operating expenses are not variable in the short term, and cannot
be quickly reduced to respond to unanticipated decreases in
revenues.
The amount of revenues associated with particular product sales can
vary significantly. The deferral or loss of one or more
individually significant sales could harm our operating results in
a particular quarter.
Our operating results also are likely to fluctuate due to factors
which impact our current and prospective customers. Expenditures by
customers tend to vary in cycles that reflect overall economic
conditions and individual budgeting and buying patterns. Our
business would be adversely affected by a decline in the economic
prospects of our customers or the economy in general, because these
adverse conditions could alter current or prospective customers'
capital spending priorities or budget cycles, or extend our sales
cycle with respect to some of our customers. Our business could
also be adversely affected by changes in customer spending patterns
reflecting industry trends. In addition, our operating results
historically have been influenced by seasonal fluctuations, with
revenues tending to be strongest in the fourth quarter of each
year. We believe that this seasonality has been due to the capital
appropriation practices of many of our customers. We expect that in
future periods this seasonal trend may cause our first quarter
revenues to remain consistent with, or decrease from, the level
achieved in the preceding quarter.
As a result of all of the foregoing, we cannot assure you that our
revenues will grow in future periods or that we will remain
profitable. In addition, in some future quarters our operating
results may be below the expectations of public market analysts. In
such event, the market price of our common stock would likely fall.
CONSOLIDATIONS IN, OR A SLOWDOWN IN THE GROWTH OF, THE
TELECOMMUNICATIONS INDUSTRY COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We have derived substantially all of our revenues from sales of
products and related services to the telecommunications industry.
The telecommunications industry has undergone a period of rapid
growth and consolidation during the past few years. Our business,
financial condition and results of operations could be materially
and adversely affected in the event of a significant slowdown in
the growth of this industry. Further, consolidations of our current
or prospective customers may delay or cause cancellations of
significant sales of our products, which could harm our operating
results in a particular period.
ANY REVERSAL OR SLOWDOWN IN DEREGULATION OF TELECOMMUNICATIONS
MARKETS COULD ADVERSELY AFFECT THE MARKET FOR OUR PRODUCTS.
Future growth in the markets for our products will depend in part
on privatization, deregulation and the restructuring of
telecommunications markets worldwide. Any reversal or slowdown in
the pace of this
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privatization, deregulation or restructuring could have a material
adverse effect on the markets for our products. Moreover, the
consequences of deregulation are subject to many uncertainties,
including judicial and administrative proceedings that affect the
pace at which the changes contemplated by deregulation occur, and
other regulatory, economic and political factors. Any
invalidation, repeal or modification of the requirements imposed
by the Telecommunications Act of 1996 or the local telephone
competition rules adopted by the U.S. Federal Communications
Commission to implement that Act could have a material adverse
effect on our business, financial condition and results of
operations. Furthermore, the uncertainties associated with
deregulation have in the past, and could in the future, cause our
customers to delay purchasing decisions pending the resolution of
these uncertainties.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG, WHICH COULD ADVERSELY
AFFECT OUR QUARTERLY OPERATING RESULTS.
The sales cycle for our products is long, typically ranging from
six to 12 months for GeoProbe sales (excluding the cycle for
subsequent applications and enhancements, which varies widely) and
up to three months for occasional, large Spectra sales. As a
result, our ability to forecast the timing and amount of specific
sales is limited. Accordingly, the deferral or loss of one or more
significant sales could harm our operating results in a given
quarter, particularly if there are significant sales and marketing
expenses associated with the deferred or lost sales.
ANY DECREASE IN DEMAND FOR OUR GEOPROBE AND SPECTRA PRODUCTS COULD
SIGNIFICANTLY DECREASE OUR SALES.
Our two principal products, GeoProbe and Spectra, generate
substantially all of our revenues and are expected to continue to
account for a substantial majority of our revenues for the
foreseeable future. Any downturn in the demand for either or both
of these products could have a material adverse effect on our
business, financial condition and results of operations. Moreover,
we cannot assure you that we will be successful in developing any
other products or taking any other steps to reduce the risk
associated with any slowdown in demand for GeoProbe and Spectra.
IF THE MARKET FOR SS7 AND CONVERGING NETWORK SOLUTIONS FAILS TO
GROW OR GROWS MORE SLOWLY THAN WE ANTICIPATE, OUR OPERATING RESULTS
COULD BE HARMED.
Our future operating results are dependent in significant part on
the continued viability and expansion of SS7 signaling networks and
the convergence of the packet-based networks (for example, Internet
protocol, or IP, and asynchronous transfer mode, or ATM) and the
public switched telephone network. Our business, financial
condition and results of operations could be materially and
adversely affected if the market for SS7 and converging network
solutions fails to grow or grows more slowly than we currently
anticipate.
COMPETITION COULD REDUCE OUR MARKET SHARE, WHICH WOULD LIKELY HARM
OUR BUSINESS AND OPERATING RESULTS AND CAUSE OUR STOCK PRICE TO
FALL.
The market for signaling-based communications network management
applications is relatively new, intensely competitive, both in the
U.S. and internationally, and subject to rapid technological
change, evolving industry standards and regulatory developments.
Competition is expected to persist, intensify and increase in the
future. We compete with a number of U.S. and international
suppliers that vary in size and in the scope and breadth of the
products and services offered. GeoProbe principally competes with
products offered by Agilent Technologies. Our diagnostic tools
principally compete with products offered by Agilent Technologies,
Tekelec and Tektronix, Inc. Some of our competitors have, in
relation to our company, longer operating histories, larger
installed customer bases, longer-standing relationships with
customers, greater name recognition and significantly greater
financial, technical, marketing, customer service, public
relations, distribution and other resources. Additionally, it is
possible that new competitors or alliances among competitors could
emerge and rapidly acquire significant market share. As a result,
these competitors may be able to more quickly develop or adapt to
new or emerging technologies and changes in customer requirements,
or devote greater resources to the development, promotion and sale
of their products. Increased competition is likely to result in
price reductions, reduced margins and loss of
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market share. The competitive pressures we face could harm our
business, financial condition and results of operations.
OUR RAPID GROWTH AND EXPANSION MAY STRAIN OUR RESOURCES AND HINDER
OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY.
We have experienced rapid and significant growth that has placed,
and is expected to continue to place, a significant strain on our
management, information systems and operations. For example, our
revenues have increased from $17.5 million in 1995 to $110.0
million in 1999 and $111.2 million for the nine months ended
September 30, 2000. The number of our employees has increased from
116 at December 31, 1995 to 457 at December 31, 1999 and 594 at
September 30, 2000. Our ability to effectively manage significant
additional growth will require us to improve our financial,
operational and management information and control systems and
procedures and to effectively attract, train, motivate and manage
our employees. The failure to manage growth effectively could harm
our business, financial condition and results of operations.
WE MAY BE UNABLE TO SUCCESSFULLY GROW OUR BUSINESS IF WE ARE UNABLE
TO ATTRACT ADDITIONAL HIGHLY-SKILLED PERSONNEL OR RETAIN OUR
EXISTING KEY PERSONNEL.
Our future success will depend to a significant extent upon the
continued service and performance of a relatively small number of
key senior managers, technical personnel and sales and marketing
personnel, most of whom are not bound by an employment agreement.
The loss of any existing key personnel or the inability to attract,
motivate and retain additional qualified personnel could harm our
business, financial condition and results of operations.
We anticipate that continued growth, if any, will require us to
recruit and hire a substantial number of new employees,
particularly sales and marketing personnel and technical personnel
with signaling and IP knowledge and experience, both in the U.S.
and internationally. Competition for personnel is intense, and we
have at times experienced difficulty in recruiting qualified
personnel. We historically have filled a portion of our new
personnel needs with non-U.S. citizens holding temporary work visas
that allow these individuals to work in the U.S. for only a limited
period of time. Accordingly, any change in U.S. immigration policy
limiting the issuance of temporary work visas could adversely
affect our ability to recruit new personnel. Furthermore, the
addition of significant numbers of new personnel requires us to
incur significant start-up expenses, including recruiting fees,
procurement of office space and equipment, initial training costs
and low utilization rates of new personnel. We may be unable to
successfully recruit additional personnel as needed. In addition,
the start-up expenses incurred in connection with the hiring of
additional personnel could harm our future operating results.
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND
EVOLVING CUSTOMER REQUIREMENTS.
The market for our products is characterized by rapid technological
advances, evolving industry and customer-specific protocol
standards, changes in customer requirements and frequent new
product introductions and enhancements. The introduction of
communications network management products involving superior
technologies or the evolution of alternative technologies or new
industry protocol standards could render our existing products, as
well as products currently under development, obsolete and
unmarketable. We believe our future success will depend in part
upon our ability, on a timely and cost-effective basis, to continue
to:
- enhance our network optimization and diagnostic
products;
- develop and introduce new products for the
communications network management market and other
markets;
- address evolving industry protocol standards and
changing customer needs; and
- achieve broad market acceptance for our products.
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We cannot assure you that we will achieve these objectives.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP NEW
PRODUCTS BASED ON EMERGING TECHNOLOGIES.
Our future success will depend in part on our ability to develop
solutions for networks based on emerging technologies and
standards, such as IP and ATM, which are likely to be characterized
by continuing technological developments, evolving industry
standards and changing customer requirements. We may not
successfully develop competitive products for these emerging
technologies, and our failure to do so could harm our business,
financial condition and results of operations.
WE HAVE INTERNATIONAL CUSTOMERS, AND, AS A RESULT, OUR BUSINESS MAY
BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN
FOREIGN MARKETS.
Our international operations are subject to the risks inherent in
international business activities. Revenues from customers located
outside of the U.S. represented 52.0% of our total revenues for the
nine months ended September 30, 2000 and 51.7%, 52.2% and 52.6% of
our total revenues in 1999, 1998 and 1997, respectively. We believe
that continued growth and profitability will require expansion of
our efforts in international markets. This expansion may be costly
and time-consuming and may not generate returns for a significant
period of time, if at all. The risks inherent in international
operations include:
- management of geographically dispersed operations;
- longer accounts receivable payment cycles, and
greater difficulty in the collection of past due
amounts;
- the ability to establish relationships with
government-owned or subsidized communications
providers;
- general economic conditions in each country;
- currency controls and exchange rate fluctuations;
- seasonal reductions in business activity specific 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, including modifications to the United
States tax code as a result of international trade
regulations;
- greater difficulty in safeguarding intellectual
property;
- import and export licensing requirements;
- trade restrictions; and
- involuntary renegotiation of contracts with foreign
governments and communications carriers.
International expansion of our business will require significant
management attention and financial resources. Moreover, in order to
further expand internationally, we may be required to establish
relationships with additional distributors and third-party
integrators. We cannot assure you that we will effectively
establish such relationships. If international revenues are not
adequate to offset the additional expense of expanding
international operations, it could harm our business, financial
condition and results of operations.
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To date, a very high percentage of international sales have been
denominated in U.S. dollars, and accordingly we have not been
significantly exposed to fluctuations in non-U.S. currency exchange
rates. As a result, our revenues in international markets may be
adversely affected by a strengthening U.S. dollar. However, we
expect that in future periods a greater portion of international
sales may be denominated in currencies other than U.S. dollars,
thereby exposing us to exchange rate gains and losses on non-U.S.
currency transactions. We may choose to limit such exposure by
entering into various hedging strategies. We cannot be certain that
any hedging strategies that we undertake would be successful in
avoiding exchange-related losses.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS
BECAUSE WE OBTAIN KEY COMPONENTS FROM SOLE AND LIMITED SOURCE
SUPPLIERS. IF WE ARE UNABLE TO OBTAIN THESE COMPONENTS, WE COULD BE
UNABLE TO SHIP OUR PRODUCTS IN A TIMELY MANNER.
Currently, our products utilize certain semiconductors that are
available from only one manufacturer and other components that are
available from a limited number of suppliers. While alternative
suppliers have been identified for certain key components, those
alternative sources have not been qualified by us. Our
qualification process could be lengthy, and we cannot assure you
that additional sources would become available to us on a timely
basis, or if such sources were to become available, that the
components would be comparable in price and quality to our current
components. We have no long-term agreements with our suppliers and
generally make our purchases with purchase orders on an "as-needed
basis." Furthermore, certain components require an order lead-time
of approximately nine months. Other components that currently are
readily available may become difficult to obtain in the future.
Accordingly, we make advance purchases of certain components in
relatively large quantities to ensure that we have an adequate and
readily available supply. Our failure to order sufficient
quantities of these components sufficiently in advance of product
delivery deadlines could prevent us from adequately responding to
unanticipated increases in customer orders. In the past, we have
experienced delays in the receipt of certain of our key components,
which have resulted in delays in product deliveries. We could
experience delays or reductions in product shipments or increases
in product costs if we are unable to obtain sufficient key
components as required or to develop alternative sources if and as
required in the future.
SINCE WE RELY ON THIRD-PARTY SUBCONTRACTORS TO MANUFACTURE AND
DEVELOP OUR PRODUCTS, IF THESE SUBCONTRACTORS DO NOT MEET THEIR
COMMITMENTS TO US, OUR ABILITY TO SELL PRODUCTS TO OUR CUSTOMERS
COULD BE IMPAIRED.
We rely exclusively upon third-party subcontractors to manufacture
our subassemblies and we have retained, from time to time,
third-party design services in the development of
application-specific integrated circuits. We also subcontract,
from time to time, the development of specific features, and
enhancements of our products. Our reliance on third-party
subcontractors involves a number of risks, including the
potential absence of adequate capacity, the unavailability of
or interruption in access to certain process technologies, and
reduced control over product quality, delivery schedules,
manufacturing yields and costs. Any disruption in our relationships
with third-party subcontractors and our inability to develop
alternative sources if and as required in the future could result
in delays or reductions in product shipments or increases in
product costs.
WE RELY UPON SOFTWARE LICENSED FROM THIRD PARTIES; IF WE ARE UNABLE
TO MAINTAIN THESE SOFTWARE LICENSES ON COMMERCIALLY REASONABLE
TERMS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE HARMED.
We rely upon software that we license from third parties, including
software that is integrated with our internally developed software
and used in our products to perform key functions. The inability to
maintain any software licenses on commercially reasonable terms
could result in shipment delays or reductions until equivalent
software could be developed or licensed and integrated into our
products, which could harm our business, financial condition and
results of operations.
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WE MAY NOT RECEIVE THE INTENDED BENEFITS OF FUTURE ACQUISITIONS,
JOINT VENTURES, OR OTHER BUSINESS RELATIONSHIPS.
We may in the future pursue acquisitions of businesses, products
and technologies, or the establishment of joint venture, strategic
partnership or other arrangements that could expand our business.
The negotiation of potential acquisitions or strategic
relationships, 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 strategic
relationships by our company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and
contingent liabilities, amortization of goodwill and other
intangibles, research and development write-offs and other
acquisition-related expenses. Further, we cannot assure you that
any acquisition or joint venture will be successfully integrated
with our operations. If we were to pursue any such acquisition or
strategic relationship, we cannot be certain that we will receive
the intended benefits of the acquisition or strategic relationship.
Also, we may pursue arrangements with third parties to perform
certain activities for us such as the development of certain
products or product features. We cannot assure you that these
arrangements will produce to the level of quality or in the time
frame expected, which could materially and adversely harm our
business.
WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS,
WHICH COULD SUBJECT US TO COSTLY AND TIME-CONSUMING LITIGATION.
The communications industry is characterized by the existence of a
large number of patents and frequent allegations of patent
infringement. We have received, and may receive in the future,
notices from holders of patents that raise issues as to possible
infringement by our products. As the number of communications
network management products increases and the functionality of
these products further overlaps, we believe that we may become
increasingly subject to allegations of infringement. To date, we
have engaged in correspondence with third-party holders of patents
as a result of two such notices. We believe that our products do
not infringe on any valid patents cited in the notices, however,
questions of infringement and the validity of patents in the field
of communications signaling technologies involve highly technical
and subjective analyses. We cannot assure you that any such patent
holders, or others, will not initiate legal proceedings in the
future against us, or that if any proceedings were initiated, we
could be successful in defending ourselves. Any proceeding could be
time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product
shipment delays, or force us to enter into royalty or license
agreements rather than dispute the merits of any such proceeding
initiated against us. We cannot assure you that any such royalty or
license agreements could be available on terms acceptable to us, if
at all.
OUR LIMITED ABILITY OR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY
MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Our continued success is dependent in part upon our proprietary
technology. To protect our proprietary technology, we rely on a
combination of technical innovation, trade secret, copyright and
trademark laws, non-disclosure agreements and, to a lesser extent,
patents, each of which affords only limited protection. In
addition, the laws of some foreign countries do not protect our
proprietary rights in the products to the same extent as do the
laws of the U.S. Despite the measures taken by us, it may be
possible for a third party to copy or otherwise obtain and use our
proprietary technology and information without authorization.
Policing unauthorized use of our products is difficult, and
litigation may be necessary in the future to enforce our
intellectual property rights. Any litigation could be time
consuming and expensive to prosecute or resolve, result in
substantial diversion of management resources, and have a material
adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will be successful in
protecting our proprietary technology or that our proprietary
rights will provide us a meaningful competitive advantage.
WE MAY FACE POTENTIAL LIABILITY FOR PRODUCT DEFECTS.
Products as complex as those we offer may contain undetected
defects or errors when first introduced or as enhancements are
released that, despite our testing, are not discovered until after
a product has been
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installed and used by customers, which could result in delayed
market acceptance of the product or damage to our reputation and
business. To date, we have not been materially adversely affected
by products containing defects or errors. We attempt to include
provisions in our agreements with customers that are intended to
limit our exposure to potential liability for damages arising out
of defects or errors in our products. However, the nature and
extent of these limitations tend to vary from customer to
customer and it is possible that these limitations may not be
effective as a result of unfavorable judicial decisions or laws
enacted in the future. Although we have not experienced any
product liability suits to date, the sale and support of our
products entails the risk of these claims. Any product liability
claim brought against us, regardless of its merit, could result
in material expense to us, diversion of management time and
attention, and damage to our business reputation and our ability
to retain existing customers or attract new customers.
OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OWN
APPROXIMATELY 80% OF OUR COMMON STOCK, WHICH ALLOWS THEM TO CONTROL
THE MANAGEMENT AND AFFAIRS OF OUR COMPANY OR PREVENT A CHANGE OF
CONTROL.
As of September 30, 2000, our three founders, Samuel S. Simonian,
Elie S. Akilian and Mark A. Weinzierl, beneficially owned
approximately 80% of the outstanding shares of our common stock.
Consequently, two or more of these individuals, acting together,
could control the outcome of all matters submitted for stockholder
action, including the election of our board of directors and the
approval of significant corporate transactions, and could
effectively control the management and affairs of our company,
which could have the effect of delaying or preventing a change in
control of our company. In addition, Messrs. Simonian, Akilian and
Weinzierl constitute three of the six members of our board of
directors and could have significant influence in directing the
actions taken by our board.
OUR BUSINESS AND REPUTATION COULD SUFFER IF WE DO NOT PREVENT
SECURITY BREACHES.
We have included security features in some of our products that are
intended to protect the privacy and integrity of customer data.
Despite the existence of these security features, our products may
be vulnerable to breaches in security due to defects in the
security mechanisms, as well as vulnerabilities inherent in the
operating system or hardware platform on which the product runs,
and/or the networks linked to that platform. Security
vulnerabilities, regardless of origin, could jeopardize the
security of information stored in and transmitted through the
computer systems of our customers. Any security problem may require
significant capital expenditures to solve and could adversely
affect our reputation and product acceptance.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT
AN ACQUISITION OF OUR COMPANY.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that may have the effect of discouraging,
delaying or preventing a change in control of our company or
unsolicited acquisition proposals that a stockholder may consider
favorable. For example, we provide for a classified board of
directors with three-year terms, our stockholders are unable to
take action by written consent and our stockholders are limited in
their ability to make proposals at stockholder meetings.
VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US.
The market price of our common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected
by factors such as:
- variations in our results of operations;
- future sales of common stock;
- the announcement of technological innovations or new
products by us, our competitors and others;
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- market analysts' estimates of our performance
- general market and economic conditions; and
- equity market conditions and industry-specific equity
market trends.
The public markets have experienced volatility that has
particularly affected the market prices of securities of many
technology companies for reasons that have often been unrelated to
operating results. This volatility may adversely affect the market
price of our common stock as well as our visibility and credibility
in our markets.
Additionally, in the past, securities class action litigation often
has been brought against a company following periods of volatility
in the market price of its common stock. We may be the target of
similar litigation in the future. Securities litigation could
result in substantial costs and divert our management's attention
and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to immaterial levels of market risk. Revenues from
customers located outside of the U.S. represented 52.0% of our
total revenues for the nine months ended September 30, 2000 and
51.7%, 52.2% and 52.6% of our total revenues in 1999, 1998 and
1997, respectively. To date, a very high percentage of
international revenues have been denominated in U.S. dollars, and
accordingly, we have not been significantly exposed to fluctuations
in currency exchange rates.
Our international business is subject to the typical risks of any
international business, including, but not limited to, the risks
described in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors.
Accordingly, our future results could be materially adversely
impacted by changes in these or other factors.
Currently, our cash is currently solely invested in money market
funds denominated in U.S. dollars. We account for these investments
in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES. These cash equivalents are treated
as available-for-sale under SFAS No. 115.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of September 30, 2000, we have used all of the net offering
proceeds for the purchase of temporary investments, consisting of
cash, cash equivalents, and short-term investments. We currently
intend 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. We also may 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 our
business and product offerings; however, at this time we have not
identified a specific acquisition or joint venture or allocated a
specific amount for this purpose.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
27.0 Financial Data Schedule (for SEC information
only)
(b) We did not file any Current Reports on Form 8-K during the
quarter ended September 30, 2000.
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INET TECHNOLOGIES, INC.
By: /s/ Jeffrey A. Kupp
-----------------------------------------------------
Jeffrey A. Kupp
Vice President, Chief Financial Officer and Secretary
(Principal accounting and financial officer)
Date: November 7, 2000
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