<PAGE>
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 March 31, 2000
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 May 10, 2000:
46,088,659
Page 1 of 23
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INET TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets ................................................... 3
Consolidated Statements of Income ............................................. 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..................... 21
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds ..................................... 22
Item 6. Exhibits and Reports on Form 8-K............................................... 22
Signatures ............................................................................... 22
</TABLE>
Page 2 of 23
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
------------ -------------
(In thousands,
except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 140,477 $ 127,903
Trade accounts receivable, net of allowance for doubtful accounts of $939 at March 31,
2000 and December 31, 1999.......................................................... 19,665 20,781
Unbilled receivables.................................................................. 4,091 2,196
Inventories........................................................................... 6,113 5,893
Deferred income taxes................................................................. 2,023 2,318
Other current assets.................................................................. 1,337 1,312
------------ -----------
Total current assets.......................................................... 173,706 160,403
Property and equipment, net............................................................. 9,489 9,324
Deferred income taxes................................................................... 35 6
Other assets............................................................................ 190 184
------------ -----------
Total assets.................................................................. $ 183,420 $ 169,917
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 1,947 $ 2,599
Accrued compensation and benefits..................................................... 3,586 5,252
Deferred revenue...................................................................... 27,806 26,432
Taxes payable......................................................................... 4,149 213
Other accrued liabilities............................................................. 1,933 1,998
------------ -----------
Total current liabilities..................................................... 39,421 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 -- 46,080,659 at March 31, 2000 and
45,312,759 at December 31, 1999.................................................. 46 45
Additional paid-in capital............................................................ 59,521 57,693
Unearned compensation................................................................. (176) (233)
Retained earnings..................................................................... 84,608 75,918
------------ -----------
Total stockholders' equity.................................................... 143,999 133,423
------------ -----------
Total liabilities and stockholders' equity.................................... $ 183,420 $ 169,917
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 23
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- ----------
(In thousands, except
per share data)
<S> <C> <C>
Revenues.......................................... $ 32,961 $ 23,239
Cost of revenues.................................. 7,759 7,125
--------- ---------
Gross profit............................ 25,202 16,114
Operating expenses:
Research and development........................ 7,103 4,852
Sales and marketing............................. 4,231 2,958
General and administrative...................... 2,459 2,030
-------- ----------
13,793 9,840
-------- ----------
Income from operations.................. 11,409 6,274
Other income (expense):
Interest income................................. 1,772 342
Other expense................................... (14) (19)
--------- ----------
1,758 323
--------- ---------
Income before provision for income
taxes................................. 13,167 6,597
Provision for income taxes........................ 4,477 2,243
---------- ----------
Net income.............................. $ 8,690 $ 4,354
========== ==========
Earnings per common share:
Basic................................... $ 0.19 $ 0.11
========== ==========
Diluted................................. $ 0.19 $ 0.10
========== ==========
Weighted-average shares outstanding:
Basic................................... 45,895 40,896
========== ==========
Diluted................................. 46,823 42,638
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 23
<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 767,900 1 1,828 -- -- 1,829
purchase plans.............
Net income................... -- -- -- -- 8,690 8,690
Stock option compensation.... -- -- -- 57 -- 57
--------- ---- ------- ------ ------- -------
Balance at March 31, 2000...... 46,080,659 $ 46 $59,521 $ (176) $84,608 $143,999
========== ==== ======= ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 23
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INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
-------- ------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 8,690 $ 4,354
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 1,129 964
Deferred income taxes............................. 266 67
Issuance of common stock and stock options charged
to expense....................................... 57 57
Change in operating assets and liabilities:
Decrease in trade accounts receivable.......... 1,116 7,278
Increase in unbilled receivables............... (1,895) (382)
Increase in inventories........................ (220) (458)
Increase in other assets....................... (31) (208)
Increase (decrease) in accounts payable........ (652) 174
Increase in taxes payable...................... 3,936 2,217
Decrease in accrued compensation and benefits.. (1,666) (752)
Increase in deferred revenue................... 1,374 8,558
Increase (decrease) in other accrued liabilities (65) 373
--------- -------
Net cash provided by operating activities........... 12,039 22,242
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (1,294) (993)
--------- -------
Net cash used in investing activities............... (1,294) (993)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise
of stock options and purchases under employee
stock purchase plan.............................. 1,829 --
-------- -------
Net cash provided by financing activities........... 1,829 --
-------- -------
Net increase in cash and cash equivalents........... 12,574 21,249
Cash and cash equivalents at beginning of period.... 127,903 21,914
-------- -------
Cash and cash equivalents at end of period.......... $140,477 $43,163
======== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................... $ -- $ --
========== =========
Income taxes paid................................ $ 51 $ --
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 23
<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-month period ended March 31,
2000 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending
December 31, 2000.
CASH AND CASH EQUIVALENTS
All highly liquid securities with original maturities of three
months or less are classified as cash equivalents. The carrying
value of cash equivalents approximates fair market value.
INVENTORIES
Inventories are valued at the lower of standard cost, which
approximates actual cost determined on a first-in, first-out basis,
or market. At March 31, 2000 and December 31, 1999, inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
Raw materials.................... $ 2,329 $ 1,791
Work-in-process.................. 429 241
Finished goods................... 3,355 3,861
------------ -----------
$ 6,113 $ 5,893
============ ===========
</TABLE>
Page 7 of 23
<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. Based on the
guidance received to date, we believe our revenue recognition
policies are in compliance with SAB 101.
We derive revenues primarily from the sale of products, and product
installation, integration and post-contract support services.
Product revenues are generally recognized in the period we have
completed all hardware manufacturing and/or software development to
contractual specifications, factory testing has been completed, the
product has been shipped to the customer, the fee is fixed and
determinable and collection is considered probable by us. When we
have significant obligations subsequent to shipment (for example,
installation and system integration), revenues are not recognized
prior to the time the product has been delivered and installed at
the customer's premises and there are no significant unfulfilled
obligations. Revenues from arrangements that include significant
acceptance terms are not recognized until acceptance has occurred.
Revenues from installation, integration and other services,
excluding post-contract support services, are recognized when the
services have been completed.
We provide our customers with post-contract support services, which
include the correction of software problems, telephone access to
our technical personnel and the right to receive unspecified
product updates, upgrades and enhancements when and if they become
available. Revenues from these services, including post-contract
support services included in initial licensing fees, are recognized
ratably over the contract period. Post-contract support services
included in the initial licensing fee are allocated from the total
contract amount based on the relative fair value of these services
determined using vendor-specific objective evidence, or VSOE.
Deferred revenue represents amounts billed to customers, but not
yet recognized as revenue. Unbilled receivables represent amounts
recognized as revenue, but not yet billed to customers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from these estimates.
NOTE 2 - RELATED PARTY TRANSACTION
On January 1, 2000, we sold our membership interest in Inet Global
Research, L.L.C., to an entity controlled by a related party for a
cash purchase price of $82,000. No gain or loss was recorded for
the sale. This entity is currently performing services for us, and
we intend to enter into a formal agreement with this entity for
certain contract services.
Page 8 of 23
<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
MARCH 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Numerator:
Net income for basic and diluted
earnings per share................... $ 8,690 $ 4,354
======= ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares....... 45,895 40,896
Effect of dilutive securities:
Employee stock options and purchase
rights................................ 928 1,742
-------- --------
Dilutive potential common shares......... 928 1,742
-------- --------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares................. 46,823 42,638
======= ========
Basic earnings per common share........... $ 0.19 $ 0.11
======= ========
Diluted earnings per common share......... $ 0.19 $ 0.10
======= ========
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
For all periods presented, we had no components of comprehensive
income other than net income.
NOTE 5 - SEGMENT INFORMATION
We operate in a single industry segment, providing communications
software solutions and associated services to our customers through
our sales personnel and certain foreign distributors. As a result,
the financial information disclosed in this report represents all
material financial information related to our principal operating
segment. The geographic distribution of our revenues as a
percentage of total revenues is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
United States............................ 60.6% 52.4%
Export:
Asia/Pacific........................... 8.1 4.8
Europe, Middle East and Africa......... 26.3 38.0
Other.................................. 5.0 4.7
------ -------
Total export revenue 39.4 47.6
------ -------
100.0% 100.0%
====== =======
</TABLE>
We have no significant long-lived assets deployed outside of the
United States.
Page 9 of 23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN HISTORICAL OR
CURRENT FACTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS ABOUT OUR
BUSINESS, FINANCIAL CONDITION, BUSINESS STRATEGY, PLANS AND
OBJECTIVES OF MANAGEMENT AND OUR FUTURE PROSPECTS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THESE EXPECTATIONS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, WITHOUT LIMITATION, CHANGES IN PRODUCT DEMAND, THE
AVAILABILITY OF PRODUCTS, CHANGES IN COMPETITION, FOREIGN RISKS,
ECONOMIC CONDITIONS, CHANGES IN TAX RISKS, AND OTHER RISKS
INDICATED BELOW UNDER THE CAPTION "RISK FACTORS" AND IN OUR OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE RISKS
AND UNCERTAINTIES ARE BEYOND OUR CONTROL AND, IN MANY CASES, WE
CANNOT PREDICT THE RISKS AND UNCERTAINTIES THAT COULD CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS QUARTERLY REPORT, THE
WORDS "BELIEVES," "PLANS," "EXPECTS," "ANTICIPATES," "INTENDS,"
"CONTINUE," "MAY," "WILL," "SHOULD" OR THE NEGATIVE OF SUCH TERMS
AND SIMILAR EXPRESSIONS AS THEY RELATE TO US OR OUR MANAGEMENT ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN OUR ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000. HISTORICAL
RESULTS AND PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS IN THE
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN
OPERATING RESULTS FOR ANY FUTURE PERIODS.
OVERVIEW
Inet was founded in 1989, and during the early stages of our
operations we focused primarily on developing and selling
diagnostic tools for a predecessor to the Signaling System #7, or
SS7, signaling protocol. As the telecommunications industry
increasingly adopted SS7, we shifted our focus to developing and
deploying SS7-based solutions as well as broadening our product
offerings. Our diagnostic tool, Spectra, was first introduced in
December 1990 and is currently in its tenth generation release.
Beginning in 1993, we focused a significant portion of our product
development efforts on developing a complete monitoring and
surveillance solution for SS7 networks, culminating in the
introduction of our GeoProbe product in late 1995. We continue to
focus significant resources on the development of enhancements to
Spectra, enhancements and add-on applications to GeoProbe and new
products focused on network optimization and interoperability for
next-generation networks.
Historically, we have generated substantially all of our revenues
from Spectra and GeoProbe. Revenues attributable to GeoProbe
represented a majority of our total revenues since 1998. Revenues
attributable to Spectra represented a majority of our total
revenues in 1997. Although we expect Spectra revenues to continue
to represent a significant portion of total revenues for the
foreseeable future, Spectra revenues are expected to continue to
decline as a percentage of total revenues as a result of a higher
growth rate for the GeoProbe product and revenues from the
introduction of new products. Our remaining revenues are derived
from services relating to these products and other products. These
services include training, warranty and post-contract support.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
data derived from our unaudited consolidated statements of income
as a percentage of revenues. The operating results for the three
months
Page 10 of 23
<PAGE>
ended March 31, 2000 are not necessarily indicative of the
results that may be expected for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 23.5 30.7
------- -------
Gross profit 76.5 69.3
------- -------
Operating expenses:
Research and development 21.6 20.9
Sales and marketing 12.8 12.7
General and administrative 7.5 8.7
------- -------
Total operating expenses 41.9 42.3
------- -------
Income from operations 34.6 27.0
Other income 5.4 1.4
------- -------
Income before provision for income taxes 40.0 28.4
Provision for income taxes 13.6 9.7
------- -------
Net income 26.4% 18.7%
======= =======
</TABLE>
REVENUES
Our revenues were $33.0 million for the three months ended March
31, 2000, an increase of 41.8% over the $23.2 million reported for
the three months ended March 31, 1999. The growth in revenues is
primarily due to an increase in unit sales. For the three months
ended March 31, 2000, international revenues accounted for 39.4% of
total revenues compared to 47.6% for the three months ended March
31, 1999. The decrease in international revenues as a percentage of
total revenues was the result of several large, domestic GeoProbe
deployments. In the three months ended March 31, 2000, we had two
customers that each accounted for slightly more than 10% of total
revenues. We anticipate that in the future, individual, large
transactions may represent a large percentage of revenues,
particularly on a quarterly basis.
COST OF REVENUES
Cost of revenues consists primarily of hardware expenses and
personnel costs related to the manufacturing, installation and
support of our products. For the three months ended March 31, 2000,
cost of revenues increased to $7.8 million from $7.1 million for
the three months ended March 31, 1999. The increase in dollars
resulted primarily from additional installation expenses and
support expenses related to servicing our growing installed
customer base. Cost of revenues represented 23.5% and 30.7% of
revenues in the three months ended March 31, 2000 and 1999,
respectively. The decrease as a percentage of revenues was
primarily attributable to a higher percentage of revenues being
derived from expansions of existing systems versus new
installations. Generally, expansions of existing systems have lower
hardware costs than new installations on a per transaction basis.
We believe that for the remainder of 2000, cost of revenues as a
percentage of revenues will be higher than the level experienced in
the three months ended March 31, 2000.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and
other compensation expenses associated with our research and
development activities. These expenses increased to $7.1 million
for the three months ended March 31, 2000 from $4.9 million for the
three months ended March 31, 1999. The increase was primarily due
to increased staffing dedicated to research and development
activities. Research and development expenses as a percentage of
revenues were 21.6% and 20.9% in the three months ended March 31,
2000 and 1999, respectively. We expect that research and
development
Page 11 of 23
<PAGE>
expenses in future periods will increase in absolute dollars as
these investments are crucial to our ability to evolve our
technologies and expand our product offerings to meet our
customers' needs.
Software development costs are expensed as incurred until
technological feasibility has been established, at which time
subsequent costs are 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 $4.2 million in the three
months ended March 31, 2000 from $3.0 million in the three months
ended March 31, 1999. The increase was primarily related to
continued expansion of our direct sales force, increased
international sales activities and increased marketing and
promotional activities. Sales and marketing expenses as a
percentage of revenues were 12.8% and 12.7% in the three months
ended March 31, 2000 and 1999, respectively. We believe that sales
and marketing expenses will continue to increase in absolute
dollars and as a percentage of revenues through 2000 due to planned
expansion of our domestic and international sales efforts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel,
facilities and other costs of our finance, administrative and
executive departments as well as fees and expenses associated with
legal and accounting requirements. These expenses increased to $2.5
million for the three months ended March 31, 2000 from $2.0 million
for the three months ended March 31, 1999. The increase was
primarily related to increased staffing levels associated with the
growth of our business and increased costs related to being a
public company. General and administrative expenses as a percentage
of revenues were 7.5% and 8.7% in the three months ended March 31,
2000 and 1999, respectively. We anticipate that general and
administrative expenses will continue to increase in absolute
dollars but decrease as a percentage of revenues.
OTHER INCOME
Other income is primarily interest income earned on our cash and
cash equivalents. Other income was $1.8 million for the three
months ended March 31, 2000 compared to $300,000 for the three
months ended March 31, 1999. The increase was due to higher
balances of cash and cash equivalents, which resulted from
increased cash flows from operations and proceeds from our initial
public offering completed in June 1999.
PROVISION FOR INCOME TAXES
We recorded income tax expense of $4.5 million and $2.2 million in
the three months ended March 31, 2000 and 1999, respectively. Our
effective income tax rate for each period was 34.0%.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily through cash flows from
operations and bank borrowings. We had working capital of $134.3
million at March 31, 2000, compared with $123.9 million at December
31, 1999. At March 31, 2000, we had $140.5 million in cash and cash
equivalents, an increase of $12.6 million from $127.9 million in
cash and cash equivalents at December 31, 1999. The increase in
cash and cash equivalents is attributable to higher levels of
income from operations, increased taxes payable, increased deferred
revenue, and
Page 12 of 23
<PAGE>
proceeds from the issuance of common stock upon the
exercise of stock options and employee stock purchases.
We have a line of credit facility with a bank providing for
borrowings of up to $10.0 million which expires June 15, 2000. Up
to $5.0 million may be utilized to support letters of credit. The
per annum usage fee on unused portions of the line is 0.125%.
Borrowings under this facility bear interest payable quarterly at
LIBOR plus 1.5% and are collateralized by our accounts receivable,
inventories, and property and equipment. The credit facility
includes covenants requiring us to maintain certain financial
ratios and restricts the payment of cash dividends without the
bank's consent. At March 31, 2000, no amounts were outstanding
under the credit facility, and the amount available to us, after
considering outstanding letters of credit, was $9.8 million.
Net cash provided by operating activities was $12.0 million for the
three months ended March 31, 2000, compared to $22.2 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.
Net cash used in investing activities was $1.3 million for the
three months ended March 31, 2000, compared to $1.0 million during
the same period in 1999. Net cash used in investing activities was
related to purchases of property and equipment.
Net cash provided by financing activities was $1.8 million for the
three months ended March 31, 2000 and $0 for the same period in
1999, and resulted from proceeds from the issuance of common stock
upon the exercise of stock options and purchases under our employee
stock purchase plan.
In January 2000, we signed a ten-year lease agreement for office
space. We estimate that our commitment for leasehold improvements
for this office space 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
acquisitions and joint ventures, we anticipate that current cash
balances, potential cash flows from operations and available
borrowings under our revolving credit facility will be sufficient
to meet our anticipated cash needs for working capital, capital
expenditures and other activities for at least the next 12 months.
Thereafter, if current sources are not sufficient to meet our
needs, we may seek additional equity or debt financing. In
addition, any material acquisition of complementary businesses,
products or technologies or material joint venture could require us
to obtain additional equity or debt financing. There can be no
assurance that additional financing would be available on
acceptable terms, if at all.
RISK FACTORS
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO
PREDICT.
Since our future operating results are likely to vary significantly
from quarter to quarter, you should not rely on our results of
operations during any particular quarter as an indication of our
future performance in any fiscal year or quarter 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;
Page 13 of 23
<PAGE>
- the timing of product shipments and product
installations by us;
- in limited circumstances, customer acceptance of
products we deliver to them;
- the capital spending patterns of our customers;
- the mix of domestic and international sales;
- changes in the timing of and level of expenses;
- the relative percentages of products sold
through our direct and indirect sales channels;
- customer order deferrals in anticipation of
enhancements or new products;
- the timing of and level of investments in
research and development activities by us;
- changes in, and our ability to implement, our
strategy;
- changes in the availability or cost of materials
needed to produce our products;
- the progress and timing of the privatization
and restructuring of telecommunications
markets and the worldwide deregulation of the
international telecommunications industry;
- defects and product quality problems;
- intellectual property disputes;
- expansion of and risks associated with our
international operations; and
- changes in general economic conditions.
Furthermore, a large portion of our operating expenses, including
rent and salaries, are largely fixed in nature. Accordingly, if
revenues are below expectations, our operating results are likely
to be adversely and disproportionately affected because these
operating expenses are not variable in the short term, and cannot
be quickly reduced to respond to unanticipated decreases in
revenues.
The amount of revenues associated with particular product sales can
vary significantly. The deferral or loss of one or more
individually significant sales could harm our operating results in
a particular quarter.
Our operating results also are likely to fluctuate due to factors
which impact our prospective customers. Expenditures by prospective
customers tend to vary in cycles that reflect overall economic
conditions and individual budgeting and buying patterns. Our
business would be adversely affected by a decline in the economic
prospects of our customers or the economy in general, because these
adverse conditions could alter current or prospective customers'
capital spending priorities or budget cycles, or extend our sales
cycle with respect to some of our customers. In addition, our
operating results historically have been influenced by seasonal
fluctuations, with revenues tending to be strongest in the fourth
quarter of each year. We believe that this seasonality has been due
to the capital appropriation practices of many of our customers. We
expect that in future periods this seasonal trend may cause our
first quarter revenues to remain consistent with, or decrease from,
the level achieved in the preceding quarter.
As a result of all of the foregoing, we cannot assure you that our
revenues will grow in future periods or that we will remain
profitable. In addition, in some future quarters our operating
results may be below the expectations of public market analysts. In
such event, the market price of our common stock would likely fall.
Page 14 of 23
<PAGE>
CONSOLIDATIONS IN, OR A SLOWDOWN IN THE GROWTH OF, THE
TELECOMMUNICATIONS INDUSTRY COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We have derived substantially all of our revenues from sales of
products and related services to the telecommunications industry.
The telecommunications industry has undergone a period of rapid
growth and consolidation during the past few years. Our business,
financial condition and results of operations could be materially
and adversely affected in the event of a significant slowdown in
the growth of this industry. Further, consolidations of our
prospective customers may delay or cause cancellations of
significant sales of our products, which could harm our operating
results in a particular period.
ANY REVERSAL OR SLOWDOWN IN DEREGULATION OF TELECOMMUNICATIONS
MARKETS COULD ADVERSELY AFFECT THE MARKET FOR OUR PRODUCTS.
Future growth in the markets for our products will depend in part
on privatization, deregulation and restructuring of
telecommunications markets worldwide. Any reversal or slowdown in
the pace of this privatization, restructuring or deregulation could
have a material adverse effect on the markets for our products.
Moreover, the consequences of deregulation are subject to many
uncertainties, including judicial and administrative proceedings
that affect the pace at which the changes contemplated by
deregulation occur, and other regulatory, economic and political
factors. Any invalidation, repeal or modification of the
requirements imposed by the Telecommunications Act of 1996 or the
local telephone competition rules adopted by the U.S. Federal
Communications Commission to implement that Act could have a
material adverse effect on our business, financial condition and
results of operations. Furthermore, the uncertainties associated
with deregulation have in the past and could in the future cause
our customers to delay purchasing decisions pending the resolution
of these uncertainties.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG, WHICH COULD ADVERSELY
AFFECT OUR QUARTERLY OPERATING RESULTS.
The sales cycle for our products is long, typically ranging from
six to 12 months for GeoProbe sales (excluding the cycle for
subsequent applications and enhancements, which varies widely) and
up to six 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.
Page 15 of 23
<PAGE>
COMPETITION COULD REDUCE OUR MARKET SHARE, WHICH WOULD LIKELY HARM
OUR BUSINESS AND OPERATING RESULTS AND CAUSE OUR STOCK PRICE TO
FALL.
The market for signaling-based communications network management
applications is relatively new, intensely competitive, both in the
U.S. and internationally, and subject to rapid technological
change, evolving industry standards and regulatory developments.
Competition is expected to persist, intensify and increase in the
future. We compete with a number of U.S. and international
suppliers that vary in size and in the scope and breadth of the
products and services offered. GeoProbe principally competes with
products offered by Agilent Technologies, a subsidiary of
Hewlett-Packard Company. Our diagnostic tools principally compete
with products offered by Agilent Technologies, Tekelec and
Tektronix, Inc. There have been new entrants in both the network
optimization and diagnostic product areas, but to date they do not
comprise a significant portion of the market. Some of our
competitors have, in relation to our company, longer operating
histories, larger installed customer bases, longer-standing
relationships with customers, greater name recognition and
significantly greater financial, technical, marketing, customer
service, public relations, distribution and other resources.
Additionally, it is possible that new competitors or alliances
among competitors could emerge and rapidly acquire significant
market share. As a result, these competitors may be able to more
quickly develop or adapt to new or emerging technologies and
changes in customer requirements, or devote greater resources to
the development, promotion and sale of their products. Increased
competition is likely to result in price reductions, reduced
margins and loss of market share. The competitive pressures we face
could harm our business, financial condition and results of
operations.
OUR RAPID GROWTH AND EXPANSION MAY STRAIN OUR RESOURCES AND HINDER
OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY.
We have experienced rapid and significant growth that has placed,
and is expected to continue to place, a significant strain on our
management, information systems and operations. For example, our
revenues have increased from $17.5 million in 1995 to $110.0
million in 1999. The number of our employees has increased from 116
at December 31, 1995 to 457 at December 31, 1999 and 475 at March
31, 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, sales and marketing
personnel, most of whom are not bound by an employment agreement.
The loss of any existing key personnel or the inability to attract,
motivate and retain additional qualified personnel could harm our
business, financial condition and results of operations.
We anticipate that continued growth, if any, will require us to
recruit and hire a substantial number of new employees,
particularly sales and marketing personnel and technical personnel
with signaling and IP knowledge and experience, both in the U.S.
and internationally. Competition for personnel is intense, and we
have at times experienced difficulty in recruiting qualified
personnel. We historically have filled a portion of our new
personnel needs with non-U.S. citizens holding temporary work visas
that allow these individuals to work in the U.S. for only a limited
period of time. Accordingly, any change in U.S. immigration policy
limiting the issuance of temporary work visas could adversely
affect our ability to recruit new personnel. Furthermore, the
addition of significant numbers of new personnel requires us to
incur significant start-up expenses, including procurement of
office space and equipment, initial training costs and low
utilization rates of new personnel. We may be unable to
successfully recruit additional personnel as needed. In addition,
the start-up expenses incurred in connection with the hiring of
additional personnel could harm our future operating results.
Page 16 of 23
<PAGE>
WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE AND
EVOLVING CUSTOMER REQUIREMENTS.
The market for our products is characterized by rapid technological
advances, evolving industry and customer-specific protocol
standards, changes in customer requirements and frequent new
product introductions and enhancements. The introduction of
communications network management products involving superior
technologies or the evolution of alternative technologies or new
industry protocol standards could render our existing products, as
well as products currently under development, obsolete and
unmarketable. We believe our future success will depend in part
upon our ability, on a timely and cost-effective basis, to continue
to:
- enhance our network optimization and diagnostic
products;
- develop and introduce new products for the
communications network management market and
other markets;
- address evolving industry protocol standards and
changing customer needs; and
- achieve broad market acceptance for our products.
We cannot assure you that we will achieve these objectives.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP NEW
PRODUCTS BASED ON EMERGING TECHNOLOGIES.
Our future success will depend in part on our ability to develop
solutions for networks based on emerging technologies and
standards, such as ATM and Internet telephony, which are likely to
be characterized by continuing technological developments, evolving
industry standards and changing customer requirements. We may not
successfully develop competitive products for these emerging
technologies, and our failure to do so could harm our business,
financial condition and results of operations.
WE HAVE INTERNATIONAL CUSTOMERS, AND, AS A RESULT, OUR BUSINESS MAY
BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN
FOREIGN MARKETS.
Our international operations are subject to the risks inherent in
international business activities. Revenues from customers located
outside of the U.S. represented 39.4% of our total revenues for the
three months ended March 31, 2000 and 51.7%, 52.2% and 52.6% of our
total revenues in 1999, 1998 and 1997, respectively. We believe
that continued growth and profitability will require expansion of
our sales efforts in international markets. This expansion may be
costly and time-consuming and may not generate returns for a
significant period of time, if at all. The risks inherent in
international operations include:
- management of geographically dispersed operations;
- longer accounts receivable payment cycles;
- the ability to establish relationships with
government-owned or subsidized communications
providers;
- general economic conditions in each country;
- currency controls and exchange rate fluctuations;
- seasonal reductions in business activity
particular to certain markets;
- loss of revenues, property and equipment from
expropriation, nationalization, war, insurrection,
terrorism and other political risks;
Page 17 of 23
<PAGE>
- foreign taxes and the overlap of different tax
structures;
- greater difficulty in safeguarding intellectual
property;
- import and export licensing requirements;
- trade restrictions; and
- involuntary renegotiation of contracts with
foreign governments and communications carriers.
International expansion of our business will require significant
management attention and financial resources. Moreover, in order to
further expand internationally, we may be required to establish
relationships with additional distributors and third-party
integrators. We cannot assure you that we will effectively
establish such relationships. If international revenues are not
adequate to offset the additional expense of expanding
international operations, it could harm our business, financial
condition and results of operations.
To date, international sales have been denominated solely in U.S.
dollars, and accordingly we have not been 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 portion of
international sales may be denominated in currencies other than
U.S. dollars, thereby exposing us to gains and losses on non-U.S.
currency transactions. We may choose to limit such exposure by
entering into various hedging strategies. We cannot be certain that
any hedging strategies that we undertake would be successful in
avoiding exchange-related losses.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS
BECAUSE WE OBTAIN KEY COMPONENTS FROM SOLE AND LIMITED SOURCE
SUPPLIERS. IF WE ARE UNABLE TO OBTAIN THESE COMPONENTS, WE COULD BE
UNABLE TO SHIP OUR PRODUCTS IN A TIMELY MANNER.
Currently, our products utilize certain semiconductors that are
available from only one manufacturer and other components that are
available from a limited number of suppliers. While alternative
suppliers have been identified for certain key components, those
alternative sources have not been qualified by us. Our
qualification process could be lengthy, and we cannot assure you
that additional sources would become available to us on a timely
basis, or if such sources were to become available, that the
components would be comparable in price and quality to our current
components. We have no long-term agreements with our suppliers and
generally make our purchases with purchase orders on an "as-needed
basis." Furthermore, certain components require an order lead-time
of approximately six months. Other components that currently are
readily available may become difficult to obtain in the future.
Accordingly, we make advance purchases of certain components in
relatively large quantities to ensure that we have an adequate and
readily available supply. Our failure to order sufficient
quantities of these components sufficiently in advance of product
delivery deadlines could prevent us from adequately responding to
unanticipated increases in customer orders. In the past, we have
experienced delays in the receipt of certain of our key components,
which have resulted in delays in product deliveries. We could
experience delays or reductions in product shipments or increases
in product costs if we are unable to obtain sufficient key
components as required or to develop alternative sources if and as
required in the future.
SINCE WE RELY ON THIRD-PARTY SUBCONTRACTORS TO MANUFACTURE AND
DEVELOP OUR PRODUCTS, IF THESE SUBCONTRACTORS DO NOT MEET THEIR
COMMITMENTS TO US, OUR ABILITY TO SELL PRODUCTS TO OUR CUSTOMERS
COULD BE IMPAIRED.
We rely exclusively upon third-party subcontractors to manufacture
our subassemblies. We also have retained, from time to time,
third-party design services in the development of
application-specific integrated circuits. Our reliance on
third-party subcontractors involves a number of risks, including
the potential absence of adequate capacity, the unavailability of
or interruption in access to certain process
Page 18 of 23
<PAGE>
technologies, and reduced control over product quality, delivery
schedules, manufacturing yields and costs. Any disruption in our
relationships with third-party subcontractors and our inability
to develop alternative sources if and as required in the future
could result in delays or reductions in product shipments or
increases in product costs.
WE RELY UPON SOFTWARE LICENSED FROM THIRD PARTIES; IF WE ARE UNABLE
TO MAINTAIN THESE SOFTWARE LICENSES ON COMMERCIALLY REASONABLE
TERMS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE HARMED.
We rely upon software that we license from third parties, including
software that is integrated with our internally developed software
and used in our products to perform key functions. The inability to
maintain any software licenses on commercially reasonable terms
could result in shipment delays or reductions until equivalent
software could be developed or licensed and integrated into our
products, which could harm our business, financial condition and
results of operations.
WE MAY NOT RECEIVE THE INTENDED BENEFITS OF FUTURE ACQUISITIONS,
JOINT VENTURES, OR OTHER BUSINESS RELATIONSHIPS.
We may in the future pursue acquisitions of businesses, products
and technologies, or the establishment of joint venture
arrangements, that could expand our business. The negotiation of
potential acquisitions or joint ventures as well as the integration
of an acquired or jointly developed business, technology or product
could cause diversion of management's time and resources. Future
acquisitions and joint ventures by our company could result in
potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities, amortization of goodwill and
other intangibles, research and development write-offs and other
acquisition-related expenses. Further, we cannot assure you that
any acquisition or joint venture will be successfully integrated
with our operations. If any such acquisition or joint venture were
to occur, we cannot be certain that we will receive the intended
benefits of the acquisition or joint venture. Also, we may pursue
arrangements with third parties to perform certain activities for
us such as the development of certain products or product features.
We cannot assure you that these arrangements will produce to the
level of quality or in the time frame expected, which could
materially and adversely harm our business.
WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS,
WHICH COULD SUBJECT US TO COSTLY AND TIME-CONSUMING LITIGATION.
The communications industry is characterized by the existence of a
large number of patents and frequent allegations of patent
infringement. We have received, and may receive in the future,
notices from holders of patents that raise issues as to possible
infringement by our products. As the number of communications
network management products increases and the functionality of
these products further overlaps, we believe that we may become
increasingly subject to allegations of infringement. To date, we
have engaged in correspondence with third-party holders of patents
as a result of two such notices. We believe that our products do
not infringe on any valid patents cited in the notices, however,
questions of infringement and the validity of patents in the field
of communications signaling technologies involve highly technical
and subjective analyses. We cannot assure you that any such patent
holders, or others, will not initiate legal proceedings in the
future against us, or that if any proceedings were initiated, we
could be successful in defending ourselves. Any proceeding could be
time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product
shipment delays, or force us to enter into royalty or license
agreements rather than dispute the merits of any such proceeding
initiated against us. We cannot assure you that any such royalty or
license agreements could be available on terms acceptable to us, if
at all.
Page 19 of 23
<PAGE>
OUR LIMITED ABILITY OR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY
MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Our continued success is dependent in part upon our proprietary
technology. To protect our proprietary technology, we rely on a
combination of technical innovation, trade secret, copyright and
trademark laws, non-disclosure agreements and, to a lesser extent,
patents, each of which affords only limited protection. In
addition, the laws of some foreign countries do not protect our
proprietary rights in the products to the same extent as do the
laws of the U.S. Despite the measures taken by us, it may be
possible for a third party to copy or otherwise obtain and use our
proprietary technology and information without authorization.
Policing unauthorized use of our products is difficult, and
litigation may be necessary in the future to enforce our
intellectual property rights. Any litigation could be time
consuming and expensive to prosecute or resolve, result in
substantial diversion of management resources, and have a material
adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will be successful in
protecting our proprietary technology or that our proprietary
rights will provide us a meaningful competitive advantage.
WE MAY FACE POTENTIAL LIABILITY FOR PRODUCT DEFECTS.
Products as complex as those we offer may contain undetected
defects or errors when first introduced or as enhancements are
released that, despite our testing, are not discovered until after
a product has been installed and used by customers, which could
result in delayed market acceptance of the product or damage to our
reputation and business. To date, we have not been materially
adversely affected by products containing defects or errors. We
attempt to include provisions in our agreements with customers that
are intended to limit our exposure to potential liability for
damages arising out of defects or errors in or the use of our
products. However, the nature and extent of these limitations tend
to vary from customer to customer and it is possible that these
limitations may not be effective as a result of unfavorable
judicial decisions or laws enacted in the future. Although we have
not experienced any product liability suits to date, the sale and
support of our products entails the risk of these claims. Any
product liability claim brought against us, regardless of its
merit, could result in material expense to us, diversion of
management time and attention, and damage to our business
reputation and our ability to retain existing customers or attract
new customers.
OUR PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS OWN
APPROXIMATELY 80.9% OF OUR COMMON STOCK, WHICH ALLOWS THEM TO
CONTROL THE MANAGEMENT AND AFFAIRS OF OUR COMPANY OR PREVENT A
CHANGE OF CONTROL.
As of March 31, 2000, our three founders, Samuel S. Simonian, Elie
S. Akilian and Mark A. Weinzierl, beneficially owned approximately
80.9% 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.
Page 20 of 23
<PAGE>
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT
AN ACQUISITION OF OUR COMPANY.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that may have the effect of discouraging,
delaying or preventing a change in control of our company or
unsolicited acquisition proposals that a stockholder may consider
favorable. For example, we provide for a classified board of
directors with staggered three-year terms, our stockholders
are unable to take action by written consent and our stockholders
are limited in their ability to make proposals at stockholder
meetings.
VOLATILITY IN OUR STOCK PRICE COULD RESULT IN CLAIMS AGAINST US.
The market price of our common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected
by factors such as:
- variations in our results of operations;
- future sales of common stock;
- the announcement of technological innovations or
new products by us, our competitors and others;
- market analysts' estimates of our performance; and
- general market and economic conditions.
The public markets have experienced volatility that has
particularly affected the market prices of securities of many
technology companies for reasons that have often been unrelated to
operating results. This volatility may adversely affect the market
price of the common stock and our visibility and credibility in our
markets.
Additionally, in the past, securities class action litigation often
has been brought against a company following periods of volatility
in the market price of its common stock. We may be the target of
similar litigation in the future. Securities litigation could
result in substantial costs and divert our management's attention
and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to immaterial levels of market risk.
Page 21 of 23
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2000, through March 31, 2000, we issued 678,000
shares of our common stock to employees pursuant to exercises of
stock options under our stock option plans (with exercise prices
ranging from $0.60 to $15.00 per share) and 89,900 shares pursuant
to employee stock purchases under our employee stock purchase
plan. These issuances were deemed exempt from registration under
Section 5 of the Securities Act of 1933 in reliance upon Rule 701
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.1 Executive Employment Agreement, dated August 30, 1999, between
the registrant and Luis Pajares.
10.2 Letter agreement, dated January 31, 2000, between the
registrant and Jeffrey A. Kupp.
27 Financial Data Schedule (for SEC information only)
</TABLE>
(b) There were no reports filed on Form 8-K during the first quarter of 2000.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INET TECHNOLOGIES, INC.
By: /s/ Elie S. Akilian
------------------------------------------------
Elie S. Akilian
President, Chief Executive Officer and Director
(Principal executive officer)
By: /s/ Jeffrey A. Kupp
------------------------------------------------
Jeffrey A. Kupp
Vice President - Chief Financial Officer
(Principal accounting and financial officer)
Date: May 15, 2000
Page 22 of 23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.1 Executive Employment Agreement, dated August
30, 1999, between the registrant and Luis
Pajares
10.2 Letter agreement, dated January 31, 2000,
between the registrant and Jeffrey A. Kupp
27 Financial Data Schedule
</TABLE>
Page 23 of 23
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of the date set forth below (hereinafter referred to as the
"Effective Date") by and between INET TECHNOLOGIES, INC., (the "Company"), and
LUIS PAJARES (the "Executive") (collectively, the "Parties").
WITNESSETH:
WHEREAS, the Executive has considerable experience, expertise and
training in management related to the types of services offered by the Company;
and
WHEREAS, the Company has agreed to employ Executive, and Executive has
agreed to be employed by the Company, subject to and on the terms and conditions
set forth herein; and
WHEREAS, both the Company and the Executive have read and understood
the terms and provisions set forth in this Agreement, and have been afforded a
reasonable opportunity to review the Agreement with their respective legal
counsel.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants contained in this Agreement, the Company and the Executive, intending
to be legally bound hereby, agree as follows:
1. EMPLOYMENT. Subject to the terms and conditions hereinafter set
forth, the Company hereby agrees to employ the Executive in the position of
Senior Vice President of Sales and Marketing, reporting directly to the
President and CEO and the Executive hereby accepts such employment.
2. TERM. This Agreement shall continue in full force and effect
for a period of two (2) years, or until terminated by one of
the Parties in accordance with Section 8. Such term shall be
referred to as the "Term of Employment". Upon the expiration
of the initial two (2) year term, this Agreement shall
automatically renew for one (1) additional year, unless
terminated by one of the Parties in accordance with Section 8.
3. DUTIES AND AUTHORITY.
(a) During the Term of Employment, the Executive shall render his
services to the Company as the Company's Senior Vice President of Sales and
Marketing. During the Term of Employment, the Executive shall devote
substantially all of his business time, efforts and entire energy and skill to
the business of the Company and will promote the interests of the Company, in
accordance with the reasonable directions and orders of the Chief Executive
Officer ("CEO"). Any such duties, powers and authority shall not violate any
federal, state or local laws or regulations.
4. COMPENSATION.
(a) Base Salary. In consideration of the services to be rendered by
the Executive pursuant to this Agreement, including, without limitation, any
services which may be rendered by the Executive as an officer, director or
member of any committee of the Company or any direct or indirect subsidiary
of the Company, the Company shall pay or cause to be paid to the Executive
during the Employment Term, and the Executive shall accept, a starting annual
compensation at the rate of one hundred sixty-eight thousand dollars
($168,000.00) per annum. The Company's obligation to pay Base Salary shall
begin to accrue on the Commencement Date (which is defined as the 1st day on
which Executive begins active employment with the Company), and Base Salary
shall be
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 1
<PAGE>
payable in accordance with the Company's standard payroll practices which are
in effect from time to time during the Employment Term. The Executive's Base
Salary shall be subject to all applicable withholding and other taxes.
(b) Variable Compensation. In addition to the Base Salary, during
the Employment Term, the Executive shall be eligible for an annual additional
compensation (the "Variable Compensation"). The target amount of the Variable
Compensation payable to the Executive shall be one hundred fifty thousand
dollars ($150,000.00) per year.
(c) Special Bonus. The Company agrees that the Executive shall be
paid a one-time lump sum bonus of one hundred forty four thousand dollars
($144,000.00) no later than October 1, 1999, provided Executive has not
terminated this Agreement before that date in accordance with the terms of
Section 8.
5. EMPLOYMENT BENEFITS. During the Employment Term, and as may
otherwise be provided below, the Executive shall be entitled to participation
in all vacation and fringe benefit programs and plans established by the
Company for executives of the Company.
6. OPTION GRANTS. The Executive shall be entitled to a grant of
options to purchase shares of the Company's Common Stock, (the "Option")
under the following terms:
(a) Grant of Options. The Company agrees to grant the Executive an
Option to purchase from the Company an aggregate of two hundred thousand
(200,000) shares of the Common Stock, under the Company's 1998 Stock Option /
Stock Issuance Plan. The Grant Date for purposes of this Option shall be the
date on which the Executive begins his employment with the Company.
(b) Vesting and Exercise of Options. The Executive shall have the
right to exercise the Option with respect to all or part of any portion of
the non qualified Option Stock that has vested in accordance with the
following schedule, immediately upon its vesting:
(1) On [[January 1, 2000]], provided Executive is still employed
by the Company, the Executive's Option to purchase twenty-five
thousand (25,000) shares of the non qualified Option Stock, shall
vest.
(2) On [[August 31, 2000]], provided Executive is still employed
by the Company, the Executive's Option to purchase twenty-five
thousand (25,000) shares of the non qualified Option Stock, shall
vest.
(3) On [[August 31, 2001]], provided Executive is still employed
by the Company, the Executive's Option to purchase twenty-five
thousand (25,000) shares of the non qualified Option Stock, shall
vest.
(4) On [[August 31, 2002]], provided Executive is still employed
by the Company, the Executive's Option to purchase twenty-five
thousand (25,000) shares of the non qualified Option Stock, shall
vest.
(5) In the event that a Change of Control (as defined in Section
13 of this Agreement) occurs at any time during the Executive's
employment, the Executive's Option to purchase all two hundred
thousand (200,000) shares of the Option Stock shall immediately
vest, notwithstanding the provisions of clauses (1) through (4) of
this subsection (b), above.
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 2
<PAGE>
(c) Status of the Executive. The Executive shall not be considered a
stockholder of the Company with respect to any shares of stock subject to these
Options, except to the extent that the shares of Option Stock have been
purchased by and transferred to the Executive.
(d) Other Option Provisions. Except as otherwise provided
herein, the terms of Options shall be governed by the Company's Stock Option
Plan in effect on the Effective Date and the terms of the stock option agreement
governing such grant.
7. EXPENSES. During the Employment Term, the Company shall reimburse
the Executive, upon presentation of proper vouchers or receipts, for all
reasonable travel, entertainment and other out-of-pocket expenses reasonably and
appropriately incurred by the Executive in the performance of his duties
hereunder in accordance with the Company's travel and business expense policy.
8. TERMINATION.
(a) Any termination of the Executive's employment by the Company or the
Executive pursuant to subsections 8(b), (c), (d) or (e) shall be communicated by
a written notice (a "Termination Notice") to the Executive or the Company, as
applicable, in accordance with Section 12 hereof. For purposes of this
Agreement, a "Termination Notice" shall mean a notice which is based upon and
shall indicate the termination provision relied upon in this Agreement, as well
as the effective date of such termination (the "Termination Date") and, except
for termination under subsection 8(c), shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Provided that the
Company does not violate any term of this Agreement or applicable law, this
Agreement provides the exclusive remedies and exclusive severance pay for any
termination of the Executive, and if the employment of the Executive is
terminated, the Company shall have no further obligations except as expressly
provided under this Agreement, or as otherwise provided by law. As a condition
to receiving any payments upon or after termination for any cause (other than
amounts, if any, due for past services, or other than the payment of amounts
accrued and unpaid under Section 4 hereof through the Termination Date), the
Executive must release the Company from all potential claims for the payment of
monies which may be due under this Agreement.
(b) Cause.
(i) The Company may, at any time, and in its sole discretion,
terminate the employment of the Executive hereunder for Cause. For
purposes of this Agreement, "Cause" means the Executive's (1)
substantial and material violation of the policies or procedures of the
Company or any of its Affiliates; (2) willful and reckless failure to
perform the duties or responsibilities set forth under Section 3 of
this Agreement; (3) gross insubordination or recklessly and
intentionally taking of any action in conflict with the interests and
objectives of the Company or any of its Affiliates; (4) commission of a
fraudulent or dishonest act in connection with his employment with the
Company or any of its Affiliates; or (5) plea of guilty or nolo
contendere to or conviction of any felony or an act of moral turpitude.
(ii) If the employment of the Executive hereunder is
terminated pursuant to this subsection 8(b), the Company shall have no
further obligations to the Executive hereunder after the Termination
Date other than the payment of Base Salary accrued and unpaid under
Section 4 hereof through the Termination Date, or except as otherwise
provided by law.
(c) Termination Without Cause. At any time after the initial year of
the term of this Agreement, in the event the Company desires to terminate the
employment of the Executive hereunder for actions other than Cause, or for any
or no reason, ("without cause"), by delivery to him of a Termination Notice,
such termination shall be
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 3
<PAGE>
effective thirty (30) days after the date of the Termination Notice; provided
however, the Company shall be required to pay the Severance Pay to Executive,
as defined in and according to the terms of Section 8(h) below.
(d) Resignation. The Executive shall be entitled to terminate this
Agreement at any time, for any reason, by providing the Company with a
written Notice of Resignation at least thirty (30) days prior to his intended
resignation date.
(e) Disability
(i) In the event that the CEO, acting reasonably and in good
faith, determines that the Executive is incapacitated by reason of a
physical or mental illness which is long-term in nature and which
prevents the Executive from performing the essential functions of his
position, with reasonable accommodation, and the CEO has been advised
in writing by the Company's physician, following a physical
examination, that such incapacity can reasonably be expected to prevent
the Executive from performing the essential functions of his position
for a period of at least six (6) months in any twelve (12) month
period, the CEO may terminate the Executive's employment hereunder;
provided however, the Company shall be required to pay the Severance
Pay to Executive, as defined in and according to the terms of Section
8(h) below. The Company may require the Executive to have the physical
examination described in the preceding sentence at any time but only
for the sole and limited purpose of determining whether or not the
Executive has a long-term disability, and the Executive agrees to
submit to such examination no later than ten (10) days after receiving
written notification from the Company.
(ii) If the employment of the Executive hereunder is terminated
pursuant to this subsection 8(e)(i) because of a long-term
disability, the Executive shall receive the Severance Pay in
accordance with Section 8(h), as well as payments pursuant to the
Company's disability policy which is in effect for executives of the
Company, Base Salary and Variable Compensation earned through the
Termination Date. If the employment of the Executive hereunder is
terminated pursuant to this paragraph 8(e)(i), the Company shall
have no further obligations hereunder except as expressly provided
under this paragraph 8(e)(i), or as otherwise provided by law.
(iii) Upon the termination of this Agreement by reason of the
Executive's disability, such termination shall not terminate or
adversely affect any rights of the Executive then vested or accrued
under any disability or other fringe benefit program of the Company
then in effect. During the period of the Executive's disability
prior to the termination of this Agreement, the Executive shall be
entitled to receive any disability benefits provided by the Company
as part of its short term or long term disability plan, if any.
(iv) The Executive represents to the Company that, as of the
date of this Agreement, to the best of his knowledge, he is in good
health and is not aware of any health condition that is likely to
lead to a temporary or long-term disability within the Employment
Term.
(f) Death. If the Executive dies during the Employment Term, the
employment of the Executive hereunder shall terminate immediately upon his
death. If the employment of the Executive hereunder is terminated pursuant to
this subsection 8(f), the Company shall have no further obligations hereunder
after the date of death other than the payment to the Executive's estate,
legal representatives, heirs, successors, assigns or other beneficiaries of
Base Salary and Variable Compensation accrued and unpaid under Section 4
through the Termination Date. If the employment of the Executive is
terminated pursuant to this subsection 8(f), the Company shall have no
further obligations hereunder except as expressly provided under this
subsection 8(f), or as otherwise provided by law.
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 4
<PAGE>
(g) Voluntary Termination. If the Executive voluntarily terminates his
employment hereunder, the Company shall have no further obligations to the
Executive hereunder after the Termination Date other than the payment of Base
Salary and any Variable Compensation accrued and unpaid under Section 4 hereof
through the Termination Date, except as required by law.
(h) Severance Pay. If, pursuant to this Agreement, Executive is to be
paid Severance Pay, then the Company shall pay to the Executive, in a lump sum
cash payment within five (5) days after Executive's execution of a valid release
as set forth in Section 8(a) above, the following (the "Severance Amount"):
(i) Executive's earned but unpaid Base Salary through the
Termination Date;
(ii) A prorated amount of Base Salary as in effect immediately
prior to the date of termination, but without regard to
any compensation deferral election under any plan, program
or arrangement, qualified or nonqualified, maintained or
contributed to by the Company, including but not limited
to a cash-or-deferred arrangement described in Section
401(k) of the Internal Revenue Code of 1986, as amended,
(the "Code") a cafeteria plan describe in Code Section 125
or a nonqualified deferred compensation plan. This portion
of the Severance Amount (the "Prorated Amount") will be
computed as follows:
(a) In the event the Company terminates the Executive's
employment pursuant to the terms of Sections 8(c)
or 8(e) during the first twelve months of
Executive's employment, the Prorated Amount shall
be the equivalent of twelve months' Base Salary.
(b) In the event the Company terminates the Executive's
employment pursuant to the terms of Sections 8(c)
or 8(e) after the first twelve months of
Executive's Employment, the Prorated Amount shall
be the equivalent of one month's Base Salary for
every month remaining between the Termination Date
and August 31st, 2001, but in no event shall be
less than six months' Base Salary.
(iii) Variable Compensation in an amount equal to one hundred
fifty thousand dollars ($150,000) less any Variable
Compensation amounts paid during the same calendar year.
(iv) Outplacement benefits at a maximum Company cost of $15,000;
and
(v) In addition, Executive will be entitled to twelve (12)
calendar months of continued medical coverage according to
the same terms to which he was entitled to medical
coverage on the date immediately preceding the termination.
9. DISCLOSURE OF INFORMATION.
(a) The Executive shall not, during or after the Employment Term,
disclose any confidential or proprietary information of the Company or any of
its affiliates to any person, firm, company, association, limited liability
company, or other entity for any reason or purpose whatsoever, except in the
performance of the duties assigned to the Executive in this Agreement, nor
shall the Executive make use of any such confidential or proprietary
information for his own purpose or for the benefit of any person, firm,
limited liability company, company or other entity, except the Company or any
of its affiliates. The term "confidential or proprietary information" means
all information which relates to the business of the Company, which is or has
been disclosed
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 5
<PAGE>
to the Executive orally or in writing by directors, employees, former
employees, consultants or others in a confidential relationship with the
Company or obtained by virtue of work performed for the Company or any of its
affiliates, and is developed by the Company or any of its affiliates or was
developed by the Company or any of its affiliates, including, without
limitation, trade secrets, research and development activities, computer or
software or software concepts in development, books and records, customer
lists, vendor lists, suppliers, distribution channels, pricing information
and private processes.
(b) The Company and the Executive acknowledge that the term
"confidential or proprietary information" shall not include information (1)
that is or becomes generally available to the public (other than as a result
of an unauthorized disclosure by the Executive), (2) which must be disclosed
by law but only to the extent necessary to comply with such law, (3) is
received from a third party having the right to make disclosure thereof, (4)
that is in the Executive's possession prior to its disclosure to him by the
Company; or (5) is approved for release by written authorization of the
Company. Additionally, the Company and the Executive acknowledge that the
term "confidential or proprietary information" does not include the general
knowledge, experience, memory, and skill acquired by the Executive or the
general "know-how" information acquired by the Executive during the course of
his service for the Company.
(c) The Executive acknowledges that disclosure of, or any
contravention of this Section 9, regardless of the materiality of such
disclosure or contravention, may result in immediate, direct, irreparable and
substantial damage to the Company for which a remedy at law may not be
sufficient and therefore, the Company shall be entitled to apply for
injunctive relief and/or specific performance by any court of competent
jurisdiction, in addition to any other rights or remedies it might have at
law or equity.
10. NON-COMPETITION.
(a) Executive acknowledges that, in exchange for the execution
of the noncompetition restriction set forth below in this Section 10,
Executive has received or will receive substantial, valuable consideration,
including the consideration set forth in Sections 2, 4,5,6 and 8, as well as
access to confidential information as defined in Section 9 and/or specialized
training. Executive agrees that this consideration constitutes fair and
adequate consideration for the execution of the non-competition restriction
set forth in this Section 10.
(b) During the Employment Term and thereafter, until the end of
a period of twelve months commencing on the Termination Date (the
"Non-Competition Period"), the Executive agrees that, without the prior
written consent of the Company:
(i) Executive will not, either alone or with others, as
principal, agent, partner, investor, lender, guarantor, lessor,
sublessor, distributor, promoter or advertiser, or in any other
capacity, carry on, be engaged in, or have any interest or otherwise be
connected or affiliated or associated with or assist any corporation,
partnership, limited liability company or partnership, proprietorship,
firm, association or other entity which is engaged in any manner in, or
otherwise competes with, the Company (including, without limitation,
any strategic plans) in the business field, products or services of the
kind and character in which Executive was engaged, either directly or
indirectly, on behalf of the Company. The restriction herein contained
shall be limited in geographical scope to each of the geographical
areas in the United States in which the Company conducts business,
provides services or sells products at any time during Executive's
employment, which the Parties hereto acknowledge is national in scope;
and
(ii) Executive shall not, directly or indirectly, solicit,
employ or otherwise engage or assist, as an employee, independent
consultant or otherwise, in the solicitation, employment or engagement
of any person who is an employee of the Company or any affiliate of the
Company, or in any manner induce or attempt to induce any employee of
the Company to terminate his or her employment with the
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 6
<PAGE>
Company. For purposes of this covenant, "an employee of the Company"
shall refer to employees who are still actively employed by, or
doing business with, the Company at the time of the attempted
solicitation, employment or engagement. Additionally, the Executive
shall not tortiously interfere with the relationship of the Company
with any person who is a customer, vendor, supplier or consultant of
or to the Company. For purposes of this covenant, "a customer,
vendor, supplier or consultant of or to the Company" shall refer to
customers, vendors, suppliers or consultants who are still actively
doing business with or serving the Company at the time of the
attempted interference.
(c) The Executive and the Company agree that, if, in the opinion of any
court of competent jurisdiction, the covenants of non-competition and
non-solicitation are not reasonable in any respect, such court shall have the
right, power and authority to excise or modify such provision or provisions of
these covenants as to the court shall appear not reasonable and to enforce the
remainder of these covenants as so amended.
(d) The Executive acknowledges that disclosure of, or any
contravention of this Section 10, regardless of the materiality of such
disclosure or contravention, may result in immediate, direct, irreparable and
substantial damage to the Company for which a remedy at law may not be
sufficient and, therefore, the Company shall be entitled to apply for
injunctive relief and/or specific performance by any court of competent
jurisdiction, in addition to any other rights or remedies it might have at law
or equity.
REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVE. The Executive hereby
represents and warrants to the Company that (a) neither the execution of this
Agreement by the Executive nor the performance by the Executive of any of his
obligations or duties hereunder will conflict with or violate or constitute a
breach of the terms of any employment or other agreement to which the Executive
is a party or by which the Executive is bound, and (b) the Executive is not
required to obtain the consent of any person, firm, company, limited liability
company or other entity in order to enter into this Agreement or to perform any
of his obligations or duties hereunder.
11. NOTICES. Any notice, request, information or other document (a
"Notice") to be given under this Agreement to any party by any other party shall
be in writing and shall be sufficiently given if delivered personally, or if
sent by prepaid certified, registered or express mail, or if transmitted by
facsimile machine addressed as follows:
If to the Company:
Inet Technologies, Inc.
1225 West 15th Street, Suite 600
Plano, Texas 75075-7270
Attn.: President
If to the Executive:
Luis Pajares
317 Brock Street
Coppell, TX 75019
or to such other address as a party hereto may hereafter designate in the same
manner provided in this Section. Any notice delivered to the party to whom it is
addressed as provided above shall be deemed to have been given and received on
the day it is so delivered at such address, provided that, if such day is not a
day on which the banks in New York, New York are open for business (a "business
day"), then the notice shall be deemed to have been given and received on the
next business day. Any notice sent by prepaid registered mail shall be deemed to
have been given and received on the fifth business day following the date of
mailing. Any notice transmitted by
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 7
<PAGE>
facsimile or other form of recorded communication shall be deemed to have
been given and received on the first business day after its transmission.
12. CHANGE IN CONTROL. If the Company should undergo a "Change in
Control" as defined in this section, the parties agree as follows:
(a) Compensation. In the event that this Agreement is terminated at
any time within two (2) years after the date of a Change in Control, as
defined in this section, by the Company communicating a Notice of Termination
Without Cause, the Company agrees to pay the Executive the Severance Pay
required to pursuant to Section 8(h). These payments shall be made within
thirty (30) days after the effective date of termination. Further, in the
event Executive desires to terminate his employment for "Good Reason" as
herein defined, by reason of a Change of Control, Executive shall be paid the
Severance Pay required pursuant to Section 8(h). The term "Good Reason" shall
mean (i) the demotion (i.e. reassignment to a position of materially lesser
rank or status), (ii) substantial reduction in annual Base Salary, (iii)
reduction in benefits (unless such reduction is made uniformly in a plan of
general application to all of the Company's substantially similar employees),
or (iv) reassignment to a location that is more than fifty (50) miles from
the Executive's then current residence without his consent.
(b) Benefits. In addition, Executive will be entitled to twelve (12)
calendar months of continued medical coverage according to the same terms to
which he was entitled to medical coverage on the date immediately preceding
the Change in Control, as well as the other benefits required pursuant to
Section 8(h).
(c) Definitions. For purposes of this Agreement, a "Change in
Control" shall mean a change in ownership or control of the Company effected
through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Company's stockholders, unless securities representing more than fifty
percent (50%) of the total combined voting power of the voting
securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the
same proportion, by the persons who beneficially owned the Company's
outstanding voting securities immediately prior to such transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Company's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company), of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which the
Board of Directors recommends such stockholders to accept.
13. ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the Company and the Executive with respect to the
employment of the Executive and supersedes all prior negotiations and
understandings between the Company and the Executive with respect to the
employment of the Executive by the Company. This Agreement may not be amended
or modified except by a written instrument signed by the Company and the
Executive.
14. SEVERABILITY. In the event any one or more provisions of this
Agreement is held to be invalid or unenforceable, such invalidity or
unenforceability shall attach only to such provision or part of such
provision,
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 8
<PAGE>
and shall not affect the validity or enforceability of the other provisions
hereof and the remaining part of such provision and all other provisions
shall remain in full force and effect.
15. APPLICABLE LAW: SUBMISSION TO ARBITRATION.
(a) Applicable Law. This Agreement and the rights, obligations and
relations of the parties hereto shall be governed by and construed and enforced
in accordance with the laws of the State of Texas without regard to the rules
thereof relating to conflict of laws. However, both Parties acknowledge that
Section 16(b) is governed by the Federal Arbitration Act and to the extent that
it is inconsistent with Texas law, it will supercede Texas law relating to the
arbitrability of any disputes.
(b) Arbitration.
(i) Any disputes between the Parties including statutory
and/or common law tort claims, other than disputes relating to the
operation of and the enforcement of Sections 9 and 10 hereof, which
cannot be resolved by negotiation between the parties hereto, shall be
submitted to, and determined by, arbitration in Dallas, Texas in
accordance with the rules of the American Arbitration Association
("AAA") and the provisions of this Section 16, and the parties hereto
agree to be bound by the final award of the arbitrator in any such
proceeding. Notwithstanding the foregoing, the Executive and the
Company acknowledge that claims for workers' compensation or
unemployment compensation benefits are not covered by this Agreement.
Moreover, the Executive and the Company further acknowledge that this
Section shall not prohibit the Executive from filing a charge or
complaint with any governmental agency.
(ii) Either party may initiate an arbitration proceeding by
delivery of written notice to the other party hereto. Resolution of
such dispute shall be resolved by a majority vote of a panel of three
arbitrators. Within 30 days after giving or receiving a demand for
arbitration, the Company and the Executive shall each select one
arbitrator. Such arbitrators shall be freely selected and the parties
shall not be limited in their selection to any prescribed list. The
arbitrators chosen by the Company and the Executive shall, by mutual
consent, select the third arbitrator.
(iii) The decision of the arbitrators shall be in writing and
presented in separate findings of fact and law. The award of the
arbitrators shall be final and binding on the parties from which no
appeal maybe taken and an order confirming the award or judgment upon
the award may be entered into in any court having jurisdiction there
over.
(iv) Prior to the appointment of the arbitrator, the Company
or the Executive may seek provisional remedies, including, without
limitation, temporary restraining orders and preliminary injunctions.
After the appointment of the arbitrators, the arbitrators shall have
sole authority to grant such provisional remedies as the arbitrators,
in their sole discretion, deem necessary or appropriate.
(v) The arbitrators shall have the authority to award any
relief permitted by relevant federal or state statute, including,
without limitation, back wages, front wages, actual damages,
compensatory damages, punitive damages, attorneys' fees, and costs
associated with the arbitration proceeding. The arbitrators, in the
award, may assess the fees and expenses of the arbitrators and of the
arbitration proceeding and the witness and attorney's fees of the
parties or any part thereof, against either the Company or the
Executive or both of them, taking into account the circumstances of the
case. Except as assessed by the arbitrators in the award, the Company
and the Executive shall each bear their own costs in connection with
the arbitration proceeding. Notwithstanding the foregoing, the Company
shall bear 100% of the aggregate fees and expenses of the arbitrators.
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 9
<PAGE>
16. HEADINGS. The headings of sections and subsections of this
Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.
17. ACCOUNTING. If the Executive breaches or threatens to breach the
covenants contained in Sections 9 and 10, the Company shall have the right to
seek relief from an arbitration panel or a court of law to require the
Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits derived or received
by the Executive as the result of any action constituting a breach of the
covenants contained in Sections 9 and 10 hereto.
18. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which, when taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written below.
INET TECHNOLOGIES, INC.
By: /s/ Elie Akilian Date: August 30, 1999
------------------------------- ---------------------
Name: Elie Akilian
-------------------------------
Title: President and Chief Executive
Officer
-------------------------------
EXECUTIVE
/s/ Luis Pajares Date: August 30, 1999
- ---------------------------------- ---------------------
Luis Pajares
EXECUTIVE EMPLOYMENT AGREEMENT - PAGE 10
<PAGE>
January 31, 2000
Jeffrey A. Kupp
2825 Amherst Avenue
Dallas, TX 75248
Dear Jeffrey:
Inet Technologies, Inc. is pleased to confirm the verbal offer extended to you
at an annual salary of $175,000, payable semi-monthly, as Chief Financial
Officer (CFO), reporting to Elie Akilian, President & CEO.
Also included is an annual performance bonus of 25% of base salary, contingent
upon your meeting certain mutually agreeable objectives. The objectives will be
outlined for you by Elie Akilian, and will be within the general scope of effort
discussed during your interview.
In addition, Inet will grant you 75,000 shares of Inet's Common Stock under
Inet's 1998 Stock Incentive Plan, on your first day of employment. The
exercise price of your option will be the closing selling price of Inet's
Common Stock on that date. Your option will be exercisable for twenty-five
percent (25%) of the option shares, upon your completion of each of the four
(4) years of service with Inet, measured from the option grant date. The
option grant and associated pricing are subject to Board approval.
Please note, that if Inet terminates your employment for any other reason than
for cause in the first year of your employment, Inet will:
- True up to one year's salary
- Allow you to vest in 25% of your options
Inet is a high-growth, profitable enterprise that provides quality, innovative,
competitively priced, state-of-the-art telecommunications products and support.
Inet focuses on complete customer satisfaction and fosters an environment that
encourages employee development. I am confident that you will find your position
to be both challenging and rewarding.
Please keep in mind that all information pertaining to compensation is
confidential. This offer is contingent upon acceptable results of your
background check. If you have any questions about the offer or the company,
please call me. We look forward to hearing from you by February 7, 2000. If you
need more time to make your decision, please let us know.
Sincerely,
/s/ Elie Akilian
Elie Akilian
President & CEO
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