<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 2000.
REGISTRATION NO. 333-42678
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IXIA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3825 95-4635982
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
26601 W. AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 871-1800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ERROL GINSBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IXIA
26601 W. AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 871-1800
(818) 871-1805 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
R. RANDALL WANG, ESQ. GREGG A. NOEL, ESQ.
KATHERINE F. ASHTON, ESQ. JOSHUA D. HELDERMAN, ESQ.
BRYAN CAVE LLP SKADDEN, ARPS, SLATE,
120 BROADWAY, SUITE 300 MEAGHER & FLOM LLP
SANTA MONICA, CALIFORNIA 90401 300 S. GRAND AVENUE
(310) 576-2100 LOS ANGELES, CALIFORNIA 90071
(310) 576-2200 (FAX) (213) 687-5000
(213) 687-5600 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM PROPOSED AMOUNT
OF SECURITIES AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE(3)
------------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value.... 6,325,000 shares $12.00 $75,900,000 $20,038
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 825,000 shares of Common Stock issuable upon exercise of the
underwriters' overallotment option.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) A total of $15,180 was previously paid by the registrant pursuant to Rule
457(o) of the Securities Act in connection with the initial filing of the
Registration Statement on July 31, 2000. Pursuant to Rule 457(b) of the
Securities Act, such fee is being credited against the Registration Fee.
Accordingly, $4,858 is being paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
PROSPECTUS
5,500,000 SHARES
[IXIA LOGO]
COMMON STOCK
----------------------
This is Ixia's initial public offering.
We expect the public offering price to be between $10.00 and $12.00 per
share. Currently, no public market exists for the shares. We have applied to
list the common stock on the Nasdaq National Market under the symbol "XXIA."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Ixia.......................... $ $
</TABLE>
The underwriters may also purchase up to an additional 825,000 shares
from Ixia at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
----------------------
The date of this prospectus is , 2000.
<PAGE> 3
IXIA GRAPHICS DESCRIPTION
INSIDE FRONT COVER
Background is divided approximately into a top one-third section which is
medium blue, and lower two thirds section which is black.
Top third section has two lines of white text in the upper portion of the
section. The first line of text is "High-speed, multi-port" and is flushed left.
The second line of text (slightly smaller print than the first) is "network
performance analysis systems" and is flushed right. In the lower left corner of
the section is the Ixia logo. In the lower middle to lower right corner of the
section is a small chassis and large chassis to the right of the small chassis.
In the lower two-thirds section, directly below the small chassis there is
the orange text "IXIA 400", and directly below the large chassis there is the
orange text "IXIA 1600". Below such text, there are two large interface cards
with one above and overlapping the other, both with an orange background glow
around them. The upper, overlapping, interface card is at a diagonal from upper
right to lower left, with the orange text "Optical Interface Card" immediately
to its left. The lower interface card is at a diagonal from upper left to lower
right with the text "Electrical Interface Card" immediately to its right. To the
left of the interface cards, and directly below the Ixia logo in the upper
section, there is a column of white text with one to four words on each line
which reads: "Ixia's systems generate network and Internet protocol data traffic
and analyze the performance, accuracy, and reliability of advanced optical fiber
and electrical cable based networks. These networks include high-speed networks
such as Gigabit Ethernet local area networks and Packet Over SONET wide area
networks."
GATEFOLD
Background is divided into a horizontal black band section across the top,
with the area below divided in equal quadrants (two upper and two lower). The
two upper quadrants are medium blue on the left side and fade to light blue on
the right side of the quadrant. The lower two quadrants are light blue on the
left side and fade into medium blue on the right side. In the middle, where the
four quadrants meet, and overlapping each, is an amorphous middle section with a
background of clouds.
The black band area has two lines of orange text. The upper line of text is
off-center to the left and reads "Ixia Addresses Multiple Network" and the lower
line of text is off-center to the right and reads "Performance Analysis
Applications." In the lower left corner of the black band area is the Ixia logo.
The upper left quadrant has a horizontal black rectangle in the lower left
corner containing the yellow text "Internet Backbone Router Performance
Verification. Customers can insert our Packet Over SONET interface cards into
our IXIA 1600 chassis to evaluate the performance of routers in high-speed
optical networks that are used to make up the core of the Internet.". In this
quadrant, there is a diagram with a chassis in the upper left corner. Above the
upper right corner of the chassis is a black oval with the white text "Ixia
1600". Connected to the chassis on the right there is a gray outline of an arrow
pointing right. To the right of the arrow there is a vertically positioned
interface card, below which, to the lower right and to the lower left each,
there is a vertical box illustration, each with the text "Router" immediately to
the right of the boxes' lower right corner. There is a two-way arrow between the
boxes, a two-way 90 degree angle arrow coming from the lower front of the
interface card and pointing to the box on the lower left, and a two-way 90
degree angle arrow between the upper front of the interface card and the box on
the lower right, with the text "Packet Over SONET Optical Interface" immediately
to the right of the arrow.
The upper right quadrant has a horizontal black rectangle in the lower
right corner containing the yellow text "Web Server Load Balancer Performance
Validation. Customers can insert our Gigabit Ethernet or Ethernet interface
cards into our IXIA 1600 chassis to evaluate the performance of Web server load
balancers at different network speeds.". In this quadrant, there is a diagram
with a chassis in the upper right corner. Above the upper right corner of the
chassis is a black oval with the white text "Ixia 1600". To the lower left of
the chassis there is a horizontal box illustration with the text "Server
<PAGE> 4
Load Balancer" immediately below it. There is a 90 degree angle two-way arrow
between the right side of the box and the bottom of the chassis which bisects
the text "Gigabit Ethernet Optical Interface". There are four 90 degree angle
two-way arrows between the top of the box and the left of the chassis, with the
text "Ethernet Electrical Interface" immediately to their left.
The lower left quadrant has a horizontal black rectangle in the lower left
corner containing the yellow text "Quality of Service Performance Analysis.
Customers can insert our Packet Over SONET or Gigabit Ethernet interface cards
into our IXIA 1600 chassis to evaluate a variety of performance characteristics,
or quality of service, of different types of optical fiber based network
equipment, including routers.". In this quadrant, there is a diagram with a
chassis in the upper left corner. Above the upper right corner of the chassis is
a black oval with the white text "Ixia 1600". To the lower right of the chassis
is a vertical box illustration with the text "Router" immediately below it.
There is a 90 degree angle two-way arrow between the right side of the chassis
and the top of the box which bisects the text "Packet Over SONET Optical
Interface". There is a 90 degree angle two-way arrow between the bottom of the
chassis and the left of the box which bisects the text "Gigabit Ethernet Optical
Interface".
The lower right quadrant has a horizontal black rectangle in the lower
right corner containing the yellow text "Broadband Access Performance
Verification. Our systems measure the performance of equipment that provides
high-speed Internet access. Customers can insert Ethernet interface cards into
our IXIA 1600 chassis to evaluate networks that include cable modem termination
systems and cable modems". In this quadrant, there is a diagram with a chassis
in the upper right corner. Above the upper right corner of the chassis is a
black oval with the white text "Ixia 1600". To the lower left of the chassis is
a horizontal box illustration with the text "Cable Modem Termination System"
immediately below it. There is a 90 degree angle two-way arrow between the left
side of the chassis and the top of the box which bisects the text "Ethernet
Electrical Interface". Extending from the right side of the box there is a line
which extends below the chassis and ends with five dots in a row. Between the
line and the chassis there are three small horizontal box illustrations in a row
all connected to the line, and each with a vertical two-way arrow between it and
the chassis. Below the row of three boxes, and below the line, there is the text
"Cable Modems".
The cloud background middle section has a diagram with three rows of box
illustrations. In the middle of the diagram, between the second and third rows,
is the text "Internet". The top row is in the upper right corner of the section
and has four vertical box illustrations in a row which slopes downward to the
right, with the text "Web Servers" above the row. The second row has (from left
to right) two vertical box illustrations and one horizontal box illustration
connected together by a line. Each of the boxes in the top row is connected by a
line to the horizontal box illustration in the second row, which has the text
"Server Load Balancer" immediately above it. The first box in the second row has
the text "Router" immediately to its left. Between, and to the left of, the
second and the third rows is a vertical box illustration with the text "Router"
immediately to its left and this box is connected to the first box in the second
and third rows by lines. The third row has six box illustrations, from left to
right, two vertical box illustrations, one horizontal box illustration and three
small horizontal box illustrations. The first three boxes are connected by a
line. The first box has the text "Router" below it and the first and second
boxes are connected to the second box of the second row by lines. The third box
has the text "Cable Modem Termination System" below it, and to the right of the
third box there is a line which extends right and ends with a row of five dots.
Above the line are the three smaller boxes, which are connected to the line and
which have the text "Multiple Cable Modems" below the line below them. Between
the second and third of these smaller boxes, there is a break in the line with
forward tilting slashes on each side of the break.
<PAGE> 5
Below the cloud background middle section, there is the following block of
text which overlaps the two lower quadrants:
"This diagram shows some of the equipment that comprises the Internet. The
equipment includes:
- routers that distribute data traffic,
- Web servers that host and transmit Web site information and content,
- server load balancers that distribute traffic among multiple Web servers,
- cable modems that connect users to the Internet, and
- cable modem termination systems that aggregate cable modem traffic.
Our systems connect through our interface cards to networks or network
equipment using either optical interfaces, which use optical fiber, or
electrical interfaces, which use electrical cable."
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 33
Management.................................................. 45
Principal Shareholders...................................... 53
Related Party Transactions.................................. 55
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 65
Experts..................................................... 65
Where You Can Find More Information......................... 65
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus, regardless of the time of delivery of this
prospectus or any sales of shares of our common stock. Our business, financial
condition, results of operations and prospects may have changed since that date.
"Ixia," "we," "us" and "our" refer to Ixia and its subsidiaries and not to the
underwriters.
IXIA(TM) is a trademark and the Ixia logo is a registered trademark of
Ixia. All other trade names, trademarks and product names used in this
prospectus are the property of their respective holders.
2
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors" beginning on page 8 and the financial statements, related notes and
other financial data, included elsewhere in this prospectus before making an
investment decision.
IXIA
We are a provider of high-speed, multi-port network performance analysis
systems. These systems allow our customers to measure the performance of their
data communications equipment and networks by simulating a large-scale network
environment. Each of our systems consists of a chassis and one or more of a
variety of interface cards that reside within the chassis and connect to the
equipment or network being tested. These interface cards simulate the
information that networks carry by generating, receiving and analyzing different
types of data traffic, including Internet Protocol, or IP, traffic.
Our systems analyze different types of networks, including advanced
optical networks that carry data traffic over optical fiber, as well as
electrical networks that carry data traffic over electrical cable. These
networks include:
- Packet Over SONET networks, which transmit units of information, called
packets, over high-speed optical networks; and
- Gigabit Ethernet networks, which are high-speed local area networks
used typically within a single building or a group of buildings.
Our systems are designed to meet the needs of network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users such as large corporations. Since our inception,
we have sold our systems to over 170 customers. Based on revenues for the 12
months ended June 30, 2000, our largest customers by category include:
- Leading network equipment manufacturers such as Cisco Systems, Extreme
Networks and Nortel Networks;
- Internet and network service providers such as AT&T and UUNET
Technologies;
- Communications chip manufacturers such as Broadcom and Level One
Communications, which is now part of Intel; and
- Network users such as Lockheed Martin and Bank of America.
We generated net revenues of $4.9 million in 1998, $24.5 million in 1999
and $28.3 million in the six months ended June 30, 2000.
The popularity of the Internet and the number of Internet-based
applications and services have fueled dramatic growth in the volume of data
traffic. According to Ryan Hankin Kent, Inc., a leading communications market
research firm, Internet traffic is expected to increase from 350,000 terabytes,
or trillions of bytes, per month at the end of 1999 to more than 15 million
terabytes per month in 2003, representing a compound annual average growth rate
of over 150%. To accommodate the growth in traffic, investments in network
equipment and systems have accelerated and increasingly complex network
configurations have emerged. Consequently, performance analysis has become more
difficult, requiring increasingly sophisticated network performance analysis
systems.
Due to the demand of network users for consistent and high levels of
performance from their Internet and network service providers, these service
providers must ensure that the equipment they deploy can deliver the required
performance. As a result, network equipment manufacturers, Internet and network
service providers, communications chip manufacturers and network users are each
demanding increasingly sophisticated network performance analysis systems.
3
<PAGE> 8
To address our customers' increasing demands, our systems provide the
following key benefits:
- High Performance. Our systems generate and receive data traffic at wire
speed, which is the maximum rate that data traffic can be transmitted
over the network. Our systems analyze the performance of the network in
real-time, that is, as the transmission is actually occurring. By
analyzing each discrete packet of information on a packet-by-packet
basis, our systems allow our customers to precisely measure the
performance of their networks.
- Highly Scalable. Each of our interface cards provides one or more ports
through which our systems generate and receive data traffic. Our
customers can easily increase port density, which is the number of
ports in an individual chassis, by inserting additional interface
cards. By connecting multiple chassis and synchronizing thousands of
ports to operate simultaneously, our customers can simulate large scale
networks. We believe that our systems offer our customers the highest
port density and therefore the most scalable systems available.
- Highly Modular. Our modular systems allow our customers to quickly and
easily create complex and custom test configurations. The modularity of
our systems also allows our customers to integrate new technologies
into our existing systems by inserting new interface cards as we
release them.
- Flexibility. Our customers can easily reconfigure our systems through
software changes to address different protocols and applications
without changing hardware or replacing interface cards.
- Ease of Use. Our systems can be installed easily and operated with
minimal training and set-up. Our customers configure and control our
systems through a graphical user interface that features a familiar
Microsoft Windows point-and-click environment and allows users to
interact easily and intuitively with our systems. Through this
interface, our customers can conduct a wide range of tests and analyses
by accessing the pre-designed test configurations included in our
systems. They can also design customized tests using industry standard
programming languages.
Our goal is to be the industry leader in multi-port traffic generation
and performance analysis systems for the high-speed data communications market.
To pursue our goal, we plan to:
- Continue to expand into high-growth markets such as advanced optical
networks that route data traffic throughout the Internet and emerging
networks that allow high-speed access to the Internet, known as
broadband access networks;
- Maintain our focus on technology leadership by developing new systems
and system applications that address the needs of evolving technology
and industry requirements;
- Expand and further penetrate our customer base by developing and
offering systems that meet customers' needs and by providing superior
customer support; and
- Expand our domestic and international sales and marketing efforts and
promote our brand name.
CORPORATE INFORMATION
Ixia was incorporated in California in May 1997. Our principal executive
offices are located at 26601 W. Agoura Road, Calabasas, California 91302, and
our telephone number is (818) 871-1800. Our Web site is located at
www.ixiacom.com. Information contained on our Web site does not constitute part
of this prospectus.
4
<PAGE> 9
THE OFFERING
Common stock offered by Ixia..... 5,500,000 shares
Common stock to be outstanding
after this offering.............. 52,754,917 shares
Use of proceeds.................. For general corporate purposes. For
additional information, see "Use of
Proceeds" on page 19.
Proposed Nasdaq National Market
symbol........................... XXIA
Unless we specifically state otherwise, the information in this
prospectus does not take into account the sale of up to 825,000 shares of common
stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 53,579,917 shares of common stock will be outstanding after the offering.
The number of shares of common stock that will be outstanding after the
offering is based on the number of shares outstanding as of August 15, 2000 and
excludes:
- 9,862,283 shares of common stock issuable upon exercise of options
outstanding as of August 15, 2000 under our 1997 stock option plan with
a weighted average exercise price of $1.50 per share;
- an additional 2,732,800 shares of common stock reserved for issuance
under our 1997 stock option plan as of August 15, 2000;
- an additional 2,000,000 shares of common stock reserved for issuance
under our 1997 stock option plan after August 15, 2000, subject to
shareholder approval;
- 80,000 shares of common stock issuable upon exercise of warrants with
an exercise price of $7.00 per share;
- 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan, subject to annual automatic increases; and
- 200,000 shares of common stock reserved for issuance under our director
stock option plan.
All share and per share information in this prospectus reflects our March
1998 five-for-one stock split and our March 2000 three-for-one stock split.
5
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 25 and our consolidated financial
statements and the notes to those consolidated financial statements beginning on
page F-1 in this prospectus. The statement of operations data set forth below
for the period from May 27, 1997, our inception, through December 31, 1997 and
for the years ended December 31, 1998 and 1999 are derived from, and are
qualified by reference to, our audited consolidated financial statements
included elsewhere in this prospectus. The statement of operations data set
forth below for the six months ended June 30, 1999 and 2000 and the balance
sheet data as of June 30, 2000 are derived from, and are qualified by reference
to, our unaudited condensed consolidated financial statements included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
MAY 27, 1997 DECEMBER 31, ENDED JUNE 30,
(INCEPTION) THROUGH ----------------- -----------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS, EXCEPT PER SHARE DATA):
Net revenues....................... $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)................ -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit.................... -- 3,607 19,555 6,802 22,642
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 513 1,580 2,780 1,182 2,744
Sales and marketing............. -- 940 4,443 1,531 4,372
General and administrative...... 110 509 1,660 588 1,733
Stock-based compensation(2)..... -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating expenses... 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from
operations................. (623) 424 8,825 3,094 7,543
Interest income, net............... 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before income
taxes...................... (616) 438 8,913 3,112 7,764
Income tax expense (benefit)....... (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income(loss).............. $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic........................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted......................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of shares
outstanding:
Basic........................... 43,041 43,200 43,574 43,218 45,236
Diluted......................... 43,041 45,619 48,896 46,340 52,989
------------
(1) Stock-based compensation included
in cost of revenues.............. $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2) Stock-based compensation:
Research and development...... $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing........... -- 62 449 124 1,771
General and administrative.... -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA):
Cash and cash equivalents................................. $ 8,952 $64,017
Working capital........................................... 15,072 70,137
Total assets.............................................. 25,119 80,184
Total shareholders' equity................................ 17,647 72,712
</TABLE>
------------
(1) As adjusted to reflect the sale of 5,500,000 shares of common stock offered
hereby at the assumed initial public offering price of $11.00 per share
after deducting the underwriting discount and estimated offering expenses
payable by us.
7
<PAGE> 12
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occur,
our business could be harmed, the trading price of our common stock could
decline and you may lose all or part of your investment. You should also refer
to the other information contained in this prospectus, including our
consolidated financial statements and the related notes.
OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A
RESULT OF NEW PRODUCT INTRODUCTIONS AND OTHER FACTORS WHICH COULD CAUSE OUR
STOCK PRICE TO DECLINE SIGNIFICANTLY
Our quarterly and annual operating results may fluctuate significantly
due to a variety of factors, most of which are outside of our control. Some of
the factors that could cause our quarterly and annual operating results to
fluctuate include:
- timing of new product introductions, such as our planned release of our
OC-192c Packet Over SONET interface card, our IXIA 100 Quality of
Service (QOS) Performance Tester and our Server Load Balancer Test
Suite, which are described below under "Business -- Products --
Products in Development" on page 39;
- our success in the development and production of these and other new
products to address evolving network technologies;
- market acceptance of our products;
- competitive pressures, including competition for limited source
components and competitors bringing products to market before we do;
and
- consistency of orders from significant customers such as Cisco Systems.
We may experience a shortfall or delay in generating or recognizing
revenues for a number of reasons. Orders on hand at the beginning of a quarter
and orders generated in a quarter do not always result in the shipment of
products and the recognition of revenues for that quarter. Failure to ship
products by the end of the quarter in which they are ordered may adversely
affect our operating results for that quarter. Our customer agreements typically
provide that the customer may delay scheduled delivery dates and cancel orders
within specified time frames without penalty. Because we incur operating
expenses based on anticipated revenues trends and a high percentage of our
expenses are fixed in the short term, any delay in generating or recognizing
forecasted revenues could significantly harm our quarterly results of
operations.
Additionally, our operating results may vary as a result of the timing of
our release of new products. The introduction of a new product in any quarter
may cause an increase in revenues in that quarter that may not be sustainable in
subsequent quarters.
If our operating results fall below market expectations, the trading
price of our common stock could decline significantly.
IF WE ARE UNABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS TO KEEP PACE WITH THE
RAPID TECHNOLOGICAL CHANGES THAT CHARACTERIZE OUR MARKET, OUR RESULTS OF
OPERATIONS WILL BE SIGNIFICANTLY HARMED
The market for our products is characterized by:
- rapid technological change such as the recent development of optical
fiber and wireless technologies;
- frequent new product introductions such as higher speed and more
complex routers;
- evolving industry standards such as new Internet protocols;
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- changing customer needs such as the increase in the levels of service
agreed to between network service providers and their customers; and
- short product life cycles as a result of rapid changes in our
customers' products.
We expect that new technologies will continue to emerge as the need for
higher and more cost-effective bandwidth increases. Our performance will depend
on our successful development, introduction and market acceptance of new and
enhanced performance analysis products that address these new technologies and
changes in customer requirements. If we experience any delay in the development
or introduction of new products or enhancements to our existing products, our
operating results may suffer. For instance, undetected software or hardware
errors, which frequently occur when new products are first introduced, could
result in the delay or loss of market acceptance of our products and the loss of
credibility with our customers. In addition, if we are not able to develop, or
license from third parties, the underlying core technologies necessary to create
new products and enhancements, our existing products are likely to become
technologically obsolete over time and our operating results will suffer. If the
rate of development of new technologies and transmission protocols by our
customers is delayed, the growth of the market for our products and therefore
our sales and operating results may be harmed.
Our ability to successfully introduce new products in a timely fashion
will depend on several factors, including our ability to:
- anticipate technological changes and industry trends;
- properly identify customer needs;
- innovate and develop new technologies and applications;
- hire and retain necessary technical personnel;
- successfully commercialize new technologies in a timely manner;
- timely obtain key components for the manufacture of new products;
- manufacture and deliver our products in sufficient volumes and on time;
- price our products competitively; and
- differentiate our offerings from our competitors' offerings.
The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technology and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely or cost-effective basis. Further, we
cannot assure you that our new products will gain market acceptance or that we
will be able to respond effectively to technological changes, emerging industry
standards or product announcements by our competitors. If we fail to respond to
technological change and the needs of our markets, we will lose revenues and our
competitive position will suffer.
WE DEPEND ON SALES OF A NARROW RANGE OF PRODUCTS AND IF CUSTOMERS DO NOT
PURCHASE OUR PRODUCTS, OUR REVENUES AND RESULTS OF OPERATIONS WOULD BE
SIGNIFICANTLY HARMED
Our business and products are concentrated in the market for systems that
analyze and measure the performance of network equipment and systems. This
market is in an early stage of development and there is uncertainty regarding
its size and scope. Our performance will depend on increased sales of our
existing systems and the successful development, introduction and market
acceptance of new and enhanced products. We cannot assure you that we will be
successful in increasing these sales or in developing and introducing new
products. Our failure to do so would significantly harm our revenues and results
of operations.
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SOME KEY COMPONENTS IN OUR PRODUCTS COME FROM SOLE OR LIMITED SOURCES OF SUPPLY,
WHICH EXPOSES US TO POTENTIAL SUPPLY SHORTAGES THAT COULD DISRUPT THE
MANUFACTURE AND SALE OF OUR PRODUCTS
We and our contract manufacturers currently purchase a number of key
components used to manufacture our products from sole or limited sources of
supply for which alternative sources may not be available. From time to time, we
have experienced shortages of key components, including chips, oscillators and
optical modules. We and our contract manufacturers have no guaranteed or
long-term supply arrangements for these or other components, including field
programmable gate arrays, or FPGA's, which are integrated circuits that can be
repeatedly reprogrammed to perform different sets of functions as required.
Financial or other difficulties faced by these suppliers or significant changes
in market demand for these components could limit the availability to us and our
contract manufacturers of these components. Any interruption or delay in the
supply of any of these components could significantly harm our ability to meet
scheduled product deliveries to our customers and cause us to lose sales.
In addition, the purchase of these components on a sole source basis
subjects us to risks of price increases and potential quality assurance
problems. Consolidation involving suppliers could further reduce the number of
alternatives available to us and affect the cost of components. An increase in
the cost of components could make our products less competitive and result in
lower margins.
There are no substitute supplies available for many of these components,
including field programmable gate arrays. All of these components are critical
to the production of our products, and competition exists with other
manufacturers for these key components. In the event that we can no longer
obtain materials from a sole source supplier, we might not be able to qualify or
identify alternative suppliers in a timely fashion, or at all.
COMPETITION IN OUR MARKET COULD SIGNIFICANTLY HARM OUR RESULTS OF OPERATIONS
The market for our products is highly competitive. We face competition
primarily from test equipment manufacturers such as Agilent Technologies, Netcom
Systems and Adtech. We also compete with start-up companies such as Antara which
are focused on network performance analysis and measurement. Additionally, some
of our network equipment manufacturer customers have developed, or may develop,
in-house performance analysis products for their own use or for sale to others.
For example, Cisco Systems, our largest customer, has used internally developed
test products for a number of years. Although Cisco Systems has purchased our
products in increasing amounts through June 30, 2000, we cannot assure you that
it will continue to do so.
As we broaden our product offerings, we may move into new markets and
face additional competition. Moreover, our competitors may have more experience
operating in these new markets and be better established with the customers in
these new markets.
Some of our competitors and potential competitors have greater brand name
recognition and greater financial, technical, marketing, sales and distribution
capabilities than we do. Moreover, our competitors may consolidate with each
other, or with other companies, giving them even greater capabilities with which
to compete against us. For example, Spirent, which owns Adtech, has acquired
Netcom Systems.
Increased competition in the network performance analysis and measurement
market could result in increased pressure on us to reduce prices and could
result in a reduction in our revenues and/or a decrease in our margins, each of
which could significantly harm our results of operations. In addition, increased
competition could prevent us from increasing our market share, or cause us to
lose our existing market share, either of which would harm our revenues and
profitability.
We cannot predict whether our current or future competitors will develop
or market technologies and products that offer higher performance or more
features or are more cost-effective than our current or future products. To
remain competitive, we must continue to develop cost-effective products and
product enhancements which offer higher performance and more functionality. Our
failure to do so will harm our revenues and results of operations.
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IF WE DO NOT DIVERSIFY OUR CUSTOMER BASE, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS OR INCREASE OUR PROFITABILITY
Our growth depends in part on our ability to diversify our customer base
by increasing sales to Internet and network service providers, communications
chip manufacturers and network users. To effectively compete for the business of
these customers, we must develop new products and enhancements to existing
products and expand our sales, marketing and customer support capabilities,
which will result in increases in operating costs. If we cannot offset these
increases in costs with an increase in our revenues, our net income and our
stock price may fall. Some of our existing and potential competitors have
existing relationships with many Internet and network service providers,
communications chip manufacturers and network users. We cannot assure you that
we will be successful in increasing our sales presence in these markets. Any
failure by us to increase sales in these markets would adversely affect our
growth.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF NETWORK EQUIPMENT MANUFACTURERS FOR A
MAJORITY OF OUR REVENUES, ANY CANCELLATION, REDUCTION OR DELAY IN PURCHASES BY
THESE CUSTOMERS COULD SIGNIFICANTLY HARM OUR REVENUES AND RESULTS OF OPERATIONS
Historically, a small number of customers has accounted for a significant
portion of our net revenues. Sales to our five largest customers represented
62.0% of our net revenues in 1998, 51.0% of our net revenues in 1999 and 53.1%
of our net revenues in the six months ended June 30, 2000. Sales to Cisco
Systems, our largest customer, accounted for 31.6% of our net revenues in 1998,
30.8% of our net revenues in 1999 and 34.0% of our net revenues in the six
months ended June 30, 2000. We expect that significant customer concentration
will continue for the foreseeable future and that our operating results will
continue to depend to a significant extent upon revenues from a small number of
customers.
Our dependence on large orders from a limited number of network equipment
manufacturers makes our relationships with these manufacturers critical to the
success of our business. We cannot assure you that we will be able to retain our
largest customers, that we will be able to increase our sales to our other
existing customers or that we will be able to attract additional customers. From
time to time, we have experienced delays and reductions in orders from some of
our major customers. In addition, our customers have sought price concessions
from us and may continue to do so. We do not have long-term contracts with our
customers, and our major customers can stop purchasing our products at any time
without penalty and are free to purchase products from our competitors. The loss
of one or more of our largest customers, any reduction or delay in sales to
these customers, our inability to successfully develop and maintain
relationships with existing and new customers or requirements that we make price
concessions could significantly harm our revenues and results of operations.
AS OUR CUSTOMERS CONSOLIDATE, THEY MAY REDUCE PURCHASES OF OUR PRODUCTS AND
DEMAND MORE FAVORABLE TERMS AND CONDITIONS FROM US, WHICH WOULD HARM OUR
REVENUES AND PROFITABILITY
Consolidation of our customers could reduce the number of customers to
whom our products could be sold. Some of our customers have recently merged.
These merged customers could obtain products from a source other than us or
demand more favorable terms and conditions from us, which would harm our
revenues and profitability. In addition, our network equipment manufacturer
customers may merge with or acquire our competitors and discontinue their
relationships with us.
IF WE ARE UNABLE TO EXPAND OUR SALES AND DISTRIBUTION CHANNELS OR ARE UNABLE TO
SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR REVENUES AND RESULTS OF
OPERATIONS WILL BE HARMED
Historically, we have relied primarily on a limited direct sales
organization, supported by third-party manufacturers' representatives and
distributors, to sell our products. Our distribution strategy focuses primarily
on developing and expanding our direct sales organization and our network of
manufacturers' representatives and distributors. We may not be able to
successfully expand our sales and distribution channels, and the cost of any
expansion may exceed the revenues that we generate. To the extent that we are
successful in expanding our sales and distribution channels, we cannot assure
you that we will be able
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to compete successfully against the significantly larger and better-funded sales
and marketing operations of many of our current or potential competitors. We
have granted exclusive rights to substantially all of our distributors and
manufacturers' representatives to market our products in their specified
territories. Our distributors and manufacturers' representatives may not market
our products effectively or devote the resources necessary to provide us with
effective sales, marketing and technical support. Our inability to effectively
manage the expansion of our sales and support staff, or to maintain existing or
establish new relationships with successful manufacturers' representatives and
distributors, would harm our revenues and results of operations.
IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS AND DISTRIBUTION
CHANNELS OR MANAGE THEM EFFECTIVELY, OUR RESULTS OF OPERATIONS WOULD BE HARMED
Historically, a significant portion of our sales have been made to
customers in the United States. Sales in the United States accounted for 86.9%
of our net revenues in 1999 and 86.2% of our net revenues during the six months
ended June 30, 2000. In the past, we have depended on distributors for the
substantial majority of our international sales. The loss of one or more of our
international distributors or their failure to sell our products would limit our
ability to sustain and grow our revenues in international markets. We intend to
expand or enter into additional international markets, including Europe and the
Asia Pacific region, by adding distributors and international sales and support
personnel. Our failure in these efforts could significantly harm our results of
operations and decrease the value of our stock. The growth of our sales outside
of the United States will be subject to a number of additional risks and
uncertainties, including:
- adoption of different local technical and regulatory standards;
- potentially adverse tax consequences;
- increased difficulty in collecting delinquent or unpaid accounts;
- legal uncertainties regarding liability, tariffs and other trade
barriers;
- potential political and economic instability; and
- inadequate protection of intellectual property in some countries.
Any of these factors could significantly harm our international
operations or significantly impair our ability to expand into international
markets.
Our international sales currently are U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less cost-effective in international markets.
IF WE FAIL TO ACCURATELY FORECAST OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS AND EXPERIENCE MANUFACTURING DELAYS
We provide our contract manufacturers with rolling forecasts based on
anticipated product orders to determine our manufacturing requirements. Some of
the components used in our products have significant lead times or lead times
which may unexpectedly increase depending on factors such as the specific
supplier, contract terms and the demand for components at a given time. Because
of these long lead times, we are often forced to forecast and order products
before we know what our specific manufacturing requirements will be. If we
overestimate our product orders, our contract manufacturers may have excess
inventory of completed products which we would be obligated to purchase. This
will lead to increased costs and the risk of obsolescence. If we underestimate
our product orders, our contract manufacturers may have inadequate inventory,
which could result in delays in shipments, the loss or deferral of revenues and
higher costs of sales. It may also add costs to our products to expedite
delivery of our products to customers or those components with long lead times
to our contract manufacturers. We cannot assure you that we will be able to
accurately forecast our product orders and may in the future carry excess or
obsolete inventory, be unable to fulfill customer demand, or both, thereby
harming our revenues, results of operations and customer relationships.
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FAILURE BY OUR CONTRACT MANUFACTURERS TO PROVIDE US WITH ADEQUATE SUPPLIES OF
HIGH-QUALITY PRODUCTS COULD HARM OUR REVENUES, RESULTS OF OPERATIONS,
COMPETITIVE POSITION AND REPUTATION
We currently rely on a limited number of contract manufacturers to
manufacture and assemble our products. We may experience delays in receiving
product shipments from contract manufacturers or other problems, such as
inferior quality and insufficient quantity of product. We cannot assure you that
we will be able to effectively manage our contract manufacturers or that these
manufacturers will meet our future requirements for timely delivery of products
of sufficient quality and quantity. We intend to introduce new products and
product enhancements, which will require that we rapidly achieve volume
production by effectively coordinating with our suppliers and contract
manufacturers. We do not have any long-term contracts with our contract
manufacturers. The inability of our contract manufacturers to provide us with
adequate supplies of high-quality products or the loss of any of our contract
manufacturers would cause a delay in our ability to fulfill customer orders
while we obtain a replacement manufacturer and would harm our revenues, results
of operations, competitive position and reputation.
We may not be able to expand our contract manufacturing capacity or our
internal testing or quality assurance functions as required to keep up with
demand for our products. Any such failure would in turn hinder our growth. If we
do not expand these capacities and functions effectively or in a timely manner,
we may experience disruptions in product flow which could limit our revenues,
adversely affect our competitive position and reputation and result in
additional cost, cancellation of orders or both.
BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS
Our success will depend in large part upon our ability to identify, hire,
retain and motivate highly skilled employees. We plan to significantly increase
the number of our research and development, marketing, sales, customer support
and operations employees. Competition for highly skilled employees in our
industry is intense. In addition, employees may leave our company and
subsequently compete against us. Our failure to attract and retain these
qualified employees could significantly harm our ability to develop new products
and maintain customer relationships. The loss of the services of any of our
qualified employees, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel could hinder the development
and introduction of new and enhanced products and harm our ability to sell our
products. Moreover, companies in our industry whose employees accept positions
with competitors frequently claim that those competitors have engaged in unfair
hiring practices. We may be subject to such claims as we seek to retain or hire
qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims, regardless of
their merits.
In June 2000, one of our competitors filed a lawsuit against one of our
executive officers, who had previously worked for that competitor, on grounds of
unfair competition, breach of contract and trade secret infringement. We cannot
assure you that the lawsuit will not harm our results of operations or
competitive position. For more information on the lawsuit, see
"Business -- Legal Proceedings" on page 44. Lawsuits such as this one could
discourage potential employees who currently work for our competitors from
joining us.
THE LOSS OF ANY OF OUR KEY PERSONNEL COULD SIGNIFICANTLY HARM OUR RESULTS OF
OPERATIONS AND COMPETITIVE POSITION
Our success depends to a significant degree upon the continuing
contributions of our key management, technical, marketing and sales employees,
particularly Errol Ginsberg, our Chief Executive Officer and President. There
can be no assurance that we will be successful in retaining our key employees or
that we can attract or retain additional skilled personnel as required. Failure
to retain key personnel could significantly harm our results of operations and
competitive position.
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CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO MAINTAIN AND UPGRADE OUR MANAGEMENT AND OPERATIONAL RESOURCES
We have experienced and are continuing to experience a period of rapid
growth. Unless we manage our growth effectively, we may have difficulty in
operating our business. As a result, we may inaccurately forecast sales and
materials requirements, fail to integrate new personnel or fail to maintain
adequate internal controls, which may result in fluctuations in our operating
results and cause the price of our stock to decline. We plan to continue to
expand our operations significantly. This anticipated growth will continue to
place a significant strain on our management and operational resources. In order
to manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we cannot manage growth
effectively, our profitability could be significantly harmed.
OUR PRODUCTS MAY CONTAIN DEFECTS WHICH MAY CAUSE US TO INCUR SIGNIFICANT COSTS,
DIVERT OUR ATTENTION FROM PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF
CUSTOMERS
Our existing products and any new or enhanced products we introduce may
contain undetected software or hardware defects when they are first introduced
or as new versions are released. These problems may cause us to incur
significant damages or warranty and repair costs, divert the attention of our
engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers and reputation, all of which
would harm our results of operations. A successful claim against us for an
amount exceeding the limit on our product liability insurance policy would force
us to use our own resources, to the extent available, to pay the claim, which
could result in an increase in our expenses and a reduction of our working
capital available for other uses, thereby harming our profitability and capital
resources.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
RESULTS OF OPERATIONS AND REPUTATION
Our success and ability to compete is dependent in part on our ability to
protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trade secret, copyright and trademark laws to
establish and protect our intellectual property. We also expect to rely on
patents to protect some of our proprietary technology. To date, we have relied
primarily on trade secret laws to protect our proprietary processes and
know-how. Although we have filed applications for two U.S. patents, we cannot
assure you that either of these applications will issue into patents or that, if
issued, the patents will be upheld. We also cannot assure you that such patents,
if issued, will be effective in protecting our proprietary technology.
We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and further limit the disclosure and use of our other
proprietary information. However, these measures provide only limited protection
of our intellectual property rights. In addition, we may not have signed
agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate
protection in all circumstances. Any infringement of our proprietary rights
could result in significant litigation costs, and any failure to adequately
protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of one or more competitive advantages
and decreased revenues.
Despite our efforts to protect our proprietary rights, existing trade
secret, copyright, patent and trademark laws afford us only limited protection.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Others may
attempt to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
prevent misappropriation of our technologies or to deter others from developing
similar technologies. Further, monitoring the unauthorized use of our products
and our proprietary rights is difficult. Litigation may be necessary to enforce
our intellectual property rights or
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to determine the validity and scope of the proprietary rights of others.
Litigation of this type could result in substantial costs and diversion of
resources and could significantly harm our results of operations and reputation.
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS
From time to time, other parties may assert patent, copyright, trademark
and other intellectual property rights to technologies and in various
jurisdictions that are important to our business. Any claims asserting that our
products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could significantly harm our results of operations.
Any claims, with or without merit, could:
- be time-consuming;
- result in costly litigation;
- divert the efforts of our technical and management personnel;
- require us to develop alternative technology, thereby causing product
shipment delays and the loss or deferral of revenues;
- require us to cease selling the products containing the infringing
intellectual property;
- require us to pay substantial damage awards;
- damage our reputation; or
- require us to enter into royalty or licensing agreements which, if
required, may not be available on terms acceptable to us, if at all.
In the event a claim against us were successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our revenues, results
of operations and competitive position would be harmed.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIPS WITH INDUSTRY EXPERTS, OUR PRODUCTS MAY
LOSE INDUSTRY AND MARKET RECOGNITION AND SALES COULD DECLINE
Our relationships with industry experts in the field of performance
analysis and measurement of networks and network equipment are critical for
maintaining our industry credibility and for developing new products and testing
methodologies in a timely fashion. These experts have established standard
testing methodologies that evaluate new network equipment products and
technologies. We provide these experts and their testing labs with our products
and engineering assistance to perform tests on these new network equipment
products and technologies. These industry experts refer to our products in their
publications which has given our products industry recognition. In addition,
these labs offer us the opportunity to test our products on the newest network
equipment and technologies, thereby assisting us in developing new products that
are designed to meet evolving technological needs. We cannot assure you that we
will be able to maintain our relationships with industry experts or that our
competitors will not obtain similar or superior relationships with industry
experts. If we are unable to maintain our relationships with industry experts,
our products may lose industry and market recognition which could harm our
reputation and competitive position and cause our sales to decline.
ANY ACQUISITIONS THAT WE MAY UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT
OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND SIGNIFICANTLY HARM OUR OPERATING
RESULTS
We expect to review opportunities to acquire other businesses or
technologies that would complement our current products, expand the breadth of
our markets, enhance our technical capabilities or otherwise offer growth
opportunities. While we have no current agreements or negotiations underway, we
may acquire businesses, products or technologies in the future. If we make any
acquisitions, we could issue
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stock that would dilute existing shareholders' percentage ownership, incur
substantial debt or assume contingent liabilities. We have no experience in
acquiring other businesses and technologies and believe potential acquisitions
could involve the following risks:
- problems assimilating the acquired operations, technologies or
products;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers,
contract manufacturers, customers and industry experts;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of the acquired organization's or our own key employees.
We cannot assure you that we would be successful in overcoming problems
in connection with such acquisitions, and our inability to do so could
significantly harm our revenues and results of operations.
OUR HEADQUARTERS, MANY OF OUR CUSTOMERS AND SOME OF OUR CONTRACT MANUFACTURERS
AND SUPPLIERS ARE LOCATED IN CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR
Currently, our corporate headquarters, many of our customers and some of
our contract manufacturers and suppliers are located in California. California
historically has been vulnerable to natural disasters and other risks, such as
earthquakes, fires and floods, which at times have disrupted the local economy
and posed physical risks to our property. We and some of our customers, contract
manufacturers and suppliers do not have redundant, multiple site capacity. In
the event of a natural disaster, our ability to conduct business could be
significantly disrupted, thereby harming our results of operations.
OUR PRINCIPAL SHAREHOLDERS WILL CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING
STOCK AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO CONTROL SUBSTANTIALLY ALL
MATTERS REQUIRING SHAREHOLDER APPROVAL
Upon completion of this offering, our principal shareholder will
beneficially own 25,425,000 shares or approximately 48.2% of our outstanding
shares of common stock, or 47.5%, assuming the full exercise of the
underwriters' over-allotment option. Upon completion of this offering, our
directors and officers and entities affiliated with them will beneficially own
12,333,374 shares, or approximately 23.3%, of our outstanding common stock, or
approximately 22.9%, assuming the full exercise of the underwriters' over-
allotment option. If these shareholders act together, they would be able to
elect at least a majority of our board of directors and to control all other
matters requiring approval by shareholders, including the approval of mergers or
other business combination transactions, going private transactions and other
extraordinary transactions, and the terms of any of these transactions. In
addition, through cumulative voting, our principal shareholder by itself will be
able to elect two of our five directors. This concentration of ownership could
have the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could have an adverse effect on the market price of our common stock or
prevent our shareholders from realizing a premium over the market price for
their shares of common stock.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS
We have not determined any specific purpose for the net proceeds of this
offering. Our management will have broad discretion in determining how to spend
the net proceeds from this offering and may spend the proceeds in a manner that
our shareholders may not deem desirable. We cannot assure you that the use of
the net proceeds of this offering will yield favorable returns or results.
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THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET AFTER THIS OFFERING MAY DEPRESS THE MARKET PRICE OF OUR STOCK
Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that substantial sales may be made
could cause the market price of our common stock to decline. In addition to the
adverse effect a price decline could have on holders of our common stock, such a
decline would likely impede our ability to raise capital through the issuance of
additional equity securities. Upon completion of this offering, based on the
number of shares of our common stock outstanding as of August 15, 2000, we will
have 52,754,917 shares of common stock outstanding or 53,579,917 shares
outstanding if the underwriters' over-allotment option is exercised in full. Of
these, at least 2,655,000 shares will become available for sale 181 days after
the date of this prospectus upon the expiration of lock-up agreements. Merrill
Lynch, Pierce, Fenner & Smith Incorporated, however, may waive the lock-up
restrictions at its sole discretion without notice. In addition, 44,599,917
additional shares will become eligible for sale at various times following the
expiration of the lock-up agreements, subject to the restrictions imposed by
Rule 144 and Rule 701 and, in the case of our principal shareholder, proposed
additional contractual restrictions. Of these shares, we expect to agree to
grant registration rights with respect to 25,425,000 shares of common stock held
by our principal shareholder. For more information, see "Shares Eligible for
Future Sale" on page 60.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE
The initial public offering price of our common stock will be
substantially higher than the pro forma net tangible book value per share of the
outstanding common stock immediately after the offering. Therefore, based on an
assumed initial public offering price of $11.00 per share and our net tangible
book value as of June 30, 2000, if you purchase our common stock in this
offering you will suffer immediate dilution of approximately $9.61 in pro forma
net tangible book value per share, or $9.59 if all options and warrants to
purchase our common stock outstanding as of August 15, 2000 are exercised. Net
tangible book value per share represents the amount of our total tangible assets
less our total liabilities, divided by the number of shares of our common stock
outstanding immediately after this offering. If additional shares are sold by
the underwriters following exercise of their over-allotment option, there will
be further dilution. We have outstanding a large number of stock options with
exercise prices significantly below the initial public offering price of the
shares. To the extent additional options are granted or shares issued, there
will be further dilution.
PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND A PROPOSED AGREEMENT
WITH OUR PRINCIPAL SHAREHOLDER MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US, DESPITE THE POSSIBLE BENEFITS TO OUR SHAREHOLDERS
Following the offering, our board of directors will have the authority to
issue up to 1,000,000 shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by the shareholders. The rights
of the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may issue.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. Furthermore, some provisions of our articles of incorporation and bylaws
could delay or make more difficult a merger, tender offer or proxy contest
involving us.
We expect to enter into an agreement with Technology Capital Group S.A.,
our principal shareholder, that will require it to notify us at least 30 days
prior to entering into any binding agreement for the sale or other disposition
of more than one percent of our outstanding shares of common stock. We expect
this provision will be effective for a period ending on the earlier of four
years after expiration of the initial 360-day period following the date of this
prospectus, and any time when it owns less than 25% of the outstanding shares.
In addition, we expect that Technology Capital Group and Stephane Ratel, the
principal beneficial owner of Technology Capital Group, will agree for a period
of 360 days after the date
17
<PAGE> 22
of this prospectus not to sell or otherwise dispose of shares of our common
stock, in the case of Technology Capital Group, and shares of capital stock of
Technology Capital Group, in the case of Mr. Ratel, except under limited
circumstances. This agreement could discourage third parties from acquiring some
or all of our shares. For more information, see "Related Party
Transactions -- Agreement with Principal Shareholder" on page 56.
These agreements and provisions may have the effect of delaying,
deferring or preventing a change in our control despite possible benefits to our
shareholders, may discourage bids at a premium over the market price of our
common stock and may harm the market price of our common stock and the voting
and other rights of our shareholders.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
There previously has not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how active that market might become. The
initial public offering price for our common stock will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. For a
discussion of the factors to be considered in determining the initial public
offering price, see "Underwriting" on page 62.
Following this offering, the price for our shares of common stock could
be highly volatile and subject to wide fluctuations in response to factors,
including the following:
- actual or anticipated variations in our operating results;
- announcements of technological innovations or new products by us or by
our competitors or customers;
- the loss of significant customers;
- changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
- additions or departures of key personnel; and
- changes in general market and economic conditions.
In addition, the stock market in general, and the Nasdaq National Market
and stocks of technology companies in particular, have often experienced extreme
price and volume fluctuations. This volatility is often unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. If our share price is volatile,
we may be the target of securities litigation, which is costly and
time-consuming to defend. Historically, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been initiated against that company. Litigation of this type could result
in substantial costs and a diversion of management's attention and resources,
which would harm our business.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as "may," "will,"
"should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "project," "predict," "potential" and similar expressions intended
to identify forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions and subject to
risks and uncertainties. These risks, uncertainties and other factors may cause
our actual results, performances or achievements to be materially different from
18
<PAGE> 23
those expressed or implied by our forward-looking statements. Our
forward-looking statements in this prospectus include, but are not limited to,
statements relating to:
- our business strategy;
- the market opportunity for our systems, including anticipated growth of
our industry and expected demand for our products;
- our plans for hiring additional personnel;
- our estimates regarding our capital requirements and needs for
additional financing; and
- any of our other plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts.
Factors that may cause our actual results to differ materially from our
forward-looking statements include, among others, changes in general economic
and business conditions and the risks and other factors set forth in "Risk
Factors" beginning on page 8.
You should read this prospectus completely and with the understanding
that our actual results may be materially different from what we expect. We will
not update these forward-looking statements, even though our situation may
change in the future. We qualify all of our forward-looking statements by these
cautionary statements.
USE OF PROCEEDS
We estimate our net proceeds from our sale of the 5,500,000 shares of
common stock to be approximately $55.1 million, or approximately $63.5 million
if the underwriters exercise their over-allotment option in full, at the assumed
initial public offering price of $11.00 per share, in each case after deducting
the estimated underwriting discount and estimated offering expenses.
The principal purposes of this offering are to increase our equity
capital and to create a public market for our common stock. We believe this will
facilitate our future access to the public equity markets and enhance our
ability to use our common stock as consideration for acquisitions and as a means
of attracting and retaining key employees.
We intend to use the net proceeds of this offering for general corporate
purposes. We may also use a portion of the net proceeds to fund acquisitions or
licenses of products or technologies, or acquisitions of businesses, that are
related or complementary to our business. However, we have no current agreements
or commitments and are not currently engaged in any negotiations with respect to
any such transactions. We will retain broad discretion in the allocation and
uses of the net proceeds of this offering. Pending use of the net proceeds for
the foregoing purposes, we intend to invest the net proceeds from this offering
in short-term, investment grade, interest bearing securities.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We
currently intend to retain earnings to finance the growth and development of our
business and we do not anticipate paying any cash dividends on our common stock
in the foreseeable future. Any determination to pay dividends will be at the
discretion of our board of directors and will depend on our financial condition,
results of operations, capital requirements and other factors the board of
directors deems relevant.
19
<PAGE> 24
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2000:
- on an actual basis; and
- on an as adjusted basis to give effect to the sale by us of shares of
common stock in this offering at an assumed initial public offering
price of $11.00 per share after deducting the underwriting discount and
estimated offering expenses, and our receipt and application of the net
proceeds.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 8,952 $ 64,017
======== ========
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares authorized
and none outstanding................................... -- --
Common stock, no par value; 75,000,000 shares authorized,
46,746,079 shares issued and outstanding, actual, and
52,246,079 shares issued and outstanding, as
adjusted............................................... 910 55,975
Additional paid-in capital................................ 34,288 34,288
Deferred stock-based compensation......................... (24,305) (24,305)
Notes receivable from shareholders........................ (341) (341)
Retained earnings......................................... 7,095 7,095
-------- --------
Total capitalization.............................. $ 17,647 $ 72,712
======== ========
</TABLE>
The actual and as adjusted information set forth in the table excludes:
- 9,862,283 shares of common stock issuable upon the exercise of options
outstanding as of August 15, 2000 under our 1997 stock option plan,
with a weighted average exercise price of $1.50 per share;
- an additional 2,732,800 shares of common stock reserved for issuance
under our 1997 stock option plan as of August 15, 2000;
- an additional 2,000,000 shares of common stock reserved for issuance
under our 1997 stock option plan after August 15, 2000, subject to
shareholder approval;
- 80,000 shares of common stock issuable upon exercise of warrants with
an exercise price of $7.00 per share;
- 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan, subject to annual automatic increases;
- 200,000 shares of common stock reserved for issuance under our director
stock option plan; and
- an additional 125,000,000 shares of common stock authorized for
issuance under our amended articles of incorporation after June 30,
2000.
For further information regarding our stock option and purchase plans,
see "Management -- Benefit Plans" on page 49.
20
<PAGE> 25
DILUTION
The net tangible book value of our common stock as of June 30, 2000, was
approximately $17,647,000, or $0.38 per share of common stock. Net tangible book
value per share represents the amount of our total tangible assets, less our
total liabilities, divided by the total number of shares of common stock
outstanding. After giving effect to the issuance and sale by us of 5,500,000
shares of common stock offered by this prospectus at an assumed initial public
offering price of $11.00 per share and after deducting the underwriting discount
and estimated offering expenses, our pro forma net tangible book value as of
June 30, 2000 would have been $72,712,000, or $1.39 per share. This represents
an immediate increase in the pro forma net tangible book value of $1.01 per
share to existing shareholders and an immediate dilution of $9.61 per share to
new investors in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share as of June 30, 2000..... $0.38
Increase in net tangible book value per share attributable
to new investors....................................... 1.01
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.39
------
Dilution per share to new investors......................... $ 9.61
======
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 2000:
- the number of shares of common stock purchased from us;
- the total consideration paid to us;
- the average price per share paid by existing shareholders; and
- the average price per share paid by new shareholders before deducting
the underwriting discount and estimated offering expenses payable by
us:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
---------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PERCENT AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 46,746 89.5% $ 2,210 3.5% $ 0.05
New shareholders.................................. 5,500 10.5 60,500 96.5 $11.00
------ ----- ------- -----
Total........................................... 52,246 100.0% $62,710 100.0%
====== ===== ======= =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock
options or warrants outstanding. As of August 15, 2000, there were options and
warrants outstanding to purchase a total of approximately 9,942,283 shares of
common stock with a weighted average exercise price of $1.55 per share.
The following table sets forth on a pro forma basis, assuming full
exercise of all outstanding options and warrants for the purchase of our common
stock, as of August 15, 2000:
- the number of shares of common stock purchased from us;
- the total consideration paid to us;
- the average price per share paid by existing shareholders; and
21
<PAGE> 26
- the average price per share paid by new shareholders before deducting
the underwriting discount and estimated offering expenses payable by
us:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
---------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PERCENT AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 57,197 91.2% $17,667 22.6% $ 0.31
New shareholders.................................. 5,500 8.8 60,500 77.4 $11.00
------ ----- ------- -----
Total........................................... 62,697 100.0% $78,167 100.0%
====== ===== ======= =====
</TABLE>
An additional 3,232,800 shares of common stock were available as of
August 15, 2000 for future issuance under our stock option and purchase plans.
An additional 2,000,000 shares of common stock were reserved for issuance under
our 1997 stock option plan after August 15, 2000, subject to shareholder
approval. For further information regarding our stock option and purchase plans,
including provisions for the automatic increase in reserved shares, see
"Management -- Benefit Plans" on page 49. To the extent that additional shares
reserved for issuance under our plans are issued, there will be further dilution
to the new shareholders.
22
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to those consolidated financial statements included elsewhere in this
prospectus. The statement of operations data set forth below for the period from
May 27, 1997, our inception, through December 31, 1997 and for the years ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998
and 1999 are derived from, and are qualified by reference to, our audited
consolidated financial statements included elsewhere in this prospectus. The
balance sheet data as of December 31, 1997 are derived from our consolidated
financial statements not included in this prospectus. The statement of
operations data set forth below for the six month periods ended June 30, 1999
and 2000 and the balance sheet data as of June 30, 2000 are derived from, and
are qualified by reference to, our unaudited consolidated financial statements
included elsewhere in this prospectus. The unaudited consolidated financial
statements include all normal recurring adjustments that we consider necessary
for a fair presentation of our financial position and results of operations. The
results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2000, or any other future period.
<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, --------------------------- -----------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Net revenues.................................. $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)........................... -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit................................ -- 3,607 19,555 6,802 22,642
------- ------- ------- ------- -------
Operating expenses:
Research and development.................... 513 1,580 2,780 1,182 2,744
Sales and marketing......................... -- 940 4,443 1,531 4,372
General and administrative.................. 110 509 1,660 588 1,733
Stock-based compensation(2)................. -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating expenses............... 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from operations............... (623) 424 8,825 3,094 7,543
Interest income, net.......................... 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before income taxes........... (616) 438 8,913 3,112 7,764
Income tax expense (benefit).................. (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income (loss)........................... $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic....................................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted..................................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of shares outstanding:
Basic....................................... 43,041 43,200 43,574 43,218 45,236
Diluted..................................... 43,041 45,619 48,896 46,340 52,989
------------
(1) Stock-based compensation included in cost of
revenues.................................... $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2) Stock-based compensation:
Research and development.................. $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing....................... -- 62 449 124 1,771
General and administrative................ -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999 2000
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents.......................... $304 $1,124 $ 8,733 $ 8,952
Working capital.................................... 691 1,232 7,500 15,072
Total assets....................................... 669 3,266 15,822 25,119
Total shareholders' equity......................... 578 1,760 8,610 17,647
</TABLE>
24
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth under "Risk Factors" beginning on page 8 and elsewhere
in this prospectus. The following discussion should be read together with our
consolidated financial statements and the notes to those consolidated financial
statements included elsewhere in this prospectus.
OVERVIEW
We develop, market and sell high-speed, multi-port network performance
analysis systems for advanced optical communications equipment and networks, as
well as electrical communications equipment and networks. Our products address a
broad range of network equipment and systems that are used throughout the
Internet and local, metropolitan and wide area networks. Our products allow
customers to generate network and Internet protocol traffic and analyze the
performance, accuracy and reliability of equipment and systems that they either
manufacture for sale to others or purchase for use in their own networks. Our
customers include manufacturers of network equipment, Internet and network
service providers, communications chip manufacturers and network users.
Our product offerings include a variety of interface cards, chassis that
can hold up to 16 interface cards each and related software products. Our
interface cards can generate traffic over a variety of optical and electrical
interfaces such as Packet Over SONET and Gigabit Ethernet. The following table
sets forth, for the periods indicated, our net revenues by principal product
category in absolute dollars and as a percentage of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
PRODUCTS 1998 1999 JUNE 30, 2000
-------- -------------- --------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Optical interface cards.................... $2,060 41.9% $12,672 51.7% $17,134 60.6%
Electrical interface cards................. 2,248 45.7 8,757 35.8 8,268 29.3
Chassis, software and other products....... 608 12.4 3,070 12.5 2,866 10.1
------ ----- ------- ----- ------- -----
Total.................................... $4,916 100.0% $24,499 100.0% $28,268 100.0%
====== ===== ======= ===== ======= =====
</TABLE>
We were incorporated in May 1997. From inception through March 1998, our
operating activities consisted primarily of research and development, staffing
and establishing relationships with potential customers. During this development
period, we funded operations by raising approximately $1.6 million in initial
equity contributions and $500,000 through a short-term loan from a major
shareholder that was repaid in September 1999. We commenced product shipments in
April 1998 and, since then, we have been able to fund operations from internal
cash flows.
Sales to our five largest customers collectively accounted for
approximately $12.5 million or 51.0% of our net revenues in 1999 and $15.0
million or 53.1% of our net revenues for the six months ended June 30, 2000. We
sell our systems primarily to network equipment manufacturers. While we expect
that we will continue to have some customer concentration for the foreseeable
future, we have sold our systems to a wide variety of customers. Through June
30, 2000, we had shipped our systems to over 170 customers. To the extent we
develop a broader and more diverse customer base, we anticipate that our
reliance on any one customer will diminish.
Net revenues. Our revenues consist primarily of hardware and software
sales. We recognize product revenues at the time of shipment. Our sales do not
involve any significant future obligations or customer acceptance terms. We
warrant the software component of our products for one year after sale. At the
time of sale we defer that portion of our revenues that relates to our
post-contract support and recognize it ratably over the 12-month service period.
Revenues from maintenance contracts are deferred and recognized ratably over the
term of the contracts.
25
<PAGE> 30
Cost of Revenues. Our cost of revenues consists of materials, payments to
third party manufacturers, salaries and related expenses for manufacturing
personnel and the warranty cost of hardware to be replaced during the one-year
warranty period. We outsource the majority of our manufacturing operations, and
we conduct final assembly, supply chain management, quality assurance,
documentation control and shipping at our facility. Accordingly, a significant
portion of our cost of revenues consists of payments to our contract
manufacturers. In addition, cost of revenues includes a non-cash component
related to the amortization of deferred stock-based compensation allocated to
manufacturing personnel.
Gross Margins. Excluding the effects of stock-based compensation, the
gross margins of our various interface cards have generally been consistent and
have exceeded the gross margins of our chassis. In general, our gross margins
are primarily affected by the following factors:
- demand for our products;
- new product introductions by us and by our competitors;
- changes in our pricing policies and those of our competitors;
- the mix of our products sold;
- the mix of sales channels through which our products are sold; and
- the pricing we are able to obtain from our component suppliers and
contract manufacturers.
Operating Expenses. We generally recognize our operating expenses as we
incur them in three general operational categories: research and development,
sales and marketing, and general and administrative. Our operating expenses also
include a non-cash component related to the amortization of deferred stock-based
compensation allocated to research and development, sales and marketing and
general and administrative personnel.
Research and development expenses consist primarily of salaries and
related personnel and consulting costs related to the design, development,
testing and enhancements of our systems. We expense our research and development
costs as they are incurred. We also capitalize and depreciate over a two-year
period some costs of our systems used for internal purposes. We expect research
and development expenses to increase as we seek to attain our strategic product
development objectives and to meet changing customer requirements and
technological advances.
Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in sales and marketing and customer
support functions, as well as costs associated with promotional and other
marketing activities. We expect sales and marketing expenses to increase
substantially as we hire additional sales and marketing personnel and
independent sales representatives, initiate additional marketing programs and
establish new sales offices in domestic and international locations. We also
expect to significantly expand our technical support staff to strengthen our
relationships with our customers.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, information technology
and administrative personnel, as well as recruiting and professional fees,
insurance costs and other general corporate expenses, including rent. We expect
general and administrative expenses to increase as we add personnel and incur
additional costs related to the growth of our business and operation as a public
company.
In connection with the grant of stock options and the sale of restricted
stock, we recorded deferred stock-based compensation of $422,000 in 1998, $6.6
million in 1999 and $26.0 million in the six months ended June 30, 2000. These
amounts represent the difference between the deemed fair value of our common
stock for accounting purposes and (1) the exercise price of the options at the
date of grant or (2) the purchase price of the restricted stock. Deferred
stock-based compensation is presented as a reduction of shareholders' equity,
with amortization recorded over the vesting period, which is typically four
years. We amortized $162,000 of deferred stock-based compensation in 1998, $1.9
million in 1999 and
26
<PAGE> 31
$6.6 million for the six months ended June 30, 2000. Based on the unvested
options and stock subject to repurchase as of June 30, 2000, we expect to record
additional stock-based compensation expense relating to deferred stock-based
compensation approximately as follows: $7.9 million during the remaining six
months of 2000, $9.4 million during 2001, $4.7 million during 2002 and
$2.3 million during 2003 and thereafter. The amount of deferred stock-based
compensation expense to be recorded in future periods could decrease if options
and stock subject to repurchase for which unearned compensation has been
recorded are forfeited or repurchased.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------- --------------
1998 1999 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 26.6 20.2 17.2 19.9
----- ----- ----- -----
Gross profit......................................... 73.4 79.8 82.8 80.1
----- ----- ----- -----
Operating expenses:
Research and development............................... 32.1 11.3 14.4 9.7
Sales and marketing.................................... 19.1 18.1 18.6 15.5
General and administrative............................. 10.4 6.8 7.2 6.1
Stock-based compensation............................... 3.1 7.5 4.9 22.1
----- ----- ----- -----
Total operating expenses.......................... 64.7 43.8 45.1 53.4
----- ----- ----- -----
Income from operations............................... 8.6 36.0 37.7 26.7
Interest income, net...................................... 0.3 0.4 0.2 0.8
----- ----- ----- -----
Income before income taxes........................... 8.9 36.4 37.9 27.5
Income tax expense........................................ 2.4 16.8 16.6 19.4
----- ----- ----- -----
Net income........................................... 6.5% 19.6% 21.3% 8.1%
===== ===== ===== =====
</TABLE>
From our inception through December 31, 1997, we generated no revenues.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000
Net Revenues. Net revenues increased 244.1% from $8.2 million for the six
months ended June 30, 1999 to $28.3 million for the six months ended June 30,
2000. Of this increase in net revenues, approximately half came from expanded
sales of existing products and approximately half came from sales of new
products, including primarily new versions of our Packet Over SONET interface
cards and, to a lesser extent, new versions of our Gigabit Ethernet interface
cards. Sales to our five largest customers collectively accounted for $15.0
million or 53.1% of net revenues for the six months ended June 30, 2000 compared
to $4.3 million or 52.3% for the six months ended June 30, 1999.
Gross Profit. Gross profit increased 232.9% from $6.8 million for the six
months ended June 30, 1999 to $22.6 million for the six months ended June 30,
2000. As a percentage of net revenues, gross profit decreased from 82.8% for the
six months ended June 30, 1999 to 80.1% for the six months ended June 30, 2000.
Of this 2.7 percentage point drop in gross margin, approximately half is
attributable to stock-based compensation related to individuals engaged in
operations activities and the balance is attributable to changes in a variety of
factors, including selling prices, product mix and component costs.
Research and Development Expenses. Research and development expenses
increased from $1.2 million for the six months ended June 30, 1999 to $2.7
million for the six months ended June 30, 2000. This increase was primarily
related to higher compensation expense and related benefit costs due to the
addition of engineering personnel. Research and development expenses decreased
as a percentage of net revenues from 14.4% for the six months ended June 30,
1999 to 9.7% for the six months ended
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<PAGE> 32
June 30, 2000 due to the significant increase in sales. Including stock-based
compensation related to individuals engaged in research and development
activities, research and development expense increased from $1.3 million in the
six months ended June 30, 1999 to $5.3 million in the six months ended June 30,
2000.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$1.5 million for the six months ended June 30, 1999 to $4.4 million for the six
months ended June 30, 2000. This increase was primarily due to increases in
commissions and increases in the number of direct sales and marketing personnel.
Sales and marketing expenses decreased as a percentage of net revenues from
18.6% for the six months ended June 30, 1999 to 15.5% for the six months ended
June 30, 2000 due to a significant increase in sales. Including stock-based
compensation related to individuals engaged in sales and marketing activities,
sales and marketing expense increased from $1.7 million in the six months ended
June 30, 1999 to $6.1 million in the six months ended June 30, 2000.
General and Administrative Expenses. General and administrative expenses
increased from $588,000 for the six months ended June 30, 1999 to $1.7 million
for the six months ended June 30, 2000. This increase was related to higher
compensation expense resulting from increased staffing and increased expenses
for professional services, primarily legal, recruiting and accounting. General
and administrative expenses decreased as a percentage of net revenues from 7.2%
for the six months ended June 30, 1999 to 6.1% for the six months ended June 30,
2000 due to a significant increase in sales. Including stock-based compensation
related to individuals engaged in general and administrative activities, general
and administrative expense increased from $777,000 in the six months ended June
30, 1999 to $3.6 million in the six months ended June 30, 2000.
Stock-based Compensation. For the six months ended June 30, 1999 we
recorded deferred compensation of $1.2 million relating to stock and option
awards compared to $26.0 million recorded for the six months ended June 30,
2000. These amounts are being amortized over the vesting periods of the stock
and option awards. Stock-based compensation increased from $407,000 for the six
months ended June 30, 1999 to $6.3 million for the six months ended June 30,
2000.
Interest Income, Net. Interest income, net increased from $18,000 for the
six months ended June 30, 1999 to $221,000 for the six months ended June 30,
2000. This increase was the result of an increase in cash and cash equivalents.
We have incurred minimal interest expense.
Income Tax Expense. Income tax expense increased from $1.4 million for
the six months ended June 30, 1999, or an effective rate of 43.8%, to $5.5
million for the six months ended June 30, 2000, or an effective tax rate of
70.5%. The difference between the effective rate and the statutory rate was
primarily due to the impact of non-deductible stock-based compensation charges
and state taxes offset by research and development credits. Excluding the impact
of stock-based compensation, the effective rates would have been 38.9% for the
six months ended June 30, 1999 and 39.0% for the six months ended June 30, 2000.
COMPARISON OF THE PERIOD FROM MAY 27, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999
Net Revenues. For the period from May 27, 1997 through December 31, 1997,
we were a development stage company and did not ship product or generate
revenues. We commenced product shipments in April 1998 and had net revenues of
$4.9 million in 1998 and $24.5 million in 1999. The 398.4% increase from 1998 to
1999 reflects increased unit sales across our product lines, the introduction of
new product lines, sales to new customers and a full year of product sales in
1999. Sales to our five largest customers collectively accounted for $3.0
million or 62.0% of net revenues in 1998 compared to $12.5 million or 51.0% of
net revenues in 1999.
Gross Profit. Gross profit increased 442.1% from $3.6 million in 1998 to
$19.6 million in 1999. Our gross margin increased from 73.4% in 1998 to 79.8% in
1999. This increase in gross margin primarily reflects purchasing and volume
manufacturing efficiencies as production and sales volumes increased.
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<PAGE> 33
Research and Development Expenses. Research and development expenses
increased from $513,000 in the period from our inception in May 1997 through
December 31, 1997 to $1.6 million in 1998 and to $2.8 million in 1999. The
increases in both 1998 and 1999 were primarily related to higher compensation
expense and related costs due to the addition of engineering personnel. Research
and development expenses declined as a percentage of net revenues from 32.1% in
1998 to 11.3% in 1999, reflecting the substantial increase in net revenues in
1999 over 1998. Including stock-based compensation related to individuals
engaged in research and development activities, research and development expense
increased from $1.7 million in 1998 to $3.4 million in 1999.
Sales and Marketing Expenses. We did not incur any sales and marketing
expenses in the period from our inception in May 1997 through December 31, 1997.
In 1998, we incurred sales and marketing expenses of $940,000 as we began sales
and marketing activities. These expenses increased to $4.4 million in 1999,
primarily due to increases in the number of direct sales and marketing personnel
and in the commissions paid to independent sales representatives. As a
percentage of net revenues, these expenses remained relatively stable at 19.1%
in 1998 and 18.1% in 1999. Including stock-based compensation related to
individuals engaged in sales and marketing activities, sales and marketing
expense increased from $1.0 million in 1998 to $4.9 million in 1999.
General and Administrative Expenses. General and administrative expenses
increased from $110,000 in the period from our inception in May 1997 through
December 31, 1997 to $509,000 in 1998 and to $1.7 million in 1999. The increase
in 1998 was primarily related to an increase in the number of administrative
personnel. The substantial increase in 1999 was related to higher compensation
expense resulting from increased staffing and increased expenses for
professional services, primarily legal, recruiting and accounting. General and
administrative expenses declined as a percentage of net revenues from 10.4% in
1998 to 6.8% in 1999. Including stock-based compensation related to individuals
engaged in general and administrative activities, general and administrative
expense increased from $509,000 in 1998 to $2.4 million in 1999.
Stock-based Compensation. We did not record any deferred stock-based
compensation for the period from our inception in May 1997 through December 31,
1997. In 1998 we recorded deferred stock-based compensation of $422,000 relating
to stock and option awards compared to $6.6 million recorded in 1999. These
amounts are being amortized over the vesting periods of the options and stock
subject to repurchase. Stock-based compensation increased from $154,000 in 1998
to $1.8 million in 1999.
Interest Income, Net. Interest income, net increased from $7,000 in the
period from our inception in May 1997 through December 31, 1997 to $14,000 in
1998 and to $88,000 in 1999. This increase was the result of an increase in cash
and cash equivalents. We have incurred minimal interest expense.
Income Tax Expense. For the period from our inception in May 1997 through
December 31, 1997, we recorded an income tax benefit of $294,000. This amount
reflects the net federal and state statutory rate net of research and
development credits. Income tax expense increased from $118,000 in 1998 to $4.1
million in 1999. The income tax expense was based on an annual effective tax
rate of 26.9% in 1998 and 46.0% in 1999. The annual effective tax rate in 1998
and 1999 differs from the statutory rate primarily due to stock-based
compensation and state taxes offset by research and development tax credits.
Excluding the effects of deferred stock-based compensation, the effective tax
rate in 1998 would have been 14.8% and the effective tax rate in 1999 would have
been 38.2%.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly statement of operations
data for the ten quarters ended June 30, 2000 expressed in dollars and as a
percentage of net revenues. We have prepared this information using our
unaudited interim financial statements that, in our opinion, have been prepared
on a basis consistent with our annual financial statements. We believe this
information reflects all normal non-recurring adjustments necessary for a fair
presentation of such information in accordance with accounting principles
generally accepted in the United States. The results for any quarter may not be
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ -- $ 918 $1,734 $2,264 $3,062 $5,152
Cost of revenues....................... -- 140 455 714 489 923
----- ------ ------ ------ ------ ------
Gross profit......................... -- 778 1,279 1,550 2,573 4,229
Operating expenses:
Research and development............. 361 368 338 513 539 643
Sales and marketing.................. 21 145 290 484 506 1,025
General and administrative........... 39 123 162 185 239 349
Stock-based compensation............. 18 36 45 55 86 321
----- ------ ------ ------ ------ ------
Total operating expenses........... 439 672 835 1,237 1,370 2,338
----- ------ ------ ------ ------ ------
Income (loss) from operations........ (439) 106 444 313 1,203 1,891
Interest income, net................... -- 6 4 4 7 11
----- ------ ------ ------ ------ ------
Income (loss) before income taxes.... (439) 112 448 317 1,210 1,902
Income tax expense (benefit)........... (118) 30 121 85 486 876
----- ------ ------ ------ ------ ------
Net income (loss).................... $(321) $ 82 $ 327 $ 232 $ 724 $1,026
===== ====== ====== ====== ====== ======
AS A PERCENTAGE OF NET REVENUES:
Net revenues........................... -- 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... -- 15.3 26.2 31.5 16.0 17.9
----- ------ ------ ------ ------ ------
Gross profit......................... -- 84.7 73.8 68.5 84.0 82.1
Operating expenses:
Research and development............. -- 40.1 19.5 22.7 17.6 12.5
Sales and marketing.................. -- 15.8 16.7 21.4 16.5 19.9
General and administrative........... -- 13.4 9.3 8.2 7.8 6.8
Stock-based compensation............. -- 3.9 2.6 2.4 2.8 6.2
----- ------ ------ ------ ------ ------
Total operating expenses........... -- 73.2 48.2 54.6 44.7 45.4
----- ------ ------ ------ ------ ------
Income from operations............... -- 11.5 25.6 13.8 39.3 36.7
Interest income, net................... -- 0.7 0.2 0.2 0.2 0.2
----- ------ ------ ------ ------ ------
Income before income taxes........... -- 12.2 25.8 14.0 39.5 36.9
Income tax expense..................... -- 3.3 7.0 3.8 15.9 17.0
----- ------ ------ ------ ------ ------
Net income........................... -- 8.9% 18.9% 10.2% 23.6% 19.9%
===== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1999 1999 2000 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $7,128 $9,157 $11,193 $17,075
Cost of revenues....................... 1,532 2,000 2,141 3,485
------ ------ ------- -------
Gross profit......................... 5,596 7,157 9,052 13,590
Operating expenses:
Research and development............. 664 934 1,083 1,661
Sales and marketing.................. 1,345 1,567 1,631 2,741
General and administrative........... 429 643 652 1,081
Stock-based compensation............. 457 983 2,236 4,014
------ ------ ------- -------
Total operating expenses........... 2,895 4,127 5,602 9,497
------ ------ ------- -------
Income (loss) from operations........ 2,701 3,030 3,450 4,093
Interest income, net................... 28 42 97 124
------ ------ ------- -------
Income (loss) before income taxes.... 2,729 3,072 3,547 4,217
Income tax expense (benefit)........... 1,257 1,484 2,200 3,277
------ ------ ------- -------
Net income (loss).................... $1,472 $1,588 $ 1,347 $ 940
====== ====== ======= =======
AS A PERCENTAGE OF NET REVENUES:
Net revenues........................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 21.5 21.8 19.1 20.4
------ ------ ------- -------
Gross profit......................... 78.5 78.2 80.9 79.6
Operating expenses:
Research and development............. 9.3 10.2 9.7 9.7
Sales and marketing.................. 18.9 17.1 14.6 16.1
General and administrative........... 6.0 7.0 5.8 6.3
Stock-based compensation............. 6.4 10.7 20.0 23.5
------ ------ ------- -------
Total operating expenses........... 40.6 45.1 50.0 55.6
------ ------ ------- -------
Income from operations............... 37.9 33.1 30.8 24.0
Interest income, net................... 0.4 0.5 0.9 0.7
------ ------ ------- -------
Income before income taxes........... 38.3 33.5 31.7 24.7
Income tax expense..................... 17.6 16.2 19.7 19.2
------ ------ ------- -------
Net income........................... 20.7% 17.3% 12.0% 5.5%
====== ====== ======= =======
</TABLE>
Net revenues have increased in each of the last nine quarters as a result
of increased sales of new and existing products to an expanding customer base.
In the quarter ended June 30, 2000, net revenues increased by $5.9 million, or
52.6%, in comparison to the quarter ended March 31, 2000. This increase was
primarily due to the initial launch of our Packet over SONET OC-48c interface
cards. Gross margins were relatively stable in the 80% range in the last six
quarters, reflecting a consistent mix of revenues from chassis, interface cards
and software. Quarterly increases in operating expenses reflect the continued
expansion of our operations throughout the ten-quarter period.
Our quarterly and annual operating results may fluctuate significantly
due to a variety of factors, most of which are outside of our control, as
discussed in "Risk Factors -- Our quarterly and annual operating results may
fluctuate significantly as a result of new product introductions and other
factors which could cause our stock price to decline significantly" on page 8.
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<PAGE> 35
Most of our expenses, such as employee compensation and lease payments
for facilities and equipment, are relatively fixed in the near term. In
addition, our expense levels are based in part on our expectations regarding
future revenues. As a result, if our actual revenues fall short of our
expectations, our operating results could vary significantly from quarter to
quarter. Due to these factors, you should not rely on our quarterly revenues and
operating results to predict our future performance.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our operations primarily from:
- $1.9 million in equity contributions;
- the issuance of a $500,000 note to a shareholder that was repaid in
September 1999; and
- cash flow from operations since our initial product launch in the
second quarter of 1998.
As of June 30, 2000, we had cash and cash equivalents of $9.0 million.
Net cash provided by operating activities was $45,000 in 1998, $9.0
million in 1999 and $1.7 million for the six months ended June 30, 2000. Net
cash generated in 1998, 1999 and in the six months ended June 30, 2000 was
primarily provided by the growth in net income offset by non-cash expenses and
an increase in working capital requirements. Additionally, for 1999, $4.5
million of the $9.0 million provided by operations relates to the timing of
payments for our 1999 estimated income tax liability. Due to the method in which
estimated income tax payments are made, in 1999 we paid only $66,000 in
estimated taxes during the year and, as of December 31, 1999, we had $4.5
million in accrued income taxes payable. During March 2000, we made an estimated
income tax payment of $4.6 million relating to the 1999 liability. Had this
payment been made in 1999, net cash provided by operations would have been $4.4
million in 1999 and $6.3 million in the six months ended June 30, 2000.
Cash used in investing activities was $425,000 in 1998, $1.0 million in
1999 and $1.6 million in the six months ended June 30, 2000. Cash used in
investing activities consisted exclusively of capital expenditures related to
the acquisition of property and equipment.
Financing activities provided net cash of $1.2 million in 1998, used net
cash of $336,000 in 1999 and provided net cash of $127,000 in the first six
months of 2000. Financing activities in 1998, 1999 and the first six months of
2000 consisted of a $700,000 capital contribution and proceeds from a $500,000
note issued to a shareholder which has been repaid and proceeds from the sale of
common stock and stock option exercises.
We had no material commitments for capital expenditures as of June 30,
2000, but we expect such expenditures to total $3.1 million in 2000, of which
$1.6 million was spent in the six months ended June 30, 2000. These expenditures
will be incurred primarily for the acquisition of property and equipment. As of
June 30, 2000, we also had total minimum lease obligations of $6.2 million
through May 31, 2007 under non-cancelable operating leases. We do not have any
capital leases.
We believe that our existing balances of cash and cash equivalents,
together with the net proceeds of this offering and cash flow expected to be
generated from our operations, will be sufficient to meet our cash needs for
working capital and capital expenditures for at least the next 12 months,
although we could be required, or could elect, to seek additional funding prior
to that time. Our capital requirements will depend on many factors, including
the growth rate of our net revenues, our profitability, our capital
expenditures, working capital requirements, the timing and extent of spending to
support product development efforts and the expansion of our sales, marketing
and technical support efforts.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold financial instruments for trading or speculative purposes.
Our financial instruments have short maturities and therefore are not subject to
significant interest rate risk. We generally place funds that are in excess of
our current needs in high credit quality instruments with maturities of less
than
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<PAGE> 36
one year, such as money market accounts and certificates of deposit. We do not
have any financial liabilities that are subject to interest rate risk. We do not
expect any material loss from our investments and therefore believe that our
potential interest rate exposure is not material. We do not use any derivatives
or similar instruments to manage our interest rate risk.
YEAR 2000 COMPLIANCE
We have not experienced, and do not expect to experience, any significant
problems associated with year 2000 issues. We did not incur material
expenditures to test, repair or replace equipment. In addition, to our
knowledge, our suppliers and other third parties with whom we conduct business
have not experienced material year 2000 problems to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Adoption of SAB 101 is required in the fourth quarter of
2000. We have historically recognized and currently recognize revenue under the
guidelines as currently provided by SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion 25." Interpretation No. 44
became effective on July 1, 2000, except for the provisions relating to
repricings and the definition of an employee, which apply to awards issued after
December 31, 1998. Interpretation No. 44 clarifies the application of APB
Opinion 25 for various matters, specifically:
- the definition of an employee for purposes of applying APB Opinion 25;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a
business combination.
We do not anticipate that the adoption of Interpretation No. 44 will have
a material impact on our financial position or results of operations.
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<PAGE> 37
BUSINESS
OVERVIEW
We are a provider of systems that allow our customers to measure the
performance of their data communications equipment and networks. Our systems
generate and analyze data traffic, including Voice over IP traffic, which sends
voice communication over data networks using a protocol known as the Internet
Protocol, or IP. The networks our systems analyze include advanced optical
networks, such as Packet Over SONET networks, which transmit packets of
information over high-speed optical networks. Other networks include Gigabit
Ethernet networks, which carry data traffic over optical fiber as well as over
electrical cable and are typically used within a single building or a group of
buildings. In the six months ended June 30, 2000, optical interface cards
accounted for 60.6% of our net revenues. Our systems are highly modular,
scalable and easy to use.
Since our inception, we have sold our systems to over 170 customers.
Based on revenues for the 12 months ended June 30, 2000, our largest customers
by category include:
- Leading network equipment manufacturers such as Cisco Systems, Extreme
Networks and Nortel Networks;
- Internet and network service providers such as AT&T and UUNET
Technologies;
- Communications chip manufacturers such as Broadcom and Level One
Communications, which is now part of Intel; and
- Network users such as Lockheed Martin and Bank of America.
We intend to expand our business by focusing on high-growth markets such
as advanced optical networks which route data traffic throughout the Internet,
as well as networks that provide high-speed access to the Internet, known as
broadband access networks. We intend to maintain our focus on technology
leadership, expanding and further penetrating our customer base and expanding
our international presence.
INDUSTRY BACKGROUND
The popularity of the Internet and the number of Internet-based
applications and services have fueled dramatic growth in the volume of data
traffic. According to Ryan Hankin Kent, Inc., a leading communications market
research firm, Internet traffic is expected to increase from 350,000 terabytes,
or trillions of bytes, per month at the end of 1999 to over 15,000,000 terabytes
per month during 2003, representing a compound annual average growth rate of
over 150%. To accommodate the growth in traffic, investments in network
equipment such as multi-port switches and routers that carry and route data
traffic throughout networks have accelerated. Likewise, increasingly complex
networks have emerged, including local, metropolitan and wide area networks. A
local area network is a data communications network composed of interconnected
computers within a single building or group of buildings. Metropolitan area
networks are local area networks that are joined together in close proximity,
such as within a city. Wide area networks typically interconnect metropolitan
area networks or remote computers across long distances.
As a result of the development of these complex networks, performance
analysis has become more difficult, requiring increasingly sophisticated network
performance analysis systems. We believe that the market for network performance
analysis systems will be driven by several specific market trends, including the
further deployment of Packet Over SONET and Gigabit Ethernet networks and the
associated increased requirements for switching and routing equipment. For
example, International Data Corporation, a data communications market research
firm, estimates that high-speed router shipments will increase from 3.8 million
units in 1999 to 16.1 million units in 2003, representing a compound annual
average growth rate of 44%.
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<PAGE> 38
THE INCREASING NEED FOR NETWORK ANALYSIS AND MEASUREMENT
The performance of the Internet and other networks such as local,
metropolitan and wide area networks and the analysis and measurement of their
performance are important to the following groups:
- Network Users. Network users such as large corporations increasingly
use specialized systems in order to verify that they are receiving the
level of service that they have contracted to receive from Internet and
network service providers. They also increasingly use these systems to
measure the performance of equipment before deployment in the network.
- Internet and Network Service Providers. Internet and network service
providers seek to provide network users with the high quality network
services they demand. Failure to provide satisfactory service can be
costly and may result in the loss of customers. To ensure these desired
service levels are met, Internet and network service providers must
verify the performance of network equipment and systems prior to
deployment and during operation. In addition, as more complex network
and transmission protocols are developed and implemented, the need to
measure system performance will continue to increase.
- Equipment Manufacturers. To meet the higher standards specified by
network operators and end users, equipment manufacturers who provide
infrastructure equipment and systems must ensure the quality of their
products during development and manufacturing and prior to shipping.
Failure to ensure the consistent performance of their products may
result in the loss of customers, increased research and development
costs, customer service charges and losses resulting from the return of
products.
- Communications Chip Manufacturers. Communications chip manufacturers
require equipment to evaluate and analyze the performance of their
chips during the design and development phase.
The following characteristics are used to evaluate the performance of
network infrastructure equipment and systems:
- Throughput is the maximum rate at which a network device or network can
transmit distinct units of data, called packets, without loss of
packets;
- Latency is the time that it takes a packet to travel through a network
device or network;
- Loss is the percentage of packets lost during transmission through a
network device or network;
- Jitter is the variation in the time intervals between packets
transmitted through a network device or network;
- Integrity checking confirms that the user information transmitted
through a network device or network has not been corrupted; and
- Sequence checking verifies that packets are received in the same order
in which they were sent through a network device or network.
CHARACTERISTICS DEMANDED OF NETWORK PERFORMANCE ANALYSIS AND MEASUREMENT
EQUIPMENT
Performance requirements of network equipment and systems are becoming
increasingly demanding. As a result, precise performance verification is
becoming more important throughout the design, development, production,
deployment and operation of network equipment and systems. Because this
performance verification must take place across multiple layers of the network
infrastructure and across all optical and electrical technologies, network
performance verification systems are required to be highly flexible and modular.
In order to address multi-port switches and routers, performance verification
systems must also be highly scalable and capable of generating and analyzing
large amounts of data at high speeds over increasingly complex configurations.
The rapid evolution of complex network technologies and protocols, including the
emergence of new, highly complex protocols such as Packet Over SONET
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<PAGE> 39
and Gigabit Ethernet, has also resulted in the need for performance verification
systems that are easy to use with minimal training and set-up.
THE IXIA SOLUTION
We are a provider of multi-port traffic generation and performance
analysis systems for the high-speed data communications market, including the
Internet infrastructure and local, metropolitan and wide area networks. Our
systems address the need for accurate and reliable performance verification of
optical and electrical networks. The optical and electrical interfaces these
networks use include Packet Over SONET OC-48c, OC-12c and OC-3c, Gigabit
Ethernet and 10/100 megabits per second Ethernet. Our systems meet the
requirements of a wide variety of customers, including network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users.
Our systems provide the following key benefits to our customers:
High Performance. Our systems generate and receive data traffic at wire
speed, which is the maximum rate that data traffic can be transmitted over the
network. Our systems provide accurate analysis across multiple layers of the
overall network and of individual network components in real-time, that is, as
the transmission is actually occurring. By analyzing each discrete packet of
information on a packet-by-packet basis, our systems allow our customers to
precisely measure the performance of their networks and individual network
components. This precision allows customers to accurately measure critical
quality of service parameters such as throughput, latency, loss and jitter and
check data integrity and packet sequence throughout the network, as well as to
locate various network problems. Our systems also allow users to precisely
repeat complex test scenarios in order to evaluate the impact of changes made to
network equipment and systems.
Highly Scalable. Each of our interface cards provides one or more ports
through which our systems generate and receive data traffic. Our customers can
easily increase port density, which is the number of ports in an individual
chassis, by inserting additional interface cards. By connecting multiple chassis
and synchronizing thousands of ports to operate simultaneously, our customers
can simulate large-scale networks. We believe that our systems offer our
customers the highest port density and therefore the most scalable systems
available. In addition, our client server architecture allows multiple users in
the same or different geographic locations to simultaneously access and operate
different interface cards contained in the same chassis without affecting one
another.
Highly Modular. Our hardware products consist of stackable and portable
chassis which can be configured with any mix of up to 16 of our optical and
electrical interface cards. This modular design allows our customers to quickly
and easily create complex and custom test configurations. Our systems also allow
for the convenient integration of additional network technologies into existing
systems through the addition of specific interface cards.
Flexibility. Our customers can easily reconfigure our systems to address
changing technologies, protocols and applications without changing system
hardware or replacing interface cards. For example, a customer can reconfigure
our systems through software changes downloaded from our Web site. A customer
might download these changes to test new network protocols or types of
equipment.
Ease of Use. We have designed our systems so that users can install and
operate them with minimal training and set-up. Our systems are easy to use and
offer our customers a wide range of readily accessible pre-designed test
configurations. These tests include industry standard and application-specific
tests. Users can easily configure and operate our systems to generate and
analyze data traffic over any combination of interface cards or ports through
our graphical user interface that features a familiar Microsoft Windows
point-and-click environment. Our systems also support the commonly used tool
command programming language, or Tcl, software which allows users to create
custom and automated testing applications tailored to meet their specific
requirements.
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STRATEGY
Our objective is to be the industry leader in multi-port traffic
generation and performance analysis systems for the high-speed data
communications market, including the Internet infrastructure and local,
metropolitan and wide area networks. Key elements of our strategy to achieve
this objective include the following:
Continue to Expand into High-Growth Markets. We plan to further expand
into high-growth markets such as advanced optical networks that route data
traffic throughout the Internet and emerging networks that allow high-speed
access to the Internet, known as broadband access networks. We believe that we
can leverage our core competencies in high speed transmission protocols into
leadership positions as these technologies are extended across multiple markets
and applications.
Maintain Focus on Technology Leadership. We intend to continue to focus
on research and development in order to maintain our technology leadership
position and to offer performance analysis systems that address new and evolving
network technologies. We intend to maintain an active role in industry standards
committees such as the Internet Engineering Task Force and to continue our
active involvement in industry forums such as the Gigabit Ethernet Alliance. We
also plan to continue to work closely with customers who are developing emerging
network technologies, including Cisco Systems, Extreme Networks, Alteon
WebSystems, Nortel Networks and Juniper Networks, as well as leading edge
start-up companies, to enhance the performance and functionality of our existing
systems and to design future products that specifically address our customers'
needs as they evolve.
Expand and Further Penetrate Customer Base. We plan to strengthen and
further penetrate our existing customer relationships, particularly those with
network equipment manufacturers and Internet and network service providers, and
to pursue sales to new customers. For example, AT&T and UUNET Technologies
currently use our systems to verify the performance and reliability of network
equipment before deployment. We believe we have the potential to increase sales
to Internet and network service providers as they increasingly require
performance measurement and analysis systems that allow them to monitor the
in-service performance of their networks. We plan to strengthen our customer
relationships and to expand our customer base by:
- developing and offering new and innovative systems that meet our
existing and potential customers' needs;
- expanding our sales and marketing efforts; and
- building our reputation and brand name recognition.
We also plan to continue our focus on customer support by maintaining and
expanding the capabilities of our highly qualified and specialized internal
customer engineering group. This group of technically trained professionals
provides our customers with extensive support and assistance, including
assistance with customized requirements and on-site training and support.
Expand International Market Presence. We plan to pursue sales in key
international markets, including Europe and the Asia Pacific region. In order to
pursue sales in these markets, we intend to continue to develop and expand our
relationships with key customers and distributors. In March 2000, we established
a European sales support subsidiary based in the United Kingdom.
PRODUCTS
Our product line is made up of network traffic generation and performance
analysis systems that simulate large-scale networks. Our systems consist of
interchangeable optical and electrical interface cards, multi-slot chassis,
which are metal cases that incorporate a computer, a power supply and a
backplane, which is a hardware component used to connect the interface cards to
the computer. The interface cards generate, receive and analyze data traffic.
The software for these systems includes management software and
application-specific test suites.
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<PAGE> 41
CHASSIS
Our primary chassis, the IXIA 1600 and the IXIA 400, are highly scalable
and can be configured with any combination of optical and electrical interface
cards. Any mix of up to 256 IXIA 1600s and IXIA 400s can be linked together and
time-synchronized to support a diverse range of complex test configurations. The
IXIA 1600 is a 19-inch rack-mountable 16-slot chassis, and the IXIA 400 is a
compact portable four-slot chassis.
INTERFACE CARDS
We offer a variety of optical and electrical interface cards ranging from
Packet Over SONET OC-48c, OC-12c and OC-3c to Gigabit Ethernet and 10/100
megabits per second Ethernet. Our Packet Over SONET interface cards can also be
used worldwide in synchronous digital hierarchy, or SDH, networks.
Each one of our interface cards contains from one to four independent
traffic generation and analysis ports. These ports operate at wire speed, the
maximum rate that data traffic can be transmitted over the network. Each port on
each interface card has a unique transmit stream engine that is used to generate
packets of information and a real-time receive analysis engine capable of
analyzing the packets as they are being received. The transmit stream engine
generates millions of Internet protocol data packets at wire speed that are
transmitted through the network and received by the analysis engine. The
analysis engine then measures throughput, latency, loss and jitter, and checks
data integrity and packet sequence on a packet-by-packet basis. These
measurements can be performed on different types of data traffic such as Web
traffic and Voice over IP. In addition, our systems measure the effectiveness of
networks in prioritizing different types of traffic.
The following tables describe our optical and electrical interface cards.
In the "Optical Interface Cards" table, the "Fiber Type" column distinguishes
between optical interface cards capable of transmitting data traffic over
distances typically longer than one kilometer, known as single-mode cards, and
optical interface cards used for transmitting data traffic over distances
typically shorter than one kilometer, known as multi-mode cards. In both the
"Optical Interface Cards" table and the "Electrical Interface Cards" table, the
"Transmission Speed" column identifies the speed at which data is sent out of
and received by each port on the interface cards, and the "Number of Ports per
Interface Card" column identifies how many ports are contained on a single card.
OPTICAL INTERFACE CARDS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
NUMBER OF PORTS
PRODUCT FIBER TYPE TRANSMISSION SPEED PER INTERFACE CARD
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Packet Over SONET/SDH
-----------------------------------------------------------------------------------------------------
OC-12c/3c Multi-mode 622/155 Mbps 2
-----------------------------------------------------------------------------------------------------
OC-12cSM/3cSM Single-mode 622/155 Mbps 2
-----------------------------------------------------------------------------------------------------
OC-48c Single-mode 2.488 Gbps 1
-----------------------------------------------------------------------------------------------------
Gigabit Ethernet
-----------------------------------------------------------------------------------------------------
1000LX3 Single-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000LX Single-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000SX3 Multi-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000SX Multi-mode 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
1000GBIC (with modular Multi-mode 1.25 Gbps 2
fiber-type transceivers) Single-mode
-----------------------------------------------------------------------------------------------------
Ethernet and Fast Ethernet
-----------------------------------------------------------------------------------------------------
100FX Multi-mode 100 Mbps 4
-----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 42
ELECTRICAL INTERFACE CARDS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
NUMBER OF PORTS
PRODUCT TRANSMISSION SPEED PER INTERFACE CARD
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
Gigabit Ethernet
-----------------------------------------------------------------------------------------------------
1000T 1.25 Gbps 2
-----------------------------------------------------------------------------------------------------
Ethernet and Fast Ethernet
-----------------------------------------------------------------------------------------------------
100TX3 10/100 Mbps 4
-----------------------------------------------------------------------------------------------------
100TX 10/100 Mbps 4
-----------------------------------------------------------------------------------------------------
</TABLE>
SYSTEM MANAGEMENT SOFTWARE
Our systems are managed through graphical user interfaces which consist
of two proprietary applications and the commonly used tool command language, or
Tcl, programming environment. Our graphical user interfaces allow users to
configure our hardware chassis and interface cards in order to generate and
analyze traffic. In addition, our graphical user interfaces allow our users to
execute a variety of industry standard and application-specific tests written by
us. Tcl allows users to create custom and automated test applications tailored
to meet their specific requirements.
APPLICATION SPECIFIC TEST SUITES
We have a large suite of software applications that measure equipment and
network performance, including throughput, latency, loss, jitter, integrity
checking and sequence checking. These measurements allow network equipment
manufacturers and Internet and network service providers to evaluate the
performance of the equipment before and after the equipment is deployed in a
network. These performance measurements also allow network users and Internet
and network service providers to validate network performance and to verify that
the requirements of service level agreements, or SLAs, are being met. Our
application-specific test suites include the following:
Internet Backbone Router Tester. Our Internet Backbone Router Tester
offers a complete system for validation of advanced routers that route data
traffic throughout the Internet and are being deployed by Internet service
providers. It provides the ability to generate and receive data traffic at wire
speed. The Internet Backbone Router Tester provides an integrated mix of Packet
Over SONET and Gigabit Ethernet interfaces. Utilizing routing protocol emulation
software based on BGP-4, a standard industry routing protocol, our tester can
simulate the data traffic of millions of users to automatically configure the
routing table within a single router or within a network of routers. Our system
thereby provides performance and reliability testing of the router or network of
routers in realistic conditions.
Cable Modem Automated Test Suite. Our Cable Modem Automated Test Suite
addresses many of the verification requirements of cable modem and cable modem
termination system vendors to obtain Data Over Cable Service Interface
Specifications, or DOCSIS, certification for their equipment from CableLabs, a
cable industry organization, and from EuroDOCSIS, the European cable standards
organization.
Benchmarking Methodology for Network Interconnect Devices (RFC-2544) Test
Suite. Our RFC-2544 Test Suite offers the complete benchmarking validation tests
defined by the Internet Engineering Task Force's Request for Comments 2544.
These tests include throughput, latency and loss tests. These tests can be
readily applied to any device or network utilizing any mix of Packet Over SONET,
Gigabit Ethernet or 10/100 megabits per second Ethernet interfaces. These tests
provide the basic industry accepted benchmarking metrics to qualify a router or
switch before network deployment.
LAN Switching Devices (RFC-2285) Test Suite. Our RFC-2285 Test Suite
complements our RFC-2544 Test Suite by offering a number of additional tests to
qualify the behavior of switching devices for local area networks. These tests
can be readily applied to any device or network utilizing any mix of Gigabit
Ethernet and 10/100 megabits per second Ethernet interfaces.
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<PAGE> 43
Quality of Service (QoS) Test Suite. Our Quality of Service, or QoS, Test
Suite offers a comprehensive set of tools designed to verify how effectively a
router distinguishes between different types of data traffic and then routes the
traffic through the network based on those distinctions. The QoS routing
technique assigns a higher priority to some traffic types and a lower priority
to other traffic types, which enables a user to determine the quality of service
of a given traffic type. This test suite supports many combinations of Packet
Over SONET, Gigabit Ethernet and 10/100 megabits per second Ethernet interfaces.
IP Multicast Test Suite. IP Multicast is a protocol that allows a single
computer to distribute data traffic to multiple recipients. For example, a
single Web server could transmit an audio or video broadcast to millions of
users simultaneously. Our IP Multicast Test Suite provides a comprehensive set
of tests designed to evaluate the behavior of Internet protocol multicast
routers, switches and networks. This test suite supports Packet Over SONET,
Gigabit Ethernet and 10/100 megabits per second Ethernet interfaces.
PRODUCTS IN DEVELOPMENT
We are currently developing a number of new products which we plan to
introduce to the market within the next several months. These products include:
Packet Over SONET OC-192c. Our OC-192c Packet Over SONET interface card
will operate at a transmission speed of 9.952 gigabits per second.
IXIA 100 Quality of Service (QoS) Performance Tester. The IXIA 100
Quality of Service Performance Tester will feature an integrated global
positioning system, or GPS, receiver that provides a precise time stamp for each
packet carried by the network. We expect Internet service providers will deploy
IXIA 100's in multiple locations in their networks. Although IXIA 100 units may
be at various geographic locations, they can be time synchronized by utilizing
the GPS-provided time stamp. By doing so, they will be able to accurately
validate network performance and measure the quality of service parameters
specified in service level agreements with their customers.
Server Load Balancer Test Suite. The Server Load Balancer Test Suite will
measure the performance of Web server load balancers which distribute traffic
among multiple Web servers.
We may delay or cancel our introduction of these, or any other, new
products to the market as a result of a number of factors, some of which are
beyond our control. For more information regarding these factors, see "Risk
Factors -- If we are unable to successfully introduce new products to keep pace
with rapid technological changes that characterize our market, our results of
operations will be significantly harmed" on page 8 and "Business -- Research and
Development" on page 43.
TECHNOLOGY
The design of all of our systems requires a combination of sophisticated
technical competencies, including design of field programmable gate arrays, or
FPGA's, which are integrated circuits that can be repeatedly reprogrammed to
perform different sets of functions as required. The design of all of our
systems also requires high-speed digital hardware design, software engineering
and optical and mechanical engineering. We have built an organization of
professional staff with skills in all of these areas. The integration of these
technical competencies enables us to design and manufacture performance analysis
systems with optical and electrical interfaces and easy-to-use user interface
software meeting the needs of our customers.
Complex Logic Design. Our systems use field programmable gate arrays that
are programmed by the host personal computer and therefore can be reconfigured
for different applications. Our newest products have clock frequencies, which
are the timing signals that synchronize all components within our system, of up
to 200 megahertz, and logic densities, which are the number of individual
switching components, or gates, of up to one million gates per chip. Our
customers can download new features and enhancements from our Web site using a
Web browser that runs on our system, thereby allowing rapid
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<PAGE> 44
updates of the system. Almost all of our logic is designed in VHDL hardware
description language, which is a unique programming language tailored to the
development of logic chips. This language enables the easy migration of the
hardware design to application specific integrated circuits as volumes warrant.
We develop VHDL code in a modular fashion for reuse in logic design, which
comprises a critical portion of our intellectual property. This reusable
technology allows us to reduce the time-to-market for our new and enhanced
products.
Software Technology. We devote substantial engineering resources to the
development of software technology for use in our product lines. We have
developed software to control our systems, analyze data collected by our
systems, and monitor, maintain and self-test our hardware and field programmable
gate array subsystems. A majority of our software technology and expertise is
focused on the use of object-oriented development techniques to design software
subsystems that can be reused across multiple product lines. These objects are
client and server independent allowing for distributed network applications.
This software architecture allows all of the software tools developed for our
existing products to be utilized in all of our new products with very little
modification. Another important component of our software technology is our
graphical user interface design. Customer experience with our test products has
enabled us to design a simple yet effective method to display complex
configurations in clear and concise graphical user interfaces for intuitive use
by engineers.
CUSTOMERS
During the period from our inception in May 1997 through June 30, 2000,
we shipped our systems to over 170 customers. No customer other than Cisco
Systems accounted for more than 10% of our net revenues in 1999 or the six
months ended June 30, 2000. Our five largest customers collectively accounted
for 51.0% of our net revenues in 1999 and 53.1% of our net revenues in the six
months ended June 30, 2000.
We have no long term contracts with any of our customers, and they may
reduce or discontinue their purchases at any time.
Customers who purchased more than $100,000 of our products during the
12-month period ended June 30, 2000 include:
<TABLE>
<CAPTION>
<S> <C> <C>
3COM Ericsson NBase Communications
Alcatel Extreme Networks Network Peripherals
Alidian Networks Force 10 Networks Nishan Systems
Allied Telesyn International GTE Nokia
Alteon WebSystems Hewlett Packard Nortel Networks
AT&T IBM Northchurch
Bank of America Intel ONI Systems
Broadband Access Systems IronBridge Networks Redback Networks
Broadcom Juniper Networks River Delta Networks
Cabletron Systems Lockheed Martin TeraBeam Networks
Cisco Systems Lucent Technologies Telseon
Compaq Computer MCI TurboNet Communications
Comverse MMC Networks UUNET Technologies
Ellacoya Networks Motorola
</TABLE>
COMPETITION
The market for network performance measurement and analysis systems for
use in the high-speed data communications industry is highly competitive, and we
expect this competition to increase in the future. We currently compete with
test equipment manufacturers such as Agilent Technologies, Netcom Systems and
Adtech. Netcom Systems and Adtech are both within the Spirent group of
companies. We also compete with start-up companies, such as Antara, which are
focused on network performance
40
<PAGE> 45
measurement. In addition, we compete with network equipment manufacturers that
have developed or may develop in-house performance analysis products for their
own use or for sale to others.
We believe that the principal competitive factors in our market include:
- timeliness of new product introductions;
- product quality, reliability and performance;
- ease of installation, integration and use;
- breadth of product offerings and features;
- price and overall cost of product ownership;
- customer service and technical support; and
- company reputation and size.
We believe that we compete favorably in the key competitive factors that
impact our markets, including technical expertise, new product introductions and
product features, services and support. We intend to remain competitive through
ongoing research and development efforts to enhance existing systems and to
develop new systems. We will also seek to expand our market presence through
marketing and sales efforts. However, our market is still evolving and we may
not be able to compete successfully against current or future competitors.
We expect competition to increase significantly from existing providers
of network performance measurement and analysis products and from companies that
may enter our existing or future markets. These companies may develop similar or
substitute solutions that may be more cost-effective or provide better
performance or functionality than our systems. Also, as we broaden our product
offerings, we may move into new markets in which we will have to compete against
companies already established in those markets. Some of our existing and
potential competitors have longer operating histories, significantly greater
financial, marketing, service, support, technical and other resources,
significantly greater name recognition and a larger installed base of customers
than we do. In addition, many of our competitors have well established
relationships with our current and potential customers and have extensive
knowledge of our industry. It is possible that new competitors or alliances
among competitors will emerge and rapidly acquire market share. Moreover, our
competitors may consolidate with each other, or with other companies, giving
them even greater capabilities with which to compete against us.
To be successful, we must continue to respond promptly and effectively to
the challenges of changing customer requirements, technological advances and
competitors' innovations. Accordingly, we cannot predict what our relative
competitive position will be as the market evolves for network performance
measurement and analysis systems. For more information regarding some of the
risks of competition, see "Risk Factors -- Competition in our market could
significantly harm our results of operations" on page 10.
SALES, MARKETING AND TECHNICAL SUPPORT
Sales. Our direct sales force and manufacturers' representatives market
and sell our systems primarily in the United States. Our distributors market and
sell our systems primarily outside of the United States. Our net revenues from
international product shipments were $565,000 in 1998, $3.2 million in 1999 and
$3.9 million in the six months ended June 30, 2000. Our direct sales force
maintains close contact with our customers and provides technical support to our
manufacturers' representatives and distributors.
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<PAGE> 46
Marketing. We have a number of marketing programs to support the sale and
distribution of our systems and to inform existing and potential customers and
our manufacturers' representatives and distributors about the capabilities and
benefits of our systems. Our marketing efforts also include promoting our
business in the following ways:
- participating in industry trade shows and technical conferences;
- advertising in trade journals; and
- communicating through our corporate Web site.
Technical Support. We maintain a technically knowledgeable and responsive
customer service and support staff that is critical to our development of
long-term customer relationships. This highly qualified and specialized internal
customer engineering group:
- offers our customers customized solutions for their performance
validation needs;
- develops custom applications at our company headquarters;
- can be deployed to customer sites on short notice; and
- provides our customers with the training necessary to optimally utilize
our systems.
MANUFACTURING
Our manufacturing operations consist primarily of materials planning and
procurement, quality control, logistics, final assembly and testing and
distribution. We outsource the manufacture and assembly of printed circuit
boards to third party contract manufacturers and assembly companies. This
manufacturing process enables us to operate without substantial space and
personnel dedicated to manufacturing operations. As a result, we can conserve a
significant portion of the working capital and capital expenditures that would
be required for funding inventory and manufacturing processes.
We are dependent upon sole or limited source suppliers for key components
and parts used in our systems, including field programmable gate arrays, chips,
oscillators and optical modules. We and our contract manufacturers purchase
these components through purchase orders and have no guaranteed or long-term
supply arrangements with these suppliers. In addition, the availability of many
of these components is dependent in part on our ability and the ability of our
contract manufacturers and assembly companies to provide suppliers with accurate
forecasts of future requirements. Any extended interruption in the supply of any
of the key components currently obtained from a sole or limited source, delay in
transitioning to a replacement supplier's product or replacement component into
our systems, could disrupt our operations and significantly harm our business in
any given period. For more information regarding risks associated with our
contract manufacturing arrangements, see "Risk Factors -- Some key components in
our products come from sole or limited sources of supply, which exposes us to
potential supply shortages that could disrupt the manufacture and sale of our
products" on page 10 and "Risk Factors -- Failure by our contract manufacturers
to provide us with adequate supplies of high-quality products could harm our
revenues, results of operations, competitive position and reputation" on page
13.
Lead times for materials and components ordered by us and by our contract
manufacturers vary and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. We and our contract
manufacturers acquire materials, complete standard subassemblies and assemble
fully-configured systems based on sales forecasts and historical purchasing
patterns. If orders do not match forecasts or substantially deviate from
historical patterns, we and our contract manufacturers may have excess or
inadequate inventory of materials and components as discussed in "Risk
Factors -- If we fail to accurately forecast our manufacturing requirements, we
could incur additional costs and experience manufacturing delays" on page 12.
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RESEARCH AND DEVELOPMENT
We believe that research and development is critical to our business. We
focus our research and development efforts on developing new products and on
further enhancing existing products. Our development efforts include
anticipating and addressing the performance analysis needs of network equipment
manufacturers, Internet and network service providers, communications chip
manufacturers and network users and focusing on emerging high growth network
technologies.
Our future success depends on our ability to continue to enhance our
existing products and to develop products that address the needs of our
customers. We closely monitor changing customer needs by communicating and
working directly with our customers and distributors. We also receive input from
active participation in industry groups responsible for establishing technical
standards.
Development schedules for technology products are inherently difficult to
predict, and we cannot assure you that we will introduce any proposed new
products in a timely fashion. Also, we cannot assure you that our product
development efforts will result in commercially successful products or that our
products will not contain software errors or other performance problems or be
rendered obsolete by changing technology or new product announcements by other
companies. For information regarding some of the risks associated with our
research and development, see "Risk Factors -- If we are unable to successfully
introduce new products to keep pace with the rapid technological changes that
characterize our market, our results of operations will be significantly harmed"
on page 8.
We plan to continue to make significant investments in research and
development. Our research and development expenditures, excluding stock-based
compensation, were $513,000 in 1997, $1.6 million in 1998, $2.8 million in 1999
and $2.7 million in the six months ended June 30, 2000.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our ability
to protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to establish and protect our intellectual
property. We also expect to rely on patents to protect some of our proprietary
technology. We have filed applications for two U.S. patents but cannot assure
you that the applications will issue into patents or that the patents will be
upheld if they are issued. We also cannot assure you that such patents, if
issued, will be effective in protecting our proprietary technology. We have
registered our Ixia logo and other Ixia trademarks in the United States and have
filed for registration of one of our trademarks in other jurisdictions. We are
also in the process of filing applications for registration of additional Ixia
trademarks.
We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and further limit the disclosure and use of other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain or use technology that we regard
as proprietary. We cannot assure you that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are similar or superior to our technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do
the laws of the United States. Any infringement of our proprietary rights could
result in significant litigation costs, and any failure to adequately protect
our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of competitive advantage and decreased
revenues. Litigation may be necessary to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Litigation of this type could result in substantial costs and diversion
of resources and could significantly harm our business.
The data communications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important
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<PAGE> 48
to our business. Any claims asserting that our systems infringe or may infringe
proprietary rights of third parties, if determined adversely to us, could
significantly harm our business.
For information regarding some of the risks associated with our
intellectual property and proprietary rights, see "Risk Factors -- Our failure
to protect our intellectual property may significantly harm our results of
operations and reputation" on page 14 and "Risk Factors -- Claims that we
infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products" on page 15.
LEGAL PROCEEDINGS
From time to time, we may be subject to disputes and potential claims by
third parties that are incidental to the conduct of our business. Additionally,
our employees may be subject to disputes and potential claims by third parties
with whom they have a prior employment relationship. On June 21, 2000, one of
our competitors, Netcom Systems, filed an action in the Los Angeles County
Superior Court against Eran Karoly, our Vice President, Marketing and a former
employee of Netcom Systems. In the action, Netcom Systems alleges that Mr.
Karoly misappropriated trade secrets and wrongfully solicited employees of
Netcom Systems. Netcom Systems is seeking, among other things, recovery of
damages and an injunction preventing Mr. Karoly and any persons acting in
concert with him from disclosing or using its alleged trade secrets, soliciting
its employees and performing business development or marketing work for Ixia for
a period of 24 months. We were not named as a defendant in the action but are
mentioned in the pleadings as the current employer of Mr. Karoly and as the
competitor for whose benefit the alleged wrongful conduct has occurred. On June
27, 2000, the court denied Netcom Systems' application for a temporary
restraining order. On August 29, 2000, Netcom Systems' filed another application
for a temporary restraining order against Mr. Karoly. The hearing on Netcom
Systems' application is scheduled to occur on September 7, 2000. Mr. Karoly
denies Netcom Systems' allegations and, based on our preliminary investigation,
we believe that he has substantial defenses. We cannot assure you, however, that
the results of the claims, including the costs of litigation, will not harm our
results of operations or competitive position.
FACILITIES
Our corporate headquarters are located in Calabasas, California, where we
lease an approximately 50,000 square foot facility which houses our research and
development, sales and marketing, finance and administration and manufacturing
operations. The lease expires in May 2007. We also lease office space for our
sales offices in Santa Clara, California and in the United Kingdom. We believe
that our current facilities will be adequate to meet our needs for at least the
next 12 months, and that we will be able to obtain additional space when and as
needed on acceptable terms.
EMPLOYEES
As of August 15, 2000, we had 110 full-time employees. We also from time
to time hire temporary and part-time employees and independent contractors. Our
future performance depends, to a significant degree, on our continued ability to
attract and retain highly skilled and qualified technical, sales and marketing
and senior management personnel. Our employees are not represented by any labor
unions. We consider our relations with our employees to be good.
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<PAGE> 49
MANAGEMENT
The executive officers, directors and key employees of Ixia as of August
15, 2000 and their positions with Ixia and ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Errol Ginsberg...................... 44 President, Chief Executive Officer
and Director
Thomas B. Miller.................... 45 Chief Financial Officer
Paul Mallinder...................... 42 Vice President, Worldwide Sales
Eran Karoly......................... 37 Vice President, Marketing
Joseph A. Noble..................... 49 Vice President, North American Sales
Mark MacWhirter..................... 42 Vice President, Software Development
Cliff Hannel........................ 38 Senior Director of Engineering
Joel Weissberger.................... 50 Director of Hardware Engineering
Walid Chamoun....................... 38 Director of Manufacturing
Jean-Claude Asscher................. 72 Chairman of the Board
Robert W. Bass...................... 54 Director
Howard Oringer...................... 58 Director
Jon F. Rager........................ 60 Director
</TABLE>
Mr. Asscher, Mr. Bass and Mr. Oringer are members of our audit committee.
Mr. Oringer and Mr. Rager are members of our compensation committee.
Mr. Ginsberg has served as our Chief Executive Officer since September
2000, as a director since May 1997 and as our President since June 1997. From
February 1996 to March 1997, Mr. Ginsberg served as Vice President, Engineering
of NetVantage, Inc., a network equipment manufacturer. From November 1994 to
February 1996, he served as an engineering consultant to Netcom Systems, Inc., a
test equipment manufacturer.
Mr. Miller has served as our Chief Financial Officer since March 2000.
From March 1997 to October 1999, Mr. Miller was employed by CoCensys, a biotech
research and development company, where he served as Director of Finance and
Controller. From September 1996 to February 1997, Mr. Miller served as a
consultant to various companies. From May 1995 to August 1996, he served as
Controller, Financial Operations of Emulex Corporation, a manufacturer of
network products.
Mr. Mallinder joined Ixia as Director of Marketing in October 1998. He
served as Vice President, Sales and Marketing from February 1999 to April 2000
when he assumed his present position as Vice President, Worldwide Sales. From
June 1998 to September 1998, Mr. Mallinder served as Director of Product
Marketing for OneBox Networks, a network equipment manufacturer. From February
1989 to January 1998, Mr. Mallinder was employed by ECI Telematics, a network
equipment manufacturer, and its predecessor, where he served as a network
consultant from January 1992 to May 1996, as Director, Product Marketing from
May 1996 to January 1998 and as Associate Vice President of Marketing from
January 1998 to May 1998.
Mr. Karoly joined Ixia as Vice President, Marketing in April 2000. From
October 1998 until March 2000, he served as Product Marketing Manager for Netcom
Systems. From November 1995 to September 1998, Mr. Karoly was employed by ECI
Telematics where he served as Product Marketing Manager from November 1995 to
January 1998 and as Director, Product Marketing from January 1998 to September
1998. From October 1994 until October 1995, Mr. Karoly served as Project Manager
for ECI Telecom, a network equipment manufacturer.
Mr. Noble joined Ixia as Vice President, Sales in March 1999. He assumed
his present position as Vice President, North American Sales in April 2000. From
January 1998 to March 1999, Mr. Noble served as Regional Sales Manager, Southern
Region, for Box Hill Systems, a provider of data storage and storage area
network systems. From March 1991 to January 1998, Mr. Noble served as Marketing
45
<PAGE> 50
Director of Lampi LLC, a lighting manufacturer, where he was responsible for
worldwide sales and marketing.
Mr. MacWhirter joined Ixia as Vice President, Software Development in
August 1999. From December 1994 to August 1999, Mr. MacWhirter served as
President of LearningCurve, Inc., a software consulting company. From August
1997 to August 1999, Mr. MacWhirter served as a consultant to Ixia in his
capacity as President of LearningCurve.
Mr. Hannel joined Ixia as Senior Director of Engineering in May 2000.
From August 1996 to May 2000, he served as Vice President, Product Development
of Internet Dynamics, a developer of network security software. From May 1995 to
August 1996, Mr. Hannel served as a Senior Project Manager for Alpharel, Inc., a
developer of client and server document management systems.
Mr. Weissberger has served as our Director of Hardware Engineering since
June 1997. From April 1996 to June 1997, Mr. Weissberger served as an
engineering consultant for NetVantage, Inc. From May 1990 to April 1996, he
served as a contracting engineer for Jet Propulsion Laboratory.
Mr. Chamoun joined Ixia as Director of Manufacturing in February 2000.
From February 1991 to November 1999, Mr. Chamoun was employed by ACT Networks, a
network equipment manufacturer, where he served as Manufacturing Manager from
July 1995 to June 1997, as Director of Manufacturing from June 1997 to November
1998 and as Vice President of Manufacturing from November 1998 to November 1999.
Mr. Asscher has been a director of Ixia since May 1997 and Chairman of
the Board since June 1997. He has been the President and principal shareholder
of Tekelec-Airtronic, S.A., a French electronics company, since he founded that
company in 1961. Mr. Asscher is Chairman of the Board of Tekelec, a
telecommunications equipment manufacturer.
Mr. Bass has been a director of Ixia since August 2000. Since December
1991, Mr. Bass has been employed by Xircom, Inc., a provider of mobile
information access solutions, where he has most recently served as Vice
President, Worldwide Operations from October 1995 to January 1997 and as
Executive Vice President, Worldwide Operations since January 1997.
Mr. Oringer has been a director of Ixia since May 1997. Since November
1994, Mr. Oringer has served as Managing Director of Communications Capital
Group, a business consulting firm. From August 1996 until December 1996, Mr.
Oringer also served as a consultant to Tekelec. Mr. Oringer also serves as a
member of the Board of Directors of Tekelec, Verilink Corporation, Digital
Microwave Corporation and Vertel Corp.
Mr. Rager has been a director of Ixia since May 1997 and served as our
Chief Financial Officer from June 1997 until March 2000. Mr. Rager also serves
as a director of Tekelec. Since 1976, Mr. Rager has been a practicing accountant
with, and President of, Rager Bell Doskocil & Meyer CPAs and its predecessors.
There is no family relationship between any of our directors or executive
officers and any of our other directors or executive officers.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our bylaws require that our board of directors consist of three to five
directors. The number of directors is currently fixed at five. Directors are
elected annually and serve until their successors are duly elected and qualified
or until their earlier resignation, removal or death. We expect that our bylaws
will be amended to provide for our board of directors to consist of four to
seven directors.
The audit committee consists of Jean-Claude Asscher, committee chairman,
Robert W. Bass and Howard Oringer. The audit committee will review our records
and affairs to determine our financial condition, oversees the adequacy of our
system of internal accounting controls and reviews our accounting methods.
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<PAGE> 51
The compensation committee consists of Jon F. Rager, committee chairman,
and Howard Oringer. The compensation committee determines compensation for our
officers and administers our stock option and stock purchase plans.
DIRECTOR COMPENSATION
Employees of Ixia do not receive any compensation for serving on the
board of directors. Non-employee directors receive an annual retainer of $3,000
for serving on the Board or $6,000 if they are serving as Chairman of the Board.
All of our directors may be reimbursed for reasonable travel expenses
incurred in attending board meetings. Our non-employee directors will also
participate in our 2000 director stock option plan. For more information
regarding this plan, see "Management -- Benefit Plans -- Director Stock Option
Plan" on page 51.
On August 2, 2000, Mr. Bass received warrants to purchase 80,000 shares
of common stock with an exercise price of $7.00 per share. The warrant vests in
four equal installments on a quarterly basis commencing September 30, 2000.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth selected information for 1999 concerning
compensation paid, or accrued by Ixia, to or on behalf of our President, each of
our other two most highly compensated executive officers for 1999 whose
aggregate salary and bonus exceeded $100,000 and one additional executive
officer as of December 31, 1999:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#)
--------------------------- ------------ -------- -------------------
<S> <C> <C> <C>
Errol Ginsberg.................................... $192,304 $290,000 --
President
Paul Mallinder(2)................................. 153,466 207,000 300,000
Vice President, Worldwide Sales
Joseph A. Noble(3)................................ 229,376(4) -- 450,000
Vice President, North American Sales
Mark MacWhirter(5)................................ -- -- --
Vice President, Software Development
</TABLE>
------------
(1) Includes amounts, if any, deferred at the election of the named officer
under our 401(k) Plan.
(2) Mr. Mallinder became an executive officer in February 1999 and served as
Vice President, Sales and Marketing from February 1999 to April 2000.
(3) Mr. Noble commenced his employment with and became an executive officer of
Ixia in March 1999 and served as Vice President, Sales from March 1999 to
April 2000.
(4) Includes sales commissions of $168,944 in lieu of participation in our bonus
plans.
(5) Mr. MacWhirter commenced his employment with and became an executive officer
of Ixia in August 1999 at an annual salary rate of $184,000.
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<PAGE> 52
OPTION GRANTS IN 1999
The following table sets forth selected information concerning stock
option grants in 1999 to the executive officers named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
POTENTIAL REALIZATION
INDIVIDUAL GRANTS(1) VALUE AT
---------------------------------------------------- ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED (#) IN 1999(2) ($/SHARE)(3) DATE 5% 10%
---- ----------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Errol Ginsberg........... -- -- -- -- -- --
Paul Mallinder........... 75,000 2.3% $0.17 01/10/09 $1,343,838 $ 2,139,838
225,000 6.8 0.28 05/15/09 4,031,514 6,419,513
Joseph A. Noble.......... 450,000 13.6 0.23 03/31/09 8,063,028 12,839,025
Mark MacWhirter.......... -- -- -- -- -- --
</TABLE>
------------
(1) The options in this table were granted under our 1997 stock option plan and
vest and become exercisable as to 25% of the shares covered thereby on the
one-year anniversary of the date of grant and as to the remaining 75% of the
shares covered thereby in 12 equal quarterly installments beginning on the
last day of the first full calendar quarter following the one-year
anniversary of the date of grant. In the event of a change in control prior
to March 31, 2001, Mr. Noble's options will vest as to 50% of the shares as
to which the options are then unvested. The options were granted for terms
of ten years subject to earlier termination under specified circumstances
relating to termination of employment.
(2) In 1999, we granted options to employees to purchase an aggregate of
3,300,000 shares.
(3) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant, as determined by the board of directors.
(4) Assumes a per share fair market value equal to the assumed initial public
offering price of $11.00. The dollar amounts under these columns represent
the potential realizable value of each grant assuming that the market value
of our stock appreciates from the date of grant to the expiration of the
option at annualized rates of 5% and 10%. These assumed rates of
appreciation have been specified by the Securities and Exchange Commission
for illustrative purposes only and are not intended to forecast future
financial performance or possible future appreciation in the price of our
stock. The actual amount the executive officer may realize will depend on
the extent to which the stock price exceeds the exercise price of the
options on the date the option is exercised.
AGGREGATE OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
The executive officers named in the Summary Compensation Table did not
exercise any stock options in 1999. The following table sets forth selected
information concerning unexercised options held as of December 31, 1999 by those
executive officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/99 OPTIONS AT 12/31/99($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Errol Ginsberg............................. -- -- -- --
Paul Mallinder............................. 56,250 468,750 $609,373 $5,051,874
Joseph A. Noble............................ -- 450,000 -- 4,845,015
Mark MacWhirter............................ 75,000 300,000 821,250 3,215,010
</TABLE>
------------
(1) Assumes a per share fair market value equal to the assumed initial public
offering price of $11.00 per share.
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<PAGE> 53
CHANGE-IN-CONTROL ARRANGEMENTS
Under our officer severance plan, executive officers are entitled to
receive severance benefits following the termination of their employment if the
termination is non-temporary, involuntary and without cause. In addition, if we
experience a "change in control," as that term is defined by the plan, an
eligible officer will receive benefits under the severance plan if the officer
terminates his or her employment either for any reason within one year following
the change in control or for "good reason," as that term is defined by the plan,
within two years following the change in control. Good reason includes the
assignment to the officer of duties significantly inconsistent with his or her
prior position or a reduction in his or her compensation or benefits.
Each eligible officer's severance pay equals the product of:
- his or her highest annual compensation (i.e., base salary plus bonus);
and
- a percentage determined in accordance with the following table:
<TABLE>
<CAPTION>
HIGHEST OFFICE HELD AT OR PRIOR TO TERMINATION
--------------------------------------------------------------------------------
CHIEF
EXECUTIVE
SENIOR VICE PRESIDENT/ CHIEF FINANCIAL OFFICER/ OFFICER/
LENGTH OF EMPLOYMENT PERIOD VICE PRESIDENT EXECUTIVE VICE PRESIDENT CHIEF OPERATING OFFICER PRESIDENT
--------------------------- -------------- ------------------------ ------------------------ ---------
<S> <C> <C> <C> <C>
Less than One Year................. 50% 55% 60% 65%
Between One and Three Years........ 75% 80% 85% 100%
Between Three and Five Years....... 100% 105% 110% 200%
More than Five Years............... 125% 130% 140% 300%
</TABLE>
Based on these factors, the amounts that would be payable under the
severance plan to our current executive officers if their employment were
terminated as of August 15, 2000 under circumstances entitling them to severance
benefits under the severance plan would be as follows: Mr. Ginsberg --
$1,080,000, Mr. Mallinder -- $305,250, Mr. Noble -- $189,708 and Mr.
MacWhirter -- $151,424. Severance benefits also include the continuation, at our
expense, of health care insurance for a period of 18 months following
termination of employment.
In connection with the commencement of Joseph A. Noble's employment with
us in March 1999, we granted to him stock options to purchase 450,000 shares of
our common stock. The stock options vest over four years provided Mr. Noble is
employed by us on the vesting dates. The options will also vest as to one-half
of the shares as to which they are then unvested in the event that more than 80%
of our common stock outstanding as of March 1999 is sold to a third party or we
sell all or substantially all of our assets or merge or consolidate with another
company and are not the surviving company.
BENEFIT PLANS
1997 STOCK OPTION PLAN
Our 1997 stock option plan was adopted by our board of directors in
November 1997 and approved by our shareholders in May 1998. A total of
17,000,000 shares of common stock has been reserved for issuance under the plan,
including a 2,000,000 share increase subject to shareholder approval. The plan
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for
the granting to employees and consultants of nonstatutory stock options.
The plan is administered by the board of directors or a committee
appointed by the board of directors. The administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to the option and the exercisability thereof.
The administrator establishes the option exercise price which must be at
least the fair market value of the common stock on the date of the grant or 110%
of fair market value with respect to optionees who own at least 10% of the
outstanding common stock.
49
<PAGE> 54
Options granted under the plan are generally not transferable by the
optionee except by will or the laws of descent and distribution, and each option
is exercisable, during the lifetime of the optionee, only by the optionee.
Options generally must be exercised within 30 days after the optionee's
termination for cause, three months following the end of the optionee's status
as an employee or consultant, other than for cause or for death or disability,
or within six months after the optionee's termination by disability or death.
However, in no event may an option be exercised later than the earlier of the
expiration of the term of the option or ten years from the date of the grant of
the option or, where an optionee owns stock representing more than 10% of the
voting power, five years from the date of the grant of the option.
The maximum number of shares of common stock which may be awarded as
options under the plan during any calendar year to any optionee is 1,500,000
shares. Any incentive stock options granted to an optionee which, when combined
with all other incentive stock options becoming exercisable for the first time
in any calendar year that are held by that person, would have an aggregate fair
market value in excess of $100,000, shall automatically be treated as
nonstatutory stock options.
The plan may be amended, altered, suspended or terminated by the
administrator at any time, but no such amendment, alteration, suspension or
termination may adversely affect the terms of any option previously granted
without the consent of the affected optionee. Unless terminated sooner, the plan
will terminate automatically in November 2007.
As of August 15, 2000, options to purchase 9,862,283 shares of common
stock were outstanding and exercisable at a weighted average price of $1.50 per
share. As of August 15, 2000, 2,404,917 shares had been issued upon exercise of
options under the plan and 2,732,800 shares were available for future option
grants. In September 2000, an additional 2,000,000 shares of common stock were
reserved for future option grants under the plan, subject to shareholder
approval.
In 2000, through August 15, we granted options to purchase 5,350,200
shares of common stock at a weighted average exercise price of $2.62 per share.
These grants included options to purchase an aggregate of 20,100 shares at an
exercise price of $0.37 per share and 110,000 shares at an exercise price of
$7.00 per share to one of our four named executive officers, and options to
purchase an aggregate of 750,000 shares at an exercise price of $0.37 per share
to our other executive officers.
EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by our board of directors in
September 2000 and approved by our shareholders in September 2000. The plan will
become effective upon the closing of our initial public offering. We have
reserved a total of 300,000 shares of common stock for issuance under the plan,
together with an automatic annual increase in the number of shares reserved
under the plan on May 1, 2001 and each May 1 thereafter equal to the lesser of:
- 200,000 shares;
- 1% of our outstanding shares of common stock on the last day of our
prior fiscal year; or
- an amount determined by our board.
The plan will be administered by our board of directors and is intended
to qualify under Section 423 of the Internal Revenue Code. Our employees,
including our officers and employee directors, are eligible to participate in
the plan if they are customarily employed for at least 20 hours per week and for
more than five months in any calendar year. The plan permits eligible employees
to purchase common stock through payroll deductions, which may not exceed 15% of
an employee's compensation, defined as Form W-2 compensation plus contributions
to our 401(k) plan, or $25,000 per annum.
Unless our board of directors determines otherwise, the plan will be
implemented in a series of overlapping 24-month offering periods with new
offering periods commencing on May 1 and November 1 of each year. The initial
offering period under the plan will commence on November 1, 2000, and subsequent
offering periods will begin on the first trading day on or after May 1 and
November 1 of each year. Each offering period will be divided into four
consecutive six-month purchase periods. All
50
<PAGE> 55
participants in an offering period will be granted an option on the first day of
the offering period, and the option will be automatically exercised on the last
day of each purchase period throughout the offering period. The purchase price
of our common stock for each purchase period within an offering period will be
85% of the lesser of the fair market value per share on the first trading day of
the offering period or on the last trading day of the applicable purchase
period, whichever is lower. If the fair market value of our common stock on any
purchase date is lower than the fair market value on the start date of the
offering period, then all participants in the offering period will be
automatically withdrawn from the offering period following the purchase date and
will be re-enrolled in the immediately following offering period.
Under the plan, no employee may be granted an option if immediately after
the grant, the employee would own stock and/or hold outstanding options to
purchase stock equaling five percent or more of the total voting power or value
of all classes of our stock or that of our subsidiaries. In addition, no
employee may purchase in any purchase period shares having a fair market value,
based on the fair market value of our common stock on the first trading day of
the offering period, of more than $12,500.
Employees may end their participation in an offering period at any time,
and their participation ends automatically on termination of employment with our
company.
The plan will terminate in September 2010, unless our board of directors
terminates it sooner.
DIRECTOR STOCK OPTION PLAN
Our director stock option plan was adopted by our board of directors in
September 2000 and approved by our shareholders in September 2000. We have
reserved a total of 200,000 shares of common stock for issuance under the plan.
The option grants under the plan are automatic and non-discretionary, and
the exercise price of the options is 100% of the fair market value of our common
stock on the grant date. The plan provides for an initial grant to a
non-employee director of an option to purchase 10,000 shares of common stock
upon the director's initial election or appointment to the board. The plan also
provides for each non-employee director to be granted an option to purchase
5,000 shares of common stock upon the director's re-election to the board at an
annual meeting of shareholders, provided the director has served as a
non-employee director for at least six months preceding the date of the annual
meeting. The grants become exercisable in four equal quarterly installments
commencing on the last day of the calendar quarter in which the option is
granted. The term of the options granted under the director stock option plan is
seven years.
The plan will terminate in September 2010, unless our board of directors
terminates it sooner.
401(k) RETIREMENT PLAN
Effective as of June 1997, we adopted a tax-qualified employee savings
and retirement plan, or 401(k) plan, that covers all of our employees. Pursuant
to our 401(k) plan, participants may elect to reduce their current compensation,
on a pre-tax basis, by up to 15% of their taxable compensation or of the
statutorily prescribed annual limit, whichever is lower, and have the amount of
the reduction contributed to the 401(k) plan. The 401(k) plan permits us, in our
sole discretion, to make additional employer contributions to the 401(k) plan of
up to 6% of an employee's compensation. Our contributions vest 25% per year over
four years. Our 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code. As such, contributions by employees or by us to the
401(k) plan, and the income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan, and we can deduct our
contributions, if any, at the time they are made. We made contributions to our
401(k) plan of $18,000 in 1998 and $59,000 in 1999.
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<PAGE> 56
2000 BONUS PLAN
On September 1, 2000, our board of directors approved our 2000 Bonus
Plan. Under the 2000 Bonus Plan, all of our non-commissioned employees are
eligible to receive bonuses of between 10% and 150% of their salaries depending
on their position and based upon our achievement of specified net revenues
thresholds. The executive officers named in the Summary Compensation Table on
page 47 are eligible to receive bonuses of between 40% and 150% of their
salaries.
LIMITATION, LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation limit the liability of our directors to the
maximum extent permitted by California law. California law provides that the
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for any of
the following:
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing and culpable violation of law;
- acts or omissions that a director believes to be contrary to the best
interest of the corporation or its shareholders;
- acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary
course of performing his duties, of a risk of serious injury to the
corporation or its shareholders;
- acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of a director's duty to the corporation
or its shareholders;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our articles of incorporation and bylaws provide that we will indemnify
our directors and executive officers, and that we may indemnify our other
officers and employees and other agents, to the fullest extent permitted by law.
Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his actions
in such capacity, regardless of whether the bylaws would permit indemnification.
We intend to enter into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceedings arising out of
such person's services as our director or executive officer or at our request.
We also maintain directors' and officers' liability insurance.
52
<PAGE> 57
PRINCIPAL SHAREHOLDERS
The following table shows information regarding beneficial ownership of
our common stock as of August 15, 2000, assuming (1) 47,254,917 shares
outstanding as of August 15, 2000 and 52,754,917 shares outstanding immediately
following this offering, and (2) no exercise of the underwriters' over-allotment
option, by:
- each person known by us to be the beneficial owner of more than five
percent of our common stock;
- each of our directors;
- each of the executive officers listed in the Summary Compensation Table
under "Management -- Executive Compensation" on page 47; and
- all of our directors and executive officers as a group.
Each person has the sole power to vote or dispose of shares of our common
stock, subject to applicable community property laws and except as described in
the footnotes to the table and for the lock-up agreements described under
"Underwriting -- No Sales of Similar Securities" on page 63. In computing the
number of shares beneficially owned by an individual and the percentage
ownership of that individual, shares of common stock subject to options owned by
that individual that can be exercised within 60 days after August 15, 2000 are
deemed outstanding for that individual, but not for any other persons.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------
NAME OF OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
---------------- ------------------ -------- --------
<S> <C> <C> <C>
Stephane Ratel(1)..................................... 25,425,000 53.8% 48.2%
Errol Ginsberg........................................ 9,600,000(2) 20.3 18.2
Joel Weissberger...................................... 4,800,000(3) 10.2 9.1
Jon F. Rager.......................................... 900,000(4) 1.9 1.7
Howard Oringer........................................ 675,000(5) 1.4 1.3
Mark MacWhirter....................................... 468,750(6) 1.0 *
Jean-Claude Asscher................................... 269,000(7) * *
Paul Mallinder........................................ 196,874(8) * *
Joseph A. Noble....................................... 168,750(9) * *
Robert W. Bass........................................ 5,000(10) * *
Executive officers and directors as a group (10
persons)............................................ 12,333,374(11) 26.0 23.3
</TABLE>
------------
* Less than one percent.
(1) Mr. Ratel is the principal beneficial owner of Technology Capital Group
S.A., an investment company organized under the laws of Luxembourg.
Technology Capital Group S.A., is the record owner of 25,425,000 shares of
our common stock, which it acquired from Natinco, S.A. in a private
transaction in March 2000. Natinco, S.A. acquired the shares in private
transactions as follows:
- 13,725,000 of the shares were acquired from Jean-Claude Asscher in June
1998;
- 2,700,000 of the shares were acquired from Mr. Asscher in November 1999;
and
- 9,000,000 of the shares were acquired from Mr. Asscher's adult children in
November 1999.
Mr. Ratel's business address is c/o Technology Capital Group S.A., 5,
boulevard de la Foire, L-1528 Luxembourg, Grand-Duchy of Luxembourg.
(2) Includes:
- 8,400,000 shares held by The Errol Ginsberg and Annette R. Michelson
Family Trust, of which Mr. Ginsberg and Annette R. Michelson are trustees;
53
<PAGE> 58
- 600,000 shares held by The Errol Ginsberg 1999 QuickGRAT, of which Mr.
Ginsberg is the sole trustee; and
- 600,000 shares held by The Annette R. Michelson 1999 QuickGRAT, of which
Ms. Michelson is the sole trustee.
Ms. Michelson is the wife of Mr. Ginsberg. Of the shares held by the
Family Trust, 300,000 shares were subject to repurchase as of August 15,
2000 under specified circumstances upon a termination of Mr. Ginsberg's
employment. For more information regarding our repurchase rights, see
"Related Party Transactions" on page 55. Mr. Ginsberg's business address
is c/o Ixia, 26601 W. Agoura Road, Calabasas, California 91302.
(3) Includes 150,000 shares subject to repurchase as of August 15, 2000 under
specified circumstances upon a termination of employment. For more
information regarding our repurchase rights, see "Related Party
Transactions" on page 55. Mr. Weissberger's business address is c/o Ixia,
26601 W. Agoura Road, Calabasas, California 91302.
(4) These shares are held by The Rager Family Trust, of which Mr. Rager and his
wife are co-trustees.
(5) These shares are held by the Oringer Family LLC, of which Mr. Oringer is
Executive Managing Member.
(6) Includes 93,750 shares subject to options held by Mr. MacWhirter which are
exercisable or become exercisable within 60 days after August 15, 2000.
Also includes 300,000 shares subject to repurchase rights under specified
circumstances upon a termination of employment. For more information
regarding our purchase rights, see "Related Party Transactions" on page 55.
(7) Does not include an aggregate of 1,980,000 shares held by Mr. Asscher's
adult children.
(8) Includes 107,813 shares subject to options held by Mr. Mallinder which are
exercisable or become exercisable within 60 days after August 15, 2000.
(9) Includes 56,250 shares subject to options held by Mr. Noble which are
exercisable or become exercisable within 60 days after August 15, 2000.
(10) Includes 5,000 shares subject to warrants held by Mr. Bass which are
exercisable or become exercisable within 60 days after August 15, 2000.
(11) Includes:
- 262,813 shares subject to options and warrants held by current officers
and directors as a group which are exercisable or become exercisable
within 60 days after August 15, 2000; and
- a total of 600,000 shares held by executive officers which were subject
to repurchase as of August 15, 2000 under specified circumstances upon a
termination of employment. For more information regarding our repurchase
rights, see "Related Party Transactions" on page 55 and footnote 2 above
in this table.
54
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RELATED PARTY TRANSACTIONS
COMMON STOCK ISSUANCES
In June 1997, we issued 9,000,000 shares of common stock to Errol
Ginsberg, our Chief Executive Officer and President, and 4,500,000 shares of
common stock to Joel Weissberger, one of our principal shareholders, in exchange
for their assignment to Ixia of all of their right, title and interest in and to
our original technology and proprietary rights and aggregate cash consideration
of $100.
In June 1997, we also issued the following shares of common stock at a
price of approximately $0.01 per share:
- 27,450,000 shares to Jean-Claude Asscher, our Chairman, for an
aggregate cash purchase price of $277,272;
- 900,000 shares to an affiliate of Jon F. Rager, one of our directors,
for an aggregate cash purchase price of approximately $9,090; and
- 675,000 shares to an affiliate of Howard Oringer, one of our directors,
for an aggregate cash purchase price of approximately $6,818.
In June 1999, we issued 225,000 shares of common stock to Jean-Claude
Asscher, our Chairman, at a price of approximately $0.28 per share for an
aggregate purchase price of $63,750. Mr. Asscher paid the full amount of the
purchase price for the shares by delivering to us a full recourse promissory
note. The note bore interest at the rate of 8% per annum, was collateralized by
the shares of stock purchased by Mr. Asscher and was payable in June 2002. Mr.
Asscher paid the note in full in September 1999.
SALES OF SHARES SUBJECT TO REPURCHASE RIGHTS
In August 1999, we sold 600,000 shares of common stock to Mr. Ginsberg at
a price of approximately $0.28 per share for an aggregate purchase price of
$170,000. In August 1999, we also sold 300,000 shares of common stock to Mr.
Weissberger at a price of approximately $0.28 per share for an aggregate
purchase price of $85,000. Each of Mr. Ginsberg and Mr. Weissberger paid the
full amount of the purchase price for his shares by delivering to us a full
recourse promissory note. Each note bears interest at the rate of 8% per annum,
is collateralized by the shares of common stock purchased by the shareholder and
is payable in August 2002. As of August 20, 2000, the aggregate amount of
principal and interest outstanding under Mr. Ginsberg's note was $183,600 and
under Mr. Weissberger's note was $91,800.
In September 1999, we sold 300,000 shares of common stock to Mark
MacWhirter, our Vice President, Software Development, at a price of
approximately $0.28 per share for an aggregate cash purchase price of $85,000.
The shares purchased by Mr. Ginsberg, Mr. Weissberger and Mr. MacWhirter,
described above, vest over time and are subject to repurchase rights held by us.
The shares purchased by Mr. Ginsberg and Mr. Weissberger vest in eight equal
quarterly installments beginning in September 1999. The shares purchased by Mr.
MacWhirter vest as to 75,000 shares in September 2000 and as to the remaining
225,000 shares in 12 equal quarterly installments beginning in December 2000.
The shares held by each shareholder continue to vest as long as the shareholder
continues to serve as our employee. If before the vesting of all of a
shareholder's shares, we terminate the shareholder's employment for cause or the
shareholder terminates his employment other than for good reason, as those terms
are defined in their agreements with us, we can repurchase the unvested shares
at their original purchase price. If before the vesting of all of the shares we
terminate the shareholder's employment other than for cause or the shareholder
terminates his employment for good reason, all of the shares will vest on the
date of the termination of his employment.
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<PAGE> 60
AGREEMENT WITH PRINCIPAL SHAREHOLDER
Prior to or upon the closing of this offering, we expect to enter into an
agreement with our principal shareholder, Technology Capital Group S.A., and
Stephane Ratel, who is the principal beneficial owner of Technology Capital
Group, pursuant to which Technology Capital Group S.A. will agree:
- for a period of 180 days after the date of this prospectus, not to:
- offer, pledge, sell or contract to sell any shares of our common
stock;
- sell any option or contract to purchase any shares of our common
stock;
- purchase any option or contract to sell any shares of our common
stock;
- grant any option, right or warrant for the sale of any shares of our
common stock;
- lend or otherwise dispose of or transfer any shares of our common
stock;
- request or demand that we file a registration statement related to
our common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any shares of our
common stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
- for an additional period of 180 days following the end of the initial
180 day period, not to sell shares except as may be permitted under
Rule 144 of the Securities Act of 1933, as amended; and
- for a period of either four years following the end of the second 180
day period, or the time when it owns less than 25% of our outstanding
shares of common stock, to give us 30 days notice prior to entering
into any binding agreement to engage in any transaction of the types
prohibited during Technology Capital Group's initial 180-day lock-up
period as described in the above bullet points with respect to one
percent or more of our outstanding shares of capital stock.
We expect that under this agreement, Mr. Ratel will agree that for a
period of 360 days after the date of this prospectus he will not engage in any
transaction of the types prohibited during Technology Capital Group's initial
180-day lock-up period as described in the above bullet points with respect to
25% or more of his shares of capital stock of Technology Capital Group.
In exchange for these agreements, we expect to grant to Technology
Capital Group demand registration rights to effect registrations for three
offerings of shares of our common stock which it owns and unlimited piggyback
registration rights with respect to the registration of those shares. For more
information regarding these registration rights, please see "Shares Eligible for
Future Sale -- Registration Rights" on page 61.
EQUIPMENT LEASE
We lease some of our computer equipment from Synchronous Network
Solutions, Inc. pursuant to an Equipment Lease Agreement dated October 1, 1997.
Tekelec-Airtronic, S. A. is the principal shareholder of Synchronous Network
Solutions, Inc., and Jean-Claude Asscher, our Chairman, is the President and
principal shareholder of Tekelec-Airtronic S.A. Jon F. Rager, one of our
directors, is the Chief Financial Officer of Synchronous Network Solutions, Inc.
We made aggregate rental payments under the lease of $4,373 in 1997, $22,159 in
1998 and $28,582 in 1999. The lease expires in October 2000.
SALES OF SYSTEMS
We sell our systems to several companies which until May 2000 were
affiliates of Tekelec-Airtronic, S.A. Jean-Claude Asscher, our Chairman, is the
President and principal shareholder of Tekelec-
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Airtronic, S.A. Our aggregate sales to these companies were $47,039 in 1999. As
of December 31, 1999, these companies owed us approximately $8,517 for purchases
of our systems.
We also sell our systems to Tekelec, Ltd., a subsidiary of Tekelec and a
distributor of our products. Mr. Asscher is the Chairman of the Board and a
principal shareholder of Tekelec, and Howard Oringer and Jon F. Rager are
directors of Tekelec. Our aggregate sales to Tekelec, Ltd. were $95,050 in 1998
and $388,461 in 1999. As of December 31, 1999, Tekelec, Ltd. owed us
approximately $19,125 for purchases of our systems.
NOTE ISSUED TO DIRECTOR
On June 1, 1998, we received $500,000 from Mr. Asscher in exchange for a
note. We used the proceeds for general corporate purposes and repaid the note in
full in September 1999. We paid no interest on the note.
GUARANTEE
In October 1999, we guaranteed the obligations of Natinco, S.A., a
Luxembourg investment company, to UBS AG in the maximum principal amount of
$1,000,000 plus accrued interest. The guarantee was cancelled in December 1999.
Natinco, S.A. was one of our principal shareholders at the time we entered into
the guarantee.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of common
stock and 1,000,000 shares of preferred stock. The following is a summary of the
material terms of our common stock and preferred stock. Please see our articles
of incorporation and bylaws, filed as exhibits to the registration statement of
which this prospectus is a part, for more detailed information.
COMMON STOCK
Currently, our authorized common stock consists of 200,000,000 shares of
common stock. As of August 15, 2000, there were outstanding 47,254,917 shares of
common stock held of record by 46 holders. As of August 15, 2000, 9,862,283
shares of common stock were issuable upon the exercise of outstanding options
and an additional 2,732,800 shares of common stock were reserved for issuance
under our 1997 stock option plan. We currently also have 200,000 shares of
common stock reserved for issuance under our director stock option plan and
300,000 shares of common stock reserved for issuance under our employee stock
purchase plan, subject to annual automatic increases. In September 2000, an
additional 2,000,000 shares of common stock were reserved for future option
grants under our 1997 stock option plan, subject to shareholder approval. Upon
the closing of this offering, we expect to have 52,754,917 shares of common
stock issued and outstanding.
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders, including the
election of directors. However, upon a shareholder giving notice prior to the
voting as required by law, shareholders may cumulate their votes in the election
of directors. This means that the shareholders would be entitled to a number of
votes equal to the number of their shares multiplied by the number of directors
to be elected. A shareholder would then be entitled to cast all of the
shareholder's votes for any director or for any two or more directors as the
shareholder would choose.
Subject to the rights, preferences, privileges and restrictions
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive dividends when, as, and if declared by the board of
directors out of legally available funds. Upon liquidation or dissolution, the
holders of common stock will be entitled to share ratably in the assets legally
available for the distribution to shareholders after payment of liabilities and
subject to the prior rights of any holders of preferred stock then outstanding.
The holders of common stock have no conversion, sinking fund, redemption,
preemptive or subscription rights. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock that may be issued in the future.
PREFERRED STOCK
Our articles of incorporation provide that we may issue up to 1,000,000
shares of preferred stock in one or more series as may be determined by our
board of directors who may, at the time of issuance, establish the number of
shares to be included in each such series, fix the dividend rights, dividend
rates, any conversion rights or right of exchange, any voting rights, rights and
terms of redemption, including sinking fund provisions, the redemption price or
prices, the liquidation preferences, and any other rights, preferences,
privileges, and restrictions of any series of preferred stock of each such
series, and increase or decrease the number of shares of any such series without
any further vote or action by the shareholders. The board of directors may
authorize, without shareholder approval, the issuance of preferred stock with
voting and conversion rights that could harm the voting power and other rights
of holders of common stock. Preferred stock could be issued quickly with terms
calculated to delay or prevent a change in our control or to make the removal of
management more difficult. This could have the effect of decreasing the market
price of the common stock.
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ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
Some provisions of our articles of incorporation may have the effect of
delaying or preventing changes in control or management of Ixia, which could
have an adverse effect on the market price of our common stock. These include:
- authorizing the board to issue additional preferred stock;
- limiting the persons who may call special meetings of shareholders to
our board of directors, our chairman of the board, our president and
holders of shares entitled to cast not less than 10% of the votes at
the meeting; and
- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by shareholders at shareholder meetings.
LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "XXIA."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Suite 200, Glendale, California
91204. Its telephone number is (818) 502-1404.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering and based on shares outstanding at August
15, 2000, we will have outstanding 52,754,917 shares of common stock, or
53,579,917 shares if the underwriters' over-allotment option is exercised in
full, in each case excluding 9,942,283 shares underlying options and warrants,
based on options and warrants outstanding at August 15, 2000. Of the outstanding
shares, all of the shares sold in this offering (5,500,000 shares, or 6,325,000
shares if the underwriters' over-allotment option is exercised in full) will be
freely tradable without restriction or further registration under the Securities
Act except for any shares purchased by an "affiliate," which will be subject to
the limitations of Rule 144 of the Securities Act. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
the issuer. The remaining outstanding shares of common stock will be "restricted
securities" as defined in Rule 144 and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including exemptions provided by Rule 144. Immediately following
this offering and based on shares outstanding at August 15, 2000, our existing
shareholders will own 47,254,917 restricted shares, representing approximately
89.6% of the then outstanding shares of common stock, 88.2% if the underwriters'
over-allotment option is exercised in full. On August 15, 2000, our executive
officers and directors beneficially owned 12,333,374 shares.
LOCK-UP AGREEMENTS
We and our executive officers and directors, and most of our existing
shareholders and optionholders, have agreed not to offer, pledge, sell, contract
to sell or otherwise dispose of any common stock or any securities convertible
into or exchangeable for common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, subject to some exceptions as described in
"Underwriting -- No Sales of Similar Securities" on page 63. We also expect that
our principal shareholder, Technology Capital Group S.A., will agree to further
restrict its sale of shares of our common stock in accordance with the terms of
the agreement described in "Related Party Transactions -- Agreement with
Principal Shareholder" on page 56.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned and fully paid for restricted
shares for at least one year, including persons who are affiliates, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the then outstanding shares of our common stock, or approximately
527,549 shares immediately after this offering; or
- the reported average weekly trading volume of our common stock during
the four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, is free to sell such shares without regard to
the volume, manner-of-sale or other limitations contained in Rule 144. Subject
to the 180-day lock-up agreements, upon completion of this offering, holders of
2,655,000 shares of our common stock will be eligible to freely sell those
shares under Rule 144(k).
Prior to this offering, there has been no public market for our common
stock and we can make no predictions about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of our common stock prevailing from time to time. Future sales of substantial
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<PAGE> 65
amounts of our common stock in the public market, or the perception that such
sales may occur, may cause the market price of our common stock to decline.
OPTIONS AND WARRANTS
As of August 15, 2000, options and warrants to purchase 9,942,283 shares
of our common stock were outstanding. We intend to file a registration statement
on Form S-8 under the Securities Act to register all of the shares of our common
stock reserved for issuance under our stock option and stock purchase plans and
warrant agreement. The filing of this registration statement will allow these
shares, other than those held by members of management who are deemed to be
affiliates, to be eligible for sale without restriction, subject to the lock-up
period related to this offering. After the effective date of the registration
statement on Form S-8 and, if applicable, the expiration of the lock-up period
related to this offering, shares purchased upon exercise of options granted
pursuant to the stock option plan or currently outstanding warrants generally
will be available for resale in the public market by non-affiliates without
restriction. Sales by our affiliates of shares registered on the registration
statement on Form S-8 are subject to all of the Rule 144 restrictions except for
the one-year minimum holding period requirement.
In addition to possibly being able to sell option and warrant shares
without restriction under a Form S-8 registration statement when effective,
persons other than our affiliates are allowed under Rule 701 under the
Securities Act to sell shares of our common stock issued upon exercise of stock
options and warrants beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144 and to the lock-up
period related to this offering. Our affiliates may also begin selling option
and warrant shares beginning 90 days after the date of this prospectus but are
subject to all of the Rule 144 restrictions except for the one-year holding
period requirement and for the 180-day lock-up period related to this offering.
REGISTRATION RIGHTS
Prior to or upon the effectiveness of the registration statement of which
this prospectus forms a part, we expect to enter into an agreement with our
principal shareholder, Technology Capital Group S.A., pursuant to which, 18
months after the effective date of the registration statement, Technology
Capital Group would be entitled to demand the registration of all or a portion
of its shares of our common stock. We would be required to effect up to three
registrations pursuant to this demand right. In addition, after the closing of
this offering, if we propose to register any securities under the Securities Act
on Form S-1, S-2 or S-3, Technology Capital Group would be entitled to include
its shares in the registration subject to quantitative limitations imposed by
any underwriters. We would agree to pay Technology Capital Group's expenses,
except underwriting and legal expenses, in connection with the registration
rights. Registration of any of the shares of our common stock held by Technology
Capital Group would result in such shares becoming freely tradeable immediately
upon effectiveness of the registration. The registration rights expire after
eight years or earlier if Technology Capital Group can resell all of its shares
under Rule 144 during any 90-day period.
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UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation and Dain Rauscher Incorporated, are acting as
representatives of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement among us and the underwriters, we
have agreed to sell to the underwriters, and the underwriters severally have
agreed to purchase from us, the number of shares listed opposite their names
below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Dain Rauscher Incorporated..................................
---------
Total......................................... 5,500,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose
initially to offer the shares to the public at the initial public offering price
set forth on the cover page of this prospectus and to dealers at that price less
a concession not in excess of $ per share. The underwriters may allow, and
the dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------------- -----------------
<S> <C> <C> <C>
Public offering price................................... $ $ $
Underwriting discount................................... $ $ $
Proceeds, before expenses, to Ixia...................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at approximately $1,200,000 and are payable by us.
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OVER-ALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to 825,000
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus for
sale to some of our business associates and related persons. If these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and most of our existing
shareholders and option holders have agreed not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other individuals
have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition. The lock-up provision will not apply to
specified limited transactions including the following, so long as the acquirer
agrees to hold acquired shares of common stock subject to the lock-up provision:
- the acquisition of shares upon an option holder's exercise of an
option;
- the transfer of shares during a shareholder's lifetime or on death, by
will or intestacy, to his or her immediate family or to a trust, the
beneficiaries of which are the shareholder and/or a member of his or
her immediate family; and
- our issuance of shares of common stock in connection with the
acquisition of a business.
Additionally, the lock-up provisions will not apply to shares we issue
upon exercise of outstanding options or warrants or any shares or options
granted pursuant to existing employee benefit plans.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "XXIA."
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Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among us and the representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public offering price
are:
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
- the present state of our development; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares being
offered in this offering to accounts over which they exercise discretionary
authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common shares is completed, SEC rules may
limit the underwriters from bidding for or purchasing our common shares.
However, the representatives may engage in transactions that stabilize the price
of the common shares, such as bids or purchases that peg, fix or maintain that
price.
The underwriters may purchase and sell the common shares in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares in the
offering. The underwriters may close out any covered short position by either
exercising their option to purchase additional shares or purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common shares in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
common shares made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common shares or preventing or retarding a decline in
the market price of the common shares. As a result, the price of the common
shares may be higher than the price that might otherwise exist in the open
market.
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Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
INTERNET OFFERING
Merrill Lynch will be facilitating Internet distribution for this
offering to some of its Internet subscription customers. Merrill Lynch intends
to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus is available on the Web site maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch Web site relating to this offering is not a part of this
prospectus.
LEGAL MATTERS
Bryan Cave LLP, Santa Monica, California, will pass upon the validity of
our common stock and certain other legal matters related to this offering.
Ronald W. Buckly, who is of counsel to Bryan Cave LLP, is our Corporate
Secretary and beneficially owns 900,000 shares of our outstanding common stock.
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, will pass
upon certain legal matters in connection with this offering for the
underwriters. In addition, several members and employees of Bryan Cave LLP have
expressed an interest in purchasing shares of our common stock in this offering
through our directed share program.
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for the
period from May 27, 1997 (inception) through December 1997 and for the years
ended December 31, 1998 and 1999, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1, of which this
prospectus is a part, with the Securities and Exchange Commission under the
Securities Act with respect to the common stock offered in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, parts of
which are omitted as permitted by the rules and regulations of the Commission.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete. For further information pertaining
to us and our common stock, we refer you to our registration statement and the
exhibits thereto, which can be obtained from the Web site identified below and
copies of which may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the registration statement
may be obtained at prescribed rates from the Commission. Please call the
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
65
<PAGE> 70
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the Commission. Such periodic reports,
proxy and information statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
Web site of the Commission referred to above.
We intend to furnish our shareholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
66
<PAGE> 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and Consolidated Balance Sheet as of June 30, 2000........ F-3
Consolidated Statements of Operations for the period from
May 27, 1997 (inception) through December 31, 1997 and for
the years ended December 31, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000....................... F-4
Consolidated Statements of Shareholders' Equity for the
period from May 27, 1997 (inception) through December 31,
1997 and for the years ended December 31, 1998 and 1999
and for the six months ended June 30, 2000................ F-5
Consolidated Statements of Cash Flows for the period from
May 27, 1997 (inception) through December 31, 1997 and for
the years ended December 31, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Ixia:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity, and cash
flows present fairly, in all material respects, the financial position of Ixia
and its subsidiary (the "Company") as of December 31, 1998 and 1999, and the
results of its operations and its cash flows for the period from May 27, 1997
(inception) through December 31, 1997 and for the years ended December 31, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Woodland Hills, California
May 12, 2000, except for Note 10,
as to which the date is September 1, 2000
F-2
<PAGE> 73
IXIA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,124 $ 8,733 $ 8,952
Accounts receivable, net.............................. 1,126 4,357 8,519
Inventories........................................... 404 746 3,056
Deferred income taxes................................. 64 585 1,414
Prepaid expenses and other current assets............. 20 291 603
------ ------- --------
Total current assets............................. 2,738 14,712 22,544
Property and equipment, net............................. 383 952 2,155
Deferred income taxes................................... 126 27 112
Other assets............................................ 19 131 308
------ ------- --------
Total assets..................................... $3,266 $15,822 $ 25,119
====== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 492 $ 1,087 $ 3,232
Accrued expenses...................................... 427 1,382 2,408
Deferred revenue...................................... 73 270 360
Income taxes payable.................................. 14 4,473 1,472
Related-party note.................................... 500 -- --
------ ------- --------
Total liabilities................................ 1,506 7,212 7,472
Shareholders' equity:
Preferred stock, no par value; 1,000 shares authorized
and none outstanding............................... -- -- --
Common stock, no par value; 75,000 shares authorized,
43,200, 45,626 and 46,746 shares issued and
outstanding as of December 31, 1998 and 1999 and
June 30, 2000, respectively........................ 300 783 910
Additional paid-in capital............................ 1,722 8,294 34,288
Deferred stock-based compensation..................... (260) (4,947) (24,305)
Notes receivable from shareholders.................... -- (328) (341)
Retained earnings (deficit)........................... (2) 4,808 7,095
------ ------- --------
Total shareholders' equity....................... 1,760 8,610 17,647
------ ------- --------
Total liabilities and shareholders' equity....... $3,266 $15,822 $ 25,119
====== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 74
IXIA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $ -- $ 4,916 $24,499 $ 8,214 $28,268
Cost of revenues(1)............. -- 1,309 4,944 1,412 5,626
------- ------- ------- ------- -------
Gross profit............. -- 3,607 19,555 6,802 22,642
Operating expenses:
Research and development...... 513 1,580 2,780 1,182 2,744
Sales and marketing........... -- 940 4,443 1,531 4,372
General and administrative.... 110 509 1,660 588 1,733
Stock-based compensation(2)... -- 154 1,847 407 6,250
------- ------- ------- ------- -------
Total operating
expenses............ 623 3,183 10,730 3,708 15,099
------- ------- ------- ------- -------
Income (loss) from
operations............ (623) 424 8,825 3,094 7,543
Interest income, net............ 7 14 88 18 221
------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (616) 438 8,913 3,112 7,764
Income tax expense (benefit).... (294) 118 4,103 1,362 5,477
------- ------- ------- ------- -------
Net income (loss)........ $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
======= ======= ======= ======= =======
Earnings (loss) per share:
Basic......................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
Diluted....................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
Weighted average number of
shares outstanding:
Basic......................... 43,041 43,200 43,574 43,218 45,236
Diluted....................... 43,041 45,619 48,896 46,340 52,989
------------
(1)Stock-based compensation
included in cost of
revenues.............. $ -- $ 8 $ 38 $ 10 $ 386
======= ======= ======= ======= =======
(2)Stock-based compensation:
Research and
development........... $ -- $ 92 $ 669 $ 94 $ 2,597
Sales and marketing...... -- 62 449 124 1,771
General and
administrative........ -- -- 729 189 1,882
------- ------- ------- ------- -------
$ -- $ 154 $ 1,847 $ 407 $ 6,250
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 75
IXIA
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE RETAINED
--------------- PAID-IN STOCK-BASED FROM EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS (DEFICIT) TOTAL
------ ------ ---------- ------------ ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of May 27, 1997
(Inception)....................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock.......... 43,200 300 300
Additional contribution of
capital......................... 600 600
Net loss.......................... (322) (322)
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1997..... 43,200 300 600 -- -- (322) 578
Additional contribution of
capital......................... 700 700
Deferred stock-based
compensation.................... 422 (422) --
Amortization of deferred
stock-based compensation........ 162 162
Net income........................ 320 320
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1998..... 43,200 300 1,722 (260) -- (2) 1,760
Exercise of stock options......... 776 15 15
Issuance of common stock.......... 1,650 468 (319) 149
Deferred stock-based
compensation.................... 6,572 (6,572) --
Amortization of deferred
stock-based compensation........ 1,885 1,885
Interest receivable from
shareholder..................... (9) (9)
Net income........................ 4,810 4,810
------ ---- ------- -------- ----- ------ -------
Balance as of December 31, 1999..... 45,626 783 8,294 (4,947) (328) 4,808 8,610
Exercise of stock options......... 1,120 127 127
Deferred stock-based
compensation.................... 25,994 (25,994)
Amortization of deferred
stock-based compensation........ 6,636 6,636
Interest receivable from
shareholders.................... (13) (13)
Net income........................ 2,287 2,287
------ ---- ------- -------- ----- ------ -------
Balance as of June 30, 2000
(unaudited)....................... 46,746 $910 $34,288 $(24,305) $(341) $7,095 $17,647
====== ==== ======= ======== ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 76
IXIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 27, 1997 SIX MONTHS
(INCEPTION) THROUGH YEAR ENDED YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------
1997 1998 1999 1999 2000
------------------- ------------ ------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(322) $ 320 $ 4,810 $1,750 $ 2,287
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation....................... 9 105 452 163 430
Stock-based compensation........... -- 162 1,885 417 6,636
Interest receivable from
shareholders..................... -- -- (9) -- (13)
Deferred income tax (benefit)
provision........................ (294) 104 (422) (203) (914)
Changes in operating assets and
liabilities:
Accounts receivable, net......... -- (1,126) (3,231) (1,473) (4,162)
Inventories...................... -- (404) (342) (426) (2,310)
Prepaid expenses and other
current assets................ (1) (18) (271) (48) (312)
Other assets..................... (7) (12) (112) (5) (177)
Accounts payable................. 72 419 595 211 2,145
Accrued expenses................. 19 408 955 468 1,026
Deferred revenue................. -- 73 197 86 90
Income taxes payable............. -- 14 4,459 1,522 (3,001)
----- ------- ------- ------ -------
Net cash provided by (used in)
operating activities........ (524) 45 8,966 2,462 1,725
----- ------- ------- ------ -------
Cash used in investing activities:
Purchases of property and equipment... (72) (425) (1,021) (284) (1,633)
----- ------- ------- ------ -------
Cash used in investing
activities.................. (72) (425) (1,021) (284) (1,633)
----- ------- ------- ------ -------
Cash flows from financing activities:
Issuance of common stock.............. 300 -- 149 -- --
Exercise of stock options............. -- -- 15 -- 127
Contributed capital from
shareholder........................ 600 700 -- -- --
Proceeds (repayment) of related-party note... -- 500 (500) -- --
----- ------- ------- ------ -------
Net cash provided by (used in)
financing activities........ 900 1,200 (336) -- 127
----- ------- ------- ------ -------
Net increase in cash and cash
equivalents................. 304 820 7,609 2,178 219
Cash and cash equivalents at beginning
of period............................. -- 304 1,124 1,124 8,733
----- ------- ------- ------ -------
Cash and cash equivalents at end of
period................................ $ 304 $ 1,124 $ 8,733 $3,302 $ 8,952
===== ======= ======= ====== =======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes....................... $ -- $ -- $ 66 $ 41 $ 9,392
===== ======= ======= ====== =======
Supplemental disclosure of noncash
transactions:
Issuance of shareholder notes
receivable......................... $ -- $ -- $ 319 $ 64 $ --
===== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 77
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Ixia (the "Company") was incorporated on May 27, 1997 as a California
corporation. The Company designs and markets high-speed, multi-port network
performance analysis systems that generate and analyze data traffic over optical
and electrical networks. Through March 1998, the Company was considered to be in
the development stage and was principally engaged in research and development,
raising capital and forming its management team. During April 1998, the Company
ceased to be in the development stage. As of June 30, 2000, the Company is
majority owned (54%) by Technology Capital Group ("TCG"), a Luxembourg private
investment company. TCG acquired its interest in a private transaction from a
former shareholder in March 2000.
Use of Estimates
In the normal course of preparing financial statements in conformity with
accounting principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Consolidation
All subsidiaries are consolidated. All intercompany transactions and
accounts are eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair value.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
certificates of deposit, accounts receivable, accounts payable and other
liabilities are carried at cost, which approximates their fair values because of
the short-term maturity of these instruments and the relative stability of
interest rates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Appropriate consideration is given to obsolescence and other factors in
evaluating net realizable value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets, ranging from two to seven years. Useful lives are
evaluated regularly by management in order to determine recoverability in light
of current technological conditions. Repairs and maintenance are charged to
expense as incurred while renewals and improvements are capitalized. Upon the
sale or retirement of property and equipment, the accounts are relieved of the
cost and the related accumulated depreciation, with any resulting gain or loss
included in the Statement of Operations.
F-7
<PAGE> 78
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. In
the event the expected undiscounted future cash flow attributable to the asset
is less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. To date,
no such impairment has been recorded.
Hardware Product Warranty Costs
The Company generally warrants its products for one year after sale and
provides for estimated future warranty costs at the time revenue is recognized.
Accrued hardware product warranty costs are included as a component of accrued
expenses on the accompanying balance sheet.
Revenue Recognition
The software component of the Company's products is an integral part of
its functionality. As such, the Company applies the provisions of the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition." The Company's products are fully
functional at the time of shipment. The software component of the Company's
product does not require significant production, modification or customization.
As such, revenue from product sales is recognized upon shipment provided that
(1) a purchase order has been received or a contract has been executed; (2)
title has transferred; (3) the fee is fixed and determinable; and (4)
collectibility is deemed probable. Revenue associated with multiple-element
arrangements (products and post-contract customer support ("PCS")) are allocated
to each element based on vendor-specific objective evidence of fair value.
Revenue related to future PCS is initially deferred and subsequently recognized
ratably over the term of the service period. Extended warranty and other service
revenues are recognized ratably over the respective service periods. Such
service revenue has not been significant to date.
Research and Development
Costs incurred in the research and development of products are expensed
as incurred. Costs incurred to establish the technological feasibility of a
software product are considered research and development costs and are expensed
as incurred. Once technological feasibility is established, all development
costs incurred until general product release are subject to capitalization. To
date, the establishment of technological feasibility of the Company's products
and general release have substantially coincided. As a result, the costs
qualifying for such capitalization have not been significant and the Company has
not capitalized any of these software development costs.
Software Developed for Internal Use
The Company capitalizes costs of software, consulting services, hardware
and payroll-related costs incurred to purchase or develop internal-use software.
The Company expenses costs incurred during preliminary project assessment,
research and development, re-engineering, training and application maintenance
phases. To date, capitalized internal use software costs have not been
significant.
Advertising
Advertising costs are expensed as incurred. Advertising costs were
$52,000 and $256,000 for the years ended December 31, 1998 and 1999,
respectively. The Company incurred no advertising costs for the period ended
December 31, 1997.
F-8
<PAGE> 79
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock and stock options issued. Accordingly, any compensation
expense is recognized over the vesting period and represents the difference
between the deemed fair value for accounting purposes of the underlying stock
and the purchase price or the exercise price at the date of grant. The Company
has provided additional disclosures (Note 6) required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18.
Income Taxes
The Company accounts for income taxes using the liability method.
Deferred taxes are determined based on the differences between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Earnings Per Share
Earnings per share are computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and restricted
stock) in accordance with SFAS No. 128, "Earnings per Share."
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income/(loss),
other than net income/(loss).
Unaudited Interim Financial Information
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are unaudited and have been prepared on the
same basis as the audited financial statements. In the opinion of management,
such unaudited financial information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the six months ended June 30, 2000
are not necessarily indicative of the results for the year ending December 31,
2000.
Segments
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company has determined that it did not have any separately
reportable business segments as of, and for the periods ended, December 31,
1997, 1998 and 1999. All of the Company's long-lived assets were located in the
United States as of December 31, 1998 and 1999.
F-9
<PAGE> 80
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The Company's
revenue recognition policies comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes to grantee status
that occur on or after July 1, 2000, except for the provisions related to
repricings and the definition of an employee, which apply to awards issued after
December 15, 1998. The provisions related to modifications to fixed stock option
awards to add a reload feature are effective for awards modified after January
12, 2000. The Company does not expect the adoption of FIN 44 to have a material
impact on its financial statements.
2. CONCENTRATIONS
Credit Risk:
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains its cash and cash equivalents with reputable
financial institutions, and at times, cash balances may be in excess of the FDIC
insurance limits. The Company extends differing levels of credit to customers,
does not require collateral deposits, and maintains reserves for potential
credit losses based upon the expected collectibility of accounts receivable.
Credit losses to date have been within management's expectations and have not
been significant.
Customers comprising at least 10% of net revenues are as follows (in
thousands except percentages):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------------- ENDED JUNE 30,
1998 1999 2000
----------------- ----------------- -----------------
% OF NET % OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Customer A................................... $1,522 32% $7,549 31% $9,612 34%
Customer B................................... 493 10 -- -- -- --
</TABLE>
As of December 31, 1998 and 1999 and June 30, 2000, the Company had
receivable balances from Customer A approximating 24%, 16% and 24%, of total
accounts receivable, respectively.
International Revenues:
Net revenues from international product shipments were $565,000 in 1998,
$3.2 million in 1999, and $3.9 million for the six months ended June 30, 2000.
Sources of Supply:
The Company currently buys a number of key components of its products
from a limited number of suppliers. Although there are a limited number of
manufacturers of these components, management believes that other suppliers
could provide similar integrated circuits on comparable terms. A change in
F-10
<PAGE> 81
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATIONS (CONTINUED)
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which could affect operating results adversely.
3. SELECTED BALANCE SHEET DATA (IN THOUSANDS)
Accounts Receivable, Net
Accounts receivable, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable............................. $ 1,151 $ 4,446 $ 8,737
Allowance for doubtful accounts....................... (25) (89) (218)
--------- ---------- ----------
$ 1,126 $ 4,357 $ 8,519
========= ========== ==========
</TABLE>
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $ 119 $ 546 $ 2,417
Work in process....................................... 141 179 152
Finished goods........................................ 153 66 682
Reserve for obsolescence.............................. (9) (45) (195)
--------- ---------- ----------
$ 404 $ 746 $ 3,056
========= ========== ==========
</TABLE>
Property and Equipment, Net
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................... $ 97 $ 232 $ 431
Computer software..................................... 47 155 197
Demonstration equipment............................... 332 1,021 1,686
Furniture and other equipment......................... 21 110 837
--------- ---------- ----------
497 1,518 3,151
Accumulated depreciation.............................. (114) (566) (996)
--------- ---------- ----------
$ 383 $ 952 $ 2,155
========= ========== ==========
</TABLE>
F-11
<PAGE> 82
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SELECTED BALANCE SHEET DATA (CONTINUED)
Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll........................................ $ 34 $ 95 $ 156
Accrued commissions.................................... 71 393 614
Accrued bonuses........................................ 161 414 751
Accrued warranty....................................... 25 140 282
Other.................................................. 136 340 605
---- ------ ------
$427 $1,382 $2,408
==== ====== ======
</TABLE>
4. INCOME TAXES
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1997 1998 1999 2000
------ ----- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.............................................. $ -- $ 13 $3,685 $5,035
State................................................ -- 1 840 1,356
Deferred:
Federal.............................................. (229) 134 (445) (748)
State................................................ (65) (30) 23 (166)
----- ---- ------ ------
$(294) $118 $4,103 $5,477
===== ==== ====== ======
</TABLE>
The net effective income tax rate differs from the federal statutory
income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1997 1998 1999 2000
----- ----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal statutory expense (benefit)................... $(202) $ 149 $3,030 $2,640
State taxes, net of federal benefit................... (34) 25 520 452
Research and development credits...................... (58) (125) (156) (158)
Nondeductible stock-based compensation................ -- 53 702 2,502
Other................................................. -- 16 7 41
----- ----- ------ ------
Actual income tax expense (benefit)................... $(294) $ 118 $4,103 $5,477
===== ===== ====== ======
Net effective income tax rate......................... (47.7)% 26.9% 46.0% 70.5%
</TABLE>
F-12
<PAGE> 83
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The primary components of temporary differences that gave rise to
deferred taxes as of December 31, 1998 and 1999 and June 30, 2000 are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------
1998 1999 2000
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
State income taxes........................................ $ -- $261 $ 452
Allowance for doubtful accounts........................... 11 38 93
Depreciation and amortization............................. -- 29 120
Research and development credit carryforward.............. 99 -- --
Warranty accrual.......................................... 11 60 121
Deferred revenue.......................................... 31 116 154
Stock-based compensation.................................. 12 58 216
Bonus accruals............................................ -- -- 322
Other..................................................... 26 50 48
---- ---- ------
Total deferred tax assets.............................. $190 $612 $1,526
==== ==== ======
</TABLE>
Realization of the December 31, 1999 deferred tax assets of $612,000 is
dependent on the Company generating sufficient taxable income in the future.
Although realization is not assured, the Company believes it is more likely than
not that the deferred tax assets will be realized. The amount of the deferred
tax assets considered realizable, however, could be reduced in the future if
estimates of future taxable income are reduced.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facility and certain computer equipment under
noncancelable operating leases for varying periods through January 2005,
excluding options to renew. The following are the future minimum commitments
under these leases (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
2000.............................................. $ 424
2001.............................................. 486
2002.............................................. 461
2003.............................................. 475
2004.............................................. 489
Thereafter........................................ 61
------
$2,396
======
</TABLE>
Rent expense for the period from May 27, 1997 (inception) through
December 31, 1997 and the years ended December 31, 1998 and 1999 was $19,000,
$67,000 and $171,000, respectively.
In March 2000, the Company amended its facility operating lease to
include additional square footage and to extend the term of the lease. In
connection with the amended lease agreement, monthly payments increased from
$29,000 to $68,000 and the lease term was extended through May 2007.
F-13
<PAGE> 84
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
From time to time, certain legal actions may arise in the ordinary course
of the Company's business. To date, such legal actions have not had a material
adverse effect on the Company's financial position, results of operations or
cash flows.
6. SHAREHOLDERS' EQUITY
Contribution of Capital
During the period from May 27, 1997 (inception) through December 31, 1997
and during the year ended December 31, 1998, the Company's then principal
shareholder contributed additional cash to the Company of $600,000 and $700,000,
respectively. The contributions were non-reciprocal in nature and were recorded
in shareholders' equity as a component of additional paid-in capital.
Stock Splits
In January 1998, the Board of Directors authorized a five-for-one split
of the Company's common stock, effected in the form of a stock dividend paid to
shareholders of record on March 16, 1998.
In February 2000, the Board of Directors authorized a three-for-one split
of the Company's common stock, effected in the form of a stock dividend paid to
shareholders of record on March 21, 2000.
The share information in the accompanying financial statements and
related notes for all periods prior to these stock splits have been adjusted to
reflect the stock splits on a retroactive basis.
Common Stock
In June 1999, the Company issued 225,000 shares of common stock to a
director in exchange for services and $64,000. The deemed fair value of these
shares for accounting purposes was determined to be $243,000, of which the
intrinsic value of $179,000 was recognized as stock-based compensation expense
for the year ended December 31, 1999.
In August 1999, the Company issued 900,000 shares of common stock to its
two employee founders in exchange for services and notes receivable totaling
$255,000. The shares are subject to a lapsing repurchase right which allows the
Company at its option to repurchase any unvested shares at the original purchase
price of $0.28 per share. The shares vest in eight equal quarterly installments
commencing on September 30, 1999, subject to acceleration provisions for certain
employment termination situations. The deemed fair value of these shares for
accounting purposes was determined to be $1,287,000, resulting in deferred
stock-based compensation totaling $1,032,000, of which approximately $323,000
was recognized as stock-based compensation expense for the year ended December
31, 1999. As of December 31, 1999, 675,000 of these shares were unvested.
In September 1999, the Company issued 225,000 shares of common stock to a
non-employee shareholder in exchange for services and note receivable totaling
$64,000. The shares are subject to a lapsing repurchase right which allows the
Company at its option to repurchase any unvested shares at the original purchase
price of $0.28 per share. The shares vest in eight equal quarterly installments
commencing on September 30, 1999, subject to acceleration provisions for certain
service termination situations. As of December 31, 1999, the deemed fair value
of the unvested shares for accounting purposes was estimated to be $1,006,000,
resulting in deferred stock-based compensation of $1,002,000, of which
approximately $275,000 was recognized as stock-based compensation expense for
the year ended December 31, 1999. This stock award is a variable award. For the
six months ended June 30, 2000, an
F-14
<PAGE> 85
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
additional $900,000 of deferred stock-based compensation was recorded related to
this issuance. As of December 31, 1999, 169,000 of these shares were unvested.
In September 1999, the Company issued 300,000 shares of common stock to
an employee in exchange for $85,000. The shares are subject to a lapsing
repurchase right which allows the Company at its option to repurchase any
unvested shares at the original purchase price of $0.28 per share. 75,000 of the
shares vest on September 30, 2000 with the remaining shares vesting in twelve
equal quarterly installments commencing on December 31, 2000. The deemed fair
value of these shares for accounting purposes was determined to be $462,000,
resulting in deferred stock-based compensation totaling $377,000, of which
stock-based compensation expense for the year ended December 31, 1999 was
$98,000. As of December 31, 1999, all of these shares were unvested.
For the six months ended June 30, 2000, stock-based compensation expense
related to the stock issuances described above was $1,383,000.
Notes Receivable from Shareholders
As of December 31, 1999, the Company held promissory notes from the
Company's two employee founders and a non-employee shareholder totaling $319,000
for the issuance of 1,125,000 shares of common stock. The notes bear interest at
8% per annum and are due at various dates through September 2002. The notes,
which are classified as a component of shareholders' equity, are full recourse
and are collateralized by the related shares of the Company. For the year ended
December 31, 1999 and the six months ended June 30, 2000, the Company recorded
interest income of approximately $9,000 and $13,000, respectively, relating to
these notes receivable.
Stock Options
The Company's 1997 Stock Option Plan, as amended in July 1999 (the "1997
Plan"), provides for the issuance of stock-based awards to qualified employees,
directors and consultants of the Company. The stock-based awards may include
incentive stock options or nonqualified stock options. Options become
exercisable over a vesting period as determined by the Board of Directors and
expire over terms not exceeding 10 years from the date of grant. The exercise
price for options granted under the 1997 Plan may not be granted at less than
100% of the fair market value of the Company's common stock on the date of grant
(110% if granted to an employee who owns more than 10% of the voting price of
the outstanding stock).
Options generally vest 25% on the first anniversary of the grant date with
the remaining options vesting in 12 equal quarterly installments with the first
installment vesting on the last day of the first full calendar quarter following
the first anniversary. In the event the holder ceases to be employed by the
Company, all unvested options are forfeited and all vested options may be
exercised within a period of up to 30 days after optionee's termination for
cause, up to three months after termination other than for cause or death or
disability, or up to six months after termination by disability or death. If an
optionee ceases to serve as an employee, as defined by the 1997 Plan, any
options exercised are subject to repurchase at the option of the Company at the
higher of the original exercise price or fair market value at the termination
date. The Company's repurchase right terminates upon the earlier of (1) the
first public offering of common stock or (2) a merger or consolidation of the
Company, as defined in the 1997 Plan. As of June 30, 2000, the Company has
reserved 15,000,000 shares of its common stock for issuance under the 1997 Plan,
4,338,000 of which are available for future grant.
The following table summarizes information relating to stock option
activity under the 1997 Plan for the period from May 27, 1997 (inception)
through December 31, 1997, for the years ended
F-15
<PAGE> 86
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
December 31, 1998 and 1999, and for the six months ended June 30, 2000 (in
thousands, except per share data):
<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
----------- ---------
<S> <C> <C>
Options outstanding as of May 27, 1997 (inception).......... -- $ --
Granted..................................................... 1,125 0.01
Exercised................................................... -- --
Canceled.................................................... -- --
-----
Options outstanding as of December 31, 1997................. 1,125 0.01
Granted..................................................... 2,690 0.07
Exercised................................................... -- --
Canceled.................................................... -- --
-----
Options outstanding as of December 31, 1998................. 3,815 0.05
Granted..................................................... 3,300 0.29
Exercised................................................... 776 0.02
Canceled.................................................... 91 0.28
-----
Options outstanding as of December 31, 1999................. 6,248 0.18
Granted..................................................... 3,720 1.05
Exercised................................................... 1,120 0.11
Canceled.................................................... 82 0.34
-----
Options outstanding as of June 30, 2000..................... 8,766 $0.55
=====
</TABLE>
Options granted for the years ended December 31, 1998 and 1999, and for
the six months ended June 30, 2000 resulted in total deferred stock-based
compensation of $422,000, $3,982,000 and $25,094,000, respectively, and were
recorded as deferred compensation in shareholders' equity. There was no deferred
stock-based compensation recognized for the period ended December 31, 1997. The
deferred stock-based compensation represented the difference between the deemed
fair value of the Company's common-stock for accounting purposes and the
exercise price of these options at the date of grant. The deferred stock-based
compensation is recognized as stock-based compensation expense in the statements
of operations over the related vesting periods of the options.
For the years ended December 31, 1998 and 1999, and for the six months
ended June 30, 1999 and 2000, stock-based compensation expense related to stock
option grants included in the accompanying statements of operations amounted to
$162,000, $1,010,000, $238,000 and $5,253,000, respectively. There was no
stock-based compensation expense for the period ended December 31, 1997. Annual
amortization of deferred stock-based compensation as of December 31, 1999 is
approximately $3,073,000, $1,275,000, $465,000 and $134,000 for the years ending
December 31, 2000, 2001, 2002 and 2003, respectively.
F-16
<PAGE> 87
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Additional information with respect to stock options outstanding as of
December 31, 1999 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 to $0.02 1,453 8.00 $0.01 312 $0.02
0.05 to 0.07 837 7.33 0.06 363 0.06
0.13 to 0.17 823 8.77 0.16 219 0.16
0.23 to 0.33 3,135 9.50 0.29 4 0.29
----- ---
$0.01 to 0.33 6,248 8.72 $0.18 898 $0.07
===== ===
</TABLE>
The deemed fair value for accounting purposes of options granted was
$0.01, $0.25 and $1.69 per share for the period from May 27, 1997 (inception)
through December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively. There were no options exercised subject to repurchase as of
December 31, 1999.
The Company calculated the fair value of each option grant on the
respective dates of grant using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Expected lives (in years)............................. 10 10 10
Risk-free interest rates.............................. 5.00% 5.75% 6.00%
Dividend yield........................................ 0% 0% 0%
Expected volatility................................... 0% 0% 0%
</TABLE>
F-17
<PAGE> 88
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Had compensation costs been determined based upon the Black-Scholes
methodology prescribed under SFAS No. 123, the Company's net income (loss) and
basic and diluted net income (loss) per share would approximate the following
pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
PRO
AS REPORTED FORMA
----------- ------
<S> <C> <C>
For the period ended December 31, 1997:
Net loss.................................................. $ (322) $ (323)
Basic and diluted net loss per share...................... $(0.01) $(0.01)
For the year ended December 31, 1998:
Net income................................................ $ 320 $ 297
Earnings per share -- Basic............................... $ 0.01 $ 0.01
Earnings per share -- Diluted............................. $ 0.01 $ 0.01
For the year ended December 31, 1999:
Net income................................................ $4,810 $4,664
Earnings per share -- Basic............................... $ 0.11 $ 0.11
Earnings per share -- Diluted............................. $ 0.10 $ 0.10
For the six months ended June 30, 1999:
Net income................................................ $1,750 $1,733
Earnings per share -- Basic............................... $ 0.04 $ 0.04
Earnings per share -- Diluted............................. $ 0.04 $ 0.04
For the six months ended June 30, 2000:
Net income................................................ $2,287 $2,169
Earnings per share -- Basic............................... $ 0.05 $ 0.05
Earnings per share -- Diluted............................. $ 0.04 $ 0.04
</TABLE>
F-18
<PAGE> 89
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share data):
<TABLE>
<CAPTION>
MAY 27, 1997
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- ---------------------
1997 1998 1999 1999 2000
------------ ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic presentation
Numerator:
Net income (loss)......................... $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287
Denominator:
Weighted average common shares............ 43,041 43,200 44,029 43,218 46,169
Adjustment for common shares subject to
repurchase............................. -- -- (455) -- (933)
------- ------- ------- ------- -------
Adjusted weighted average common shares... 43,041 43,200 43,574 43,218 45,236
======= ======= ======= ======= =======
Basic net income (loss) per share........... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05
======= ======= ======= ======= =======
Diluted presentation
Denominator:
Shares used above......................... 43,041 43,200 44,029 43,218 46,169
Weighted average effect of dilutive
securities:
Stock options.......................... -- 2,419 4,412 3,122 5,887
Common shares subject to repurchase.... -- -- 455 -- 933
------- ------- ------- ------- -------
Denominator for diluted calculation......... 43,041 45,619 48,896 46,340 52,989
======= ======= ======= ======= =======
Diluted net income (loss) per share......... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04
======= ======= ======= ======= =======
</TABLE>
The diluted per share computations for the period ended December 31,
1997, exclude 1,125,000 options which were antidilutive. There were no shares
excluded from the diluted earnings computation for the years ended December 31,
1998 and 1999, and the six month periods ended June 30, 1999 and 2000.
8. RETIREMENT PLAN
Effective June 1997, the Company adopted a 401(k) Retirement Plan (the
"Plan") under which eligible employees may authorize up to 15% of their
compensation to be invested in employee elected investment funds. As determined
annually by the Board of Directors, the Company may contribute matching funds of
up to 6% of the employee's compensation which vest over a four-year period. For
the period from May 27, 1997 (inception) through December 31, 1997, the Company
made no contributions to the Plan. For the years ended December 31, 1998 and
1999, the Company expensed and made contributions to the Plan in the amount of
approximately $18,000 and $59,000, respectively.
F-19
<PAGE> 90
IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
In June 1998, the Company received $500,000 from a director/shareholder
of the Company in exchange for a note. In September 1999, the Company repaid the
note in full.
For the years ended December 31, 1998 and 1999, respectively, the Company
recorded $95,000 and $436,000 of revenues to companies in which a
director/shareholder of the Company is a major shareholder. Related party
accounts receivable as of December 31, 1998 and 1999 were $81,000 and $28,000,
respectively.
10. SUBSEQUENT EVENTS
On July 29, 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission ("SEC") that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering. In addition, the Board of
Directors reserved an additional 500,000 shares of common stock for future stock
and option awards and approved an increase in the number of common shares
authorized for issuance from 75 million to 200 million.
From July 1, 2000 to September 1, 2000, the Company granted 1,865,000
options to purchase common shares at exercise prices ranging from $3.50 to $9.00
per share. In connection with these grants, the Company will record deferred
stock-based compensation of approximately $6,106,000, which will be amortized
over the respective four-year vesting period.
During August of 2000, the Company issued warrants to purchase 80,000
shares of common stock to a director. The warrants have an exercise price of
$7.00 and vest in four equal quarterly installments commencing September 30,
2000. The Company will record deferred stock-based compensation of approximately
$217,000 which will be amortized ratably over the vesting period.
Also in August of 2000, the Company's Board of Directors reserved an
additional 2 million shares of common stock for issuance under the Company's
1997 stock option plan.
On September 1, 2000, the Company's Board of Directors approved the
Company's 2000 Bonus Plan (the "Bonus Plan") and its Officer Severance Plan (the
"Severance Plan"). The Bonus Plan is based on the Company's achievement of
certain revenue thresholds. All non-commissioned employees are eligible to
receive bonuses of between 10% and 150% of their salaries. Under the Severance
Plan, executive officers are entitled under certain circumstances to receive
severance benefits following the termination of their employment.
F-20
<PAGE> 91
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligations to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
[IXIA LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
DAIN RAUSCHER WESSELS
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of our common stock registered hereby. All amounts are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 20,038
NASD filing fee............................................. 7,590
Nasdaq/NMS application fee.................................. 95,000
Printing and engraving expenses............................. 225,000
Registrar and transfer agent fees........................... 3,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 375,000
Miscellaneous............................................... 74,372
----------
Total..................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code provides that a
corporation may indemnify corporate "agents" (including directors, officers and
employees of the corporation) against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with defending
non-derivative actions if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful, and against expenses actually and
reasonably incurred in connection with defending derivative actions if such
person acted in good faith and in a manner such person believed to be in the
best interests of the corporation and its shareholders. Indemnification is
obligatory to the extent that an agent of a corporation has been successful on
the merits in defense of any such proceeding against such agent, but otherwise
may be made only upon a determination in each instance either by a majority vote
of a quorum of the Board of Directors (other than directors involved in such
proceeding), by independent legal counsel if such a quorum of directors is not
obtainable, by the shareholders (other than shareholders to be indemnified), or
by the court, that indemnification is proper because the agent has met the
applicable statutory standards of conduct. Corporations may also advance
expenses incurred in defending proceedings against corporate agents, upon
receipt of an undertaking that the agent will reimburse the corporation unless
it is ultimately determined that the agent is entitled to be indemnified against
expenses reasonably incurred.
The indemnification provided by Section 317 of the California
Corporations Code is not deemed to be exclusive of any other rights to which
agents of Ixia seeking indemnification may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in an official capacity and as to action in another capacity while
holding such office, to the extent such additional rights are authorized in the
articles of the corporation. Article V of our Amended and Restated Articles of
Incorporation authorizes Ixia to provide for indemnification of our agents for
breach of duty to Ixia and its shareholders, through bylaw provisions or through
agreements with such agents, or both, in excess of the indemnification otherwise
permitted by Section 317, subject to the limits on such excess indemnification
set forth in Section 204 of the California General Corporation Law.
Article VI of the Registrant's bylaws provides for the indemnification of
all past and current directors and executive officers to the maximum extent and
in the manner permitted by Section 317. Additionally, the Registrant intends to
enter into Indemnity Agreements with its directors and executive officers under
which the Company will undertake to indemnify them to the fullest extent
permitted by its
II-1
<PAGE> 93
Articles of Incorporation, bylaws and applicable law against all expenses,
liability and loss (which are not paid by insurance or otherwise by the Company)
reasonably incurred or suffered by such agent in connection with the defense of
any action or proceeding to which the director or officer was or is a party or
is threatened to be made a party by reason of conduct in his capacity as an
officer or director, or in which the agent is or may be involved by reason of
the fact that he is or was serving as an officer or director of the Company, not
including actions brought for violation of Section 16 of the Securities Exchange
Act of 1934 or for failure to qualify for an exemption under Section 4 of the
Securities Act of 1933.
We also provide our directors and executive officers liability insurance
for certain losses arising from claims or charges made against them while acting
in their capacities as our directors or executive officers.
The Underwriting Agreement, the form of which will be filed as Exhibit
1.1 to this Registration Statement, will provide for indemnification for
specified matters by the underwriters of the Registrant, its directors, its
officers who sign the registration statement and the Registrant's controlling
persons for certain liabilities, including liabilities arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has issued unregistered securities to a limited number of
persons, as described below. None of these transactions involved any
underwriters or any public offerings and registrant believes that each of these
transactions was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts related to compensation
as provided under Rule 701. The recipients of the shares of common stock in
these transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had adequate access to
information about registrant through their relationship with registrant.
In June 1997, the Registrant sold an aggregate of 43,200,000 shares of
its common stock to Jean-Claude Asscher, its Chairman, Errol Ginsberg, its
President and Chief Executive Officer, an affiliate of Howard Oringer, one of
its directors, an affiliate of Jon F. Rager, one of its directors, Joel
Weissberger, one of its founders, and Ronald W. Buckly, its Corporate Secretary.
The total consideration received by the Registrant was approximately $300,000
and, in the case of Messrs. Ginsberg and Weissberger, all of their right, title
and interest in and to the Registrant's original technology and proprietary
rights.
In June 1999, the Registrant sold 225,000 shares of its common stock to
Jean-Claude Asscher, its Chairman, for total consideration of $63,750 paid in
the form of a full recourse promissory note bearing interest at the rate of 8%
per annum.
In August 1999, the Registrant sold an aggregate of 600,000 shares of its
common stock to Errol Ginsberg, its Chief Executive Officer and President, for
total consideration of $170,000 paid in the form of a full recourse promissory
note bearing interest at the rate of 8% per annum and 300,000 shares of its
common stock to Joel Weissberger, one of its founders, for total consideration
of $85,000 paid in the form of a full recourse promissory note bearing interest
at the rate of 8% per annum.
In September 1999, the Registrant sold 225,000 shares of its common stock
to Ronald W. Buckly, its Corporate Secretary, for total consideration of $63,750
paid in the form of a full recourse promissory note bearing interest at the rate
of 8% per annum and 300,000 shares of its common stock to Mark MacWhirter, its
Vice President, Software Development, for total consideration of $85,000.
In August 2000, the Registrant granted warrants to purchase 80,000 shares
of its common stock at an exercise price of $7.00 per share to Robert W. Bass,
one of its directors.
From November 1, 1997 to August 29, 2000, the Registrant granted stock
options pursuant to the registrant's 1997 stock option plan to purchase an
aggregate of 12,464,700 shares of common stock at
II-2
<PAGE> 94
exercise prices ranging from $0.01 to $7.00 per share to its employees, officers
and consultants, including Thomas B. Miller, its Chief Financial Officer, Paul
Mallinder, its Vice President, Worldwide Sales, Eran Karoly, its Vice President,
Marketing, and Joseph A. Noble, its Vice President, North American Sales. From
August 25, 1999 to August 29, 2000, options to acquire 2,556,293 shares of
common stock were exercised at exercise prices ranging from $0.01 to $0.33 per
share for an aggregate consideration of approximately $229,890.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statements schedules filed as part of this
registration statement are as follows:
(a) EXHIBITS.
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation, as amended
3.2* Bylaws, as amended
4.1** Specimen Certificate evidencing shares of Common Stock
5.1 Form of Opinion of Bryan Cave LLP regarding legality of the
common stock
10.1* 1997 Stock Option Plan, as amended
10.1.1 Amendment No. 4 to 1997 Stock Option Plan
10.2 Director Stock Option Plan
10.3 Employee Stock Purchase Plan
10.4 Officer Severance Plan
10.5 Form of Indemnity Agreement between Ixia and its directors
and executive officers
10.6* Promissory Note dated June 1, 1998, in the principal amount
of $500,000 issued by Ixia in favor of Jean-Claude Asscher
10.7* Guarantee dated October 25, 1999 issued by Ixia in favor of
UBS AG
10.8* Master Equipment Lease Agreement dated October 1, 1997
between Ixia and Synchronous Network Solutions, Inc.
10.9* Subscription Agreement dated June 2, 1997 between Ixia and
Errol Ginsberg
10.10* Subscription Agreement dated June 3, 1997 between Ixia and
Joel Weissberger
10.11* Subscription Agreement dated August 20, 1999 between Ixia
and Errol Ginsberg
10.12* Subscription Agreement dated August 20, 1999 between Ixia
and Joel Weissberger
10.13* Subscription Agreement dated September 8, 1999 between Ixia
and Mark MacWhirter
10.14* Office Lease Agreement dated November 5, 1999 between Malibu
Canyon Office Partners, LLC and Ixia and First Amendment to
Office Lease dated as of March 22, 2000
10.15 Warrants dated August 2, 2000 to Purchase 80,000 Shares of
Common Stock issued to Robert W. Bass
10.16 2000 Bonus Plan
10.17** Form of Registration Rights and Stock Transfer Restriction
Agreement between Ixia and Technology Capital Group S.A.
23.1** Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1* Power of Attorney for Messrs. Ginsberg, Miller, Asscher,
Oringer and Rager
24.2 Power of Attorney for Mr. Bass
27.1* Financial Data Schedule
</TABLE>
------------
* Previously filed.
** To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
Financial Statement Schedules have been omitted because of the absence of
conditions under which they would be required or because the required
information has been included in the financial statements.
II-3
<PAGE> 95
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions of Item 14 of this registration
statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance on
Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
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<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Calabasas, State of California on September 5, 2000.
IXIA
By: /s/ ERROL GINSBERG
------------------------------------
Errol Ginsberg
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated on the date set forth opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ERROL GINSBERG President, Chief Executive September 5, 2000
--------------------------------------------------- Officer and Director (Principal
Errol Ginsberg Executive Officer)
/s/ THOMAS B. MILLER* Chief Financial Officer September 5, 2000
--------------------------------------------------- (Principal Financial and
Thomas B. Miller Accounting Officer)
/s/ JEAN-CLAUDE ASSCHER* Chairman of the Board of September 5, 2000
--------------------------------------------------- Directors
Jean-Claude Asscher
/s/ ROBERT W. BASS* Director September 5, 2000
---------------------------------------------------
Robert W. Bass
/s/ HOWARD ORINGER* Director September 5, 2000
---------------------------------------------------
Howard Oringer
/s/ JON F. RAGER* Director September 5, 2000
---------------------------------------------------
Jon F. Rager
*By: /s/ ERROL GINSBERG
---------------------------------------------
Errol Ginsberg
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation, as amended
3.2* Bylaws, as amended
4.1** Specimen Certificate evidencing shares of Common Stock
5.1 Form of Opinion of Bryan Cave LLP regarding legality of the
common stock
10.1* 1997 Stock Option Plan, as amended
10.1.1 Amendment No. 4 to 1997 Stock Option Plan
10.2 Director Stock Option Plan
10.3 Employee Stock Purchase Plan
10.4 Officer Severance Plan
10.5 Form of Indemnity Agreement between Ixia and its directors
and executive officers
10.6* Promissory Note dated June 1, 1998, in the principal amount
of $500,000 issued by Ixia in favor of Jean-Claude Asscher
10.7* Guarantee dated October 25, 1999 issued by Ixia in favor of
UBS AG
10.8* Master Equipment Lease Agreement dated October 1, 1997
between Ixia and Synchronous Network Solutions, Inc.
10.9* Subscription Agreement dated June 2, 1997 between Ixia and
Errol Ginsberg
10.10* Subscription Agreement dated June 3, 1997 between Ixia and
Joel Weissberger
10.11* Subscription Agreement dated August 20, 1999 between Ixia
and Errol Ginsberg
10.12* Subscription Agreement dated August 20, 1999 between Ixia
and Joel Weissberger
10.13* Subscription Agreement dated September 8, 1999 between Ixia
and Mark MacWhirter
10.14* Office Lease Agreement dated November 5, 1999 between Malibu
Canyon Office Partners, LLC and Ixia and First Amendment to
Office Lease dated as of March 22, 2000
10.15 Warrants dated August 2, 2000 to Purchase 80,000 Shares of
Common Stock issued to Robert W. Bass
10.16 2000 Bonus Plan
10.17** Form of Registration Rights and Stock Transfer Restriction
Agreement between Ixia and Technology Capital Group S.A.
23.1** Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1* Power of Attorney for Messrs. Ginsberg, Miller, Asscher,
Oringer and Rager
24.2 Power of Attorney for Mr. Bass
27.1* Financial Data Schedule
</TABLE>
------------
* Previously filed.
** To be filed by amendment.
