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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-31523
IXIA
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4635982
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
26601 W. AGOURA ROAD, CALABASAS CA 91302
(Address of principal executive offices, including zip code)
(818) 871-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK 53,883,196
(Class of Common Stock) (Outstanding at November 3, 2000)
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IXIA
TABLE OF CONTENTS
PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the three and nine month periods ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30,
2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 21
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IXIA
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 12,819 $ 8,733
Accounts receivable, net of allowance for doubtful accounts of
$197 and $89 as of September 30, 2000 and December 31,
1999, respectively 9,753 4,357
Inventories 3,689 746
Deferred income taxes 2,890 585
Prepaid expenses and other current assets 1,443 291
-------- --------
TOTAL CURRENT ASSETS 30,594 14,712
Property and equipment, net 2,795 952
Other assets, net 510 158
-------- --------
$ 33,899 $ 15,822
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,615 $ 1,087
Accrued expenses 3,770 1,382
Deferred revenue 801 270
Income taxes payable 2,541 4,473
-------- --------
TOTAL CURRENT LIABILITIES 9,727 7,212
Shareholders' equity:
Preferred stock, no par value;
1,000 shares authorized and none outstanding -- --
Common stock, no par value; 200,000 and 75,000 shares
authorized at September 30, 2000 and December 31,
1999, respectively, 47,412 and 45,626 shares issued
and outstanding as of September 30, 2000 and
December 31, 1999, respectively 999 783
Additional paid-in capital 40,632 8,294
Deferred stock-based compensation (25,852) (4,947)
Notes receivable from shareholders (257) (328)
Retained earnings 8,650 4,808
-------- --------
TOTAL SHAREHOLDERS' EQUITY 24,172 8,610
-------- --------
$ 33,899 $ 15,822
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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IXIA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $21,263 $ 7,128 $49,531 $15,342
Cost of revenues (1) 4,012 1,532 9,638 2,944
------- ------- ------- -------
Gross profit 17,251 5,596 39,893 12,398
Operating expenses:
Research and development 1,998 664 4,742 1,846
Sales and marketing 3,668 1,345 8,040 2,876
General and administrative 1,354 429 3,087 1,017
Stock-based compensation (2) 4,410 457 10,660 864
------- ------- ------- -------
Total operating expenses 11,430 2,895 26,529 6,603
------- ------- ------- -------
Income from operations 5,821 2,701 13,364 5,795
Interest income, net 183 28 404 46
------- ------- ------- -------
Income before income taxes 6,004 2,729 13,768 5,841
Income tax expense 4,449 1,257 9,926 2,619
------- ------- ------- -------
Net income $ 1,555 $ 1,472 $ 3,842 $ 3,222
======= ======= ======= =======
Earnings per share:
Basic $ 0.03 $ 0.03 $ 0.08 $ 0.07
Diluted $ 0.03 $ 0.03 $ 0.07 $ 0.07
Weighted average number of shares outstanding:
Basic 46,454 43,786 45,622 43,314
Diluted 55,333 49,399 54,015 47,818
-----------------------------
(1) Stock-based compensation included
in cost of revenues $ 298 $ 9 $ 684 $ 19
======= ======= ======= =======
(2) Stock-based compensation:
Research and development $ 2,137 $ 196 $ 4,734 $ 290
Sales and marketing 1,431 111 3,202 235
General and administrative 842 150 2,724 339
------- ------- ------- -------
$ 4,410 $ 457 $10,660 $ 864
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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IXIA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2000 1999
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,842 $ 3,222
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 754 281
Stock-based compensation 11,344 883
Interest receivable from shareholders 71 --
Deferred income tax provision (2,450) --
Changes in operating assets and liabilities:
Accounts receivable, net (5,396) (1,733)
Inventories (2,943) (800)
Prepaid expenses and other current assets (1,152) (60)
Other assets (118) (7)
Accounts payable 1,528 536
Accrued expenses 2,388 977
Deferred revenue 531 136
Income taxes payable (1,932) 2,561
-------- --------
Net cash provided by operating activities 6,467 5,996
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (2,597) (705)
-------- --------
Cash used in investing activities (2,597) (705)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock -- 149
Exercise of stock options 216 7
Repayment of related-party note -- (500)
-------- --------
Net cash provided by (used in) financing activities 216 (344)
-------- --------
Net increase in cash and cash equivalents 4,086 4,947
Cash and cash equivalents at beginning of period 8,733 1,124
-------- --------
Cash and cash equivalents at end of period $ 12,819 $ 6,071
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 14,197 $ 58
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Issuance of shareholder notes receivable $ -- $ 319
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. 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.
On October 17, 2000, the Company sold 6,325,000 shares of common stock in an
initial public offering, including 825,000 shares sold upon exercise of the
underwriters' over-allotment option. Net proceeds to the Company totaled
approximately $75.0 million, net of the underwriters' discount of $5.8 million
and estimated offering expenses of $1.4 million.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements as of September 30,
2000 and for the three and nine months ended September 30, 2000 and 1999, are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for the interim periods presented. The results of operations for the
current interim periods presented are not necessarily indicative of results to
be expected for the current year.
These consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's final Prospectus dated October 17, 2000, as filed with
the Securities and Exchange Commission on October 18, 2000 in connection with
our Registration Statement on Form S-1 (Reg. No. 333-42678).
3. 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.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
4. NET INCOME PER SHARE
Basic and diluted net income per share applicable to common stock has
been computed using the weighted average number of shares of common stock and
common stock equivalents outstanding during the period, less shares subject to
repurchase.
The following table sets forth the computation of basic and diluted net
income per share for the three and nine months ended September 30, 2000 and 1999
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic presentation
Numerator:
Net income $ 1,555 $ 1,472 $ 3,842 $ 3,222
Denominator:
Weighted average common shares 47,209 44,066 46,517 43,503
Adjustment for common shares subject
to repurchase (755) (280) (895) (189)
-------- -------- -------- --------
Denominator for basic calculation 46,454 43,786 45,622 43,314
======== ======== ======== ========
Basic net income per share $ 0.03 $ 0.03 $ 0.08 $ 0.07
======== ======== ======== ========
Diluted presentation
Denominator:
Shares used above 46,454 43,786 45,622 43,314
Weighted average effect of dilutive securities:
Stock options and warrants 8,124 5,333 7,497 4,315
Common shares subject to repurchase 755 280 895 189
-------- -------- -------- --------
Denominator for diluted calculation 55,333 49,399 54,015 47,818
======== ======== ======== ========
Diluted net income per share $ 0.03 $ 0.03 $ 0.07 $ 0.07
======== ======== ======== ========
</TABLE>
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Raw materials $1,897 $ 506
Work in process 454 179
Finished goods 1,338 61
------ ------
$3,689 $ 746
====== ======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company recorded $644,000 and $218,000 of net revenues for the
three months ended September 30, 2000 and 1999, respectively, and $1.3 million
and $436,000 for the nine months ended September 30, 2000 and 1999,
respectively, resulting from sales to companies in which a director/shareholder
of the Company is a major shareholder. Related party accounts receivable as of
September 30, 2000 and December 31, 1999 were $194,000 and $28,000,
respectively.
7. CONCENTRATIONS
International Revenues:
Net revenues from international product shipments were $3.7 million and
$927,000 for the three months ended September 30, 2000 and 1999, respectively,
and $7.5 million and $2.0 million for the nine months ended September 30, 2000
and 1999, respectively.
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.
Only one customer comprises more than 10% of net revenues as follows
(in thousands, except percentages):
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CONCENTRATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
CUSTOMER A 2000 1999 2000 1999
---------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Amount of net revenues $ 4,902 $ 2,956 $14,514 $ 5,479
As a percent of total net revenues 23% 41% 29% 36%
</TABLE>
As of both September 30, 2000 and December 31, 1999, the Company had
receivable balances from Customer A approximating 16% of total accounts
receivable.
ITEM 2. 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. The results of operations for the three and nine months ended
September 30, 2000, are not necessarily indicative of the results that may be
expected for the full fiscal year ending December 31, 2000, or any other
future period. The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included in Item 1 of
this Quarterly Report and in conjunction with our final Prospectus dated October
17, 2000, as filed with the Securities and Exchange Commission on October 18,
2000 in connection with our Registration Statement on Form S-1 (Reg. No.
333-42678).
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 dollars and as a percentage of total net revenues:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ----------------------------------------
PRODUCTS 2000 1999 2000 1999
------------- ----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Optical interface cards $13,023 61.3% $ 4,255 59.7% $30,157 60.9% $ 7,626 49.7%
Electrical interface cards 5,766 27.1 2,305 32.3 14,035 28.3 6,027 39.3
Chassis, software and other products 2,474 11.6 568 8.0 5,339 10.8 1,689 11.0
------- ----- ------- ----- ------- ----- ------- -----
Total $21,263 100.0% $ 7,128 100.0% $49,531 100.0% $15,342 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Sales to our five largest customers collectively accounted for
approximately $9.4 million or 44.2% of our net revenues for the three months
ended September 30, 2000 and $4.3 million or 60.4% of our net revenues for the
three months ended September 30, 1999. Sales to our five largest customers
collectively accounted for $23.4 million or 47.3% of our net revenues for the
nine months ended September 30, 2000 and $8.3 million or 54.2% of our net
revenues for the nine months ended September 30, 1999. To date, we have sold our
systems primarily to network equipment manufacturers. While we expect that we
will continue to have some customer concentration for the foreseeable future, we
continue to sell our systems to a wide variety of customers. Through September
30, 2000, we had shipped our systems to over 200 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 product sales. The
hardware and software components of our products are sold as an integrated
system. The software component of our products does not require significant
modification or customization, and our sales do not involve any significant
future obligations or customer acceptance terms. Accordingly, product revenue
from product sales is recognized upon shipment. We warrant the hardware and
software components 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.
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:
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- 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.
In connection with the grant of stock options, warrants and the sale of
restricted stock, we recorded deferred stock-based compensation of $6.3 million
in the three months ended September 30, 2000 and $2.5 million in the three
months ended September 30, 1999, and $32.2 million in the nine months ended
September 30, 2000 and $3.7 million in the nine months ended September 30,
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1999. 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 and warrants 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 $4.7 million of stock-based
compensation in the three months ended September 30, 2000, $466,000 in the three
months ended September 30, 1999, $11.3 million in the nine months ended
September 30, 2000 and $883,000 in the nine months ended September 30, 1999.
Based on the unvested options, warrants and stock subject to repurchase as of
September 30, 2000, we expect to record additional stock-based compensation
expense relating to deferred stock-based compensation approximately as follows:
$4.6 million during the remaining three months of 2000, $12.0 million during
2001, $6.1 million during 2002 and $3.2 million during 2003 and thereafter. The
amount of deferred stock-based compensation expense to be recorded in future
periods could decrease if options, warrants and stock subject to
repurchase for which unearned compensation has been recorded are forfeited or
repurchased. Changes in the market value of the Company's common stock could
also affect future stock-based compensation expense related to instruments
which receive variable accounting treatment.
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 18.9 21.5 19.5 19.2
----- ----- ----- -----
Gross profit 81.1 78.5 80.5 80.8
Operating expenses:
Research and development 9.4 9.3 9.6 12.0
Sales and marketing 17.3 18.9 16.2 18.8
General and administrative 6.4 6.0 6.2 6.6
Stock-based compensation 20.7 6.4 21.5 5.6
----- ----- ----- -----
Total operating expenses 53.8 40.6 53.5 43.0
----- ----- ----- -----
Income from operations 27.3 37.9 27.0 37.8
Interest income, net 0.9 0.4 0.8 0.3
----- ----- ----- -----
Income before income taxes 28.2 38.3 27.8 38.1
Income tax expense 20.9 17.6 20.0 17.1
----- ----- ----- -----
Net income 7.3% 20.7% 7.8% 21.0%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999
Net Revenues. In the third quarter of 2000, net revenues increased 198%
to $21.3 million from the $7.1 million recorded in the third quarter of 1999.
For the first nine months of 2000, net revenues increased 223% to $49.5 million
from the $15.3 million recorded in the first nine months of 1999. These
increases were primarily related to increased unit sales across our product
lines, the introduction of new product lines and sales to new customers.
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Sales to our five largest customers collectively accounted for
approximately $9.4 million or 44% of our net revenues in the third quarter of
2000 and $4.3 million or 60% of our net revenues in the third quarter of 1999.
Sales to our five largest customers collectively accounted for approximately
$23.4 million or 47% of our net revenues in the first nine months of 2000 and
$8.3 million or 54% of our net revenues in the first nine months of 1999.
Gross Profit. In the third quarter of 2000, gross profit increased 208%
to $17.3 million from the $5.6 million recorded in the third quarter of 1999.
For the first nine months of 2000, gross profit increased 222% to $39.9 million
from the $12.4 million recorded in the first nine months of 1999. These
increases in gross profit are attributable to the higher level of net revenues
recorded in the three and nine month periods of the current year in comparison
to the prior year. As a percentage of net revenues, gross profit decreased from
80.8% for the nine months ended September 30, 1999 to 80.5% for the nine months
ended September 30, 2000.
Research and Development Expenses. In the third quarter of 2000,
research and development expenses increased 201% to $2.0 million from the
$664,000 recorded in the third quarter of 1999. For the first nine months of
2000, research and development expenses increased 157% to $4.7 million from the
$1.8 million recorded in the first nine months of 1999. These increases were
primarily a result of higher compensation expense and related benefits cost due
to the addition of engineering personnel. Including stock-based compensation
related to individuals engaged in research and development activities, research
and development expenses increased from $860,000 in the three months ended
September 30, 1999 to $4.1 million in the three months ended September 30, 2000
and from $2.1 million in the nine months ended September 30, 1999 to $9.5
million in the nine months ended September 30, 2000.
Sales and Marketing Expenses. In the third quarter of 2000, sales and
marketing expenses increased 173% to $3.7 million from the $1.3 million recorded
in the third quarter of 1999. For the first nine months of 2000, sales and
marketing expenses increased 180% to $8.0 million from the $2.9 million recorded
in the first nine months of 1999. These increases were primarily due to
increases in commissions and additional direct sales and marketing personnel.
Including stock-based compensation related to individuals engaged in sales and
marketing activities, sales and marketing expenses increased from $1.5 million
in the three months ended September 30, 1999 to $5.1 million in the three months
ended September 30, 2000 and from $3.1 million in the nine months ended
September 30, 1999 to $11.2 million in the nine months ended September 30, 2000.
General and Administrative Expenses. In the third quarter of 2000,
general and administrative expenses increased 216% to $1.4 million from the
$429,000 recorded in the third quarter of 1999. For the first nine months of
2000, general and administrative expenses increased 204% to $3.1 million from
the $1.0 million recorded in the first nine months of 1999. The increases were
related to higher compensation expense resulting from increased personnel,
increased expenses for professional services, primarily legal, recruiting and
accounting, and higher facility rental costs. Including stock-based compensation
related to personnel engaged in general and administrative activities, general
and administrative expenses increased from
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$579,000 in the three months ended September 30, 1999 to $2.2 million in the
three months ended September 30, 2000 and from $1.4 million in the nine months
ended September 30, 1999 to $5.8 million in the nine months ended September 30,
2000.
Stock-based Compensation. For the three months ended September 30,
1999, we recorded, as a reduction of shareholders' equity, deferred stock-based
compensation of $2.5 million relating to stock, option and warrant awards
compared to $6.3 million recorded for the three months ended September 30, 2000.
For the nine months ended September 30, 1999, we recorded deferred stock-based
compensation of $3.7 million relating to stock, option and warrant awards
compared to $32.2 million recorded for the nine months ended September 30, 2000.
These amounts are being amortized over the vesting periods of the stock, option
and warrant awards. Stock-based compensation increased from $457,000 for the
three months ended September 30, 1999 to $4.4 million for the three months ended
September 30, 2000. Stock-based compensation increased from $864,000 for the
nine months ended September 30, 1999 to $10.7 million for the nine months ended
September 30, 2000.
Interest Income, Net. Net interest income increased from $28,000 for
the three months ended September 30, 1999 to $183,000 for the three months ended
September 30, 2000. For the nine months ended September 30, 1999, net interest
income increased from $46,000 to $404,000 for the nine months ended September
30, 2000. These increases were the result of an increase in cash and cash
equivalents. We have incurred minimal interest expense.
Income Tax Expense. Income tax expense increased from $1.3 million, or
an effective rate of 46% for the three months ended September 30, 1999, to $4.4
million, or an effective tax rate of 74% for the three months ended September
30, 2000. For the nine months ended September 30, 1999, income tax expense
increased from $2.6 million, or an effective rate of 45%, to $9.9 million, or an
effective tax rate of 72% for the nine months ended September 30, 2000. The
differences between the effective rates and the statutory rates were primarily
due to the impact of non-deductible stock-based compensation charges, offset by
research and development credits. Excluding the impact of stock-based
compensation, the effective rates would have been 40% for the three months ended
September 30, 2000 and 39% for the three months ended September 30, 1999.
Excluding the impact of stock-based compensation, the effective rates would have
been 38% for the nine months ended September 30, 2000 and 39% for the nine
months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of $12.8
million. On October 18, 2000, we completed our initial public offering of stock
and raised approximately $75.0 million, net of underwriters' fees and estimated
offering costs. The net proceeds will be used for general corporate purposes.
Net cash provided by operating activities was $6.5 million in the nine
months ended September 30, 2000 and $6.0 million in the nine months ended
September 30, 1999. Net cash
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generated from operations in the nine months ended September 30, 2000, was
primarily provided by the growth in net income adjusted for non-cash expenses
and offset by an increase in working capital requirements. Additionally, in the
nine months ended September 30, 1999, $2.6 million of the $6.0 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 the nine months ended September 30, 1999 we paid only $58,000 in
estimated taxes. 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.
Cash used in investing activities was $2.6 million in the nine months
ended September 30, 2000 and $705,000 in the nine months ended September 30,
1999. Cash used in investing activities consisted exclusively of capital
expenditures related to the acquisition of property and equipment.
Financing activities provided net cash of $216,000 in the nine months
ended September 30, 2000. This cash consisted of proceeds from the exercise of
stock options. Financing activities used net cash of $344,000 in the nine months
ended September 30, 1999. The use of cash represented the repayment of a related
party note, as partially offset by proceeds received from the exercise of stock
options.
We had no material commitments for capital expenditures as of September
30, 2000, but we expect such expenditures to total approximately $3.1 million
for the year ended December 31, 2000, of which $2.6 million was spent in the
nine months ended September 30, 2000. These expenditures will be incurred
primarily for the acquisition of property and equipment.
We believe that our existing balances of cash and cash equivalents,
together with the net proceeds of our October 17, 2000 initial public 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.
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.
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SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The statements that are not historical facts in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this Quarterly Report are forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 and are
subject to the safe harbor created by that section. Words such as "may," "will,"
"should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "project," "predict," "potential" and variations of these words and
similar expressions are 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 those expressed or implied by our
forward-looking statements and include, among other things: the timing of new
product releases, our success in developing and producing new products, market
acceptance of our products, competitive pressures including competition for
limited source components and consistency of orders from significant customers.
Many of these risks and uncertainties are outside of our control and are
difficult for us to forecast or mitigate. Factors that may cause our actual
results to differ materially from our forward-looking statements include the
risks and other factors set forth in the "Risk Factors" and other sections of
our final Prospectus dated October 17, 2000, as filed with the Securities and
Exchange Commission on October 18, 2000 in connection with our initial public
offering.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company's exposure to market risk for changes in interest rates
relates primarily to our investment portfolio, which consists entirely of cash
equivalents as September 30, 2000. The primary objective of our investment
activities is to maintain the safety of principal and preserve liquidity while
maximizing yields without significantly increasing risk. This is accomplished by
investing in marketable investment grade securities, and by limiting exposure to
any one issue or issuer. We do not use derivative financial instruments in our
investment portfolio and due to the nature of our investments, we do not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on our investment
portfolio. As of September 30, 2000, all investments mature within 90 days and
are carried at cost, which approximates fair market value.
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IXIA
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 principally 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 and September 8, 2000 the court
denied Netcom Systems' applications for a temporary restraining order. On
October 2, 2000 the court denied Netcom Systems' motion for a preliminary
injunction to enjoin Mr. Karoly, among other things, from working for us pending
the outcome of the lawsuit. Mr. Karoly denies Netcom Systems' allegations and,
based on our preliminary investigation, we believe that he has substantial
defenses. Subject to certain limitations, we have agreed to defend and indemnify
Mr. Karoly in this action. We cannot assure you that the results of the claims,
including the costs of litigation, will not harm our financial position, results
of operations or competitive position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We completed our initial public offering on October 17, 2000 pursuant
to a Registration Statement on Form S-1 (File No. 333-42678), which was declared
effective by the Securities and Exchange Commission on October 17, 2000. In the
offering, we sold 6,325,000 shares of our common stock, including 825,000 shares
that were sold upon exercise of the underwriters' overallotment option, at a per
share public offering price of $13.00. The managing underwriters for the
offering were Merrill Lynch & Co., Donaldson, Lufkin & Jenrette and Dain
Rauscher Wessels.
The aggregate net proceeds to Ixia from the offering, after deducting the
underwriting discount of $5.8 million and the estimated offering expenses of
$1.4 million, were approximately $75.0 million. The net proceeds will be used
for general corporate purposes. Pending such uses, the net proceeds of the
offering have been invested in short-term, interest-bearing, investment grade
securities.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since July 1, 2000 and prior to the completion of our initial public
offering and pursuant to written consents of the holders of a majority of our
outstanding shares of common stock, the following matters were approved, all of
which were reflected in the Registration Statement on Form S-1 (Reg. No.
333-42678) relating to our initial public offering or in documents filed as
exhibits thereto. For each approved matter, we have indicated the date of the
written consent in which the matter was approved, the number of shares for which
a consent approving the matter was received and the number of shares not voting
on the matter.
1. In a written consent dated as of July 31, 2000, the shareholders
approved, with the holders of 42,953,062 shares consenting in writing and the
holders of 4,121,105 shares not voting:
(i) an amendment to our Amended and Restated Articles of
Incorporation, as amended, increasing the total number of authorized shares of
our common stock from 75,000,000 to 200,000,000 shares; and
(ii) an amendment to our Bylaws establishing certain advance
notice requirements for shareholders intending to nominate persons for election
to our board of directors or to propose matters to be acted on by shareholders
at shareholder meetings.
2. In a written consent dated as of September 1, 2000, the shareholders
approved, with the holders of 37,753,061 shares consenting in writing and the
holders of 9,653,232 shares not voting:
(i) our Officer Severance Plan;
(ii) our Employee Stock Purchase Plan pursuant to which
300,000 shares of our common stock, subject to annual automatic increases, were
reserved for issuance;
(iii) our Director Stock Option Plan under which 200,000
shares of our common stock were reserved for issuance; and
(iv) the form of the Indemnity Agreement entered into
between Ixia and its directors and executive officers.
3. In a written consent dated as of September 11, 2000, the
shareholders approved, with the holders of 45,234,045 shares consenting in
writing and the holders of 2,172,248 shares not voting:
(i) an amendment to our 1997 Stock Option Plan, as amended,
increasing the total number of shares of our common stock reserved for issuance
thereunder from 15,000,000 to 17,000,000 shares; and
(ii) an amendment to our Bylaws increasing the authorized size
of our board of directors to a range of from four to seven directors (with the
fixed number of directors remaining at five).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amendment No. 4 to 1997 Stock Option Plan(1)
10.2 Director Stock Option Plan(2)
10.3 Employee Stock Purchase Plan(3)
10.4 Officer Severance Plan(4)
10.5 Form of Indemnity Agreement between Ixia and its directors and
executive officers(5)
10.6 Warrants dated August 2, 2000 to purchase 80,000 shares of the
Registrant's Common Stock issued to Robert
W. Bass(6)
10.7 Registration Rights and Stock Transfer Restriction Agreement
dated as of September 1, 2000 among Ixia,
Technology Capital Group S.A. and Stephane Ratel(7)
10.8 Agreement dated as of September 26, 2000 between Ixia and Eran
Karoly(8)
27.1 Financial Data Schedule
(1) Incorporated by reference to Exhibit 10.1.1 to
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 27, 2000.
(2) Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 5, 2000.
(3) Incorporated by reference to Exhibit 10.3 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 5, 2000.
(4) Incorporated by reference to Exhibit 10.4 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 5, 2000.
(5) Incorporated by reference to Exhibit 10.5 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 5, 2000.
(6) Incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 5, 2000.
(7) Incorporated by reference to Exhibit 10.17 to
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 27, 2000.
(8) Incorporated by reference to Exhibit 10.19 to
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (Registration No. 333-42678)
filed with the Commission on September 27, 2000.
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(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the registrant during the
three months ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
IXIA
Date: November 14, 2000 By: /s/ Errol Ginsberg
--------------------- --------------------------------------
Errol Ginsberg
President and Chief Executive Officer
Date: November 14, 2000 By: /s/ Thomas B. Miller
--------------------- --------------------------------------
Thomas B. Miller
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.1 Amendment No. 4 to 1997 Stock Option Plan(1)
10.2 Director Stock Option Plan(2)
10.3 Employee Stock Purchase Plan(3)
10.4 Officer Severance Plan(4)
10.5 Form of Indemnity Agreement between Ixia and its directors and
executive officers(5)
10.6 Warrants dated August 2, 2000 to purchase 80,000 shares of the
Registrant's Common Stock issued to Robert W. Bass(6)
10.7 Registration Rights and Stock Transfer Restriction Agreement
dated as of September 1, 2000 among Ixia, Technology Capital
Group S.A. and Stephane Ratel(7)
10.8 Agreement dated as of September 26, 2000 between Ixia and
Eran Karoly(8)
27.1 Financial Data Schedule
----------------------------
(1) Incorporated by reference to Exhibit 10.1.1 to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 27, 2000.
(2) Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 5, 2000.
(3) Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 5, 2000.
(4) Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 5, 2000.
(5) Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 5, 2000.
(6) Incorporated by reference to Exhibit 10.15 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 5, 2000.
(7) Incorporated by reference to Exhibit 10.17 to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 27, 2000.
(8) Incorporated by reference to Exhibit 10.19 to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-42678) filed with the Commission on September 27, 2000.
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