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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
26601 WEST AGOURA ROAD, CALABASAS, CA 91302
(Address of principal executive offices, including zip code)
(818) 871-1800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was $233,983,652 based on the closing sales
price of the Registrant's Common Stock on the Nasdaq National Market on March
9, 2001.
As of March 9, 2001, the number of shares of the Registrant's Common
Stock outstanding was 53,970,636.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be delivered to
shareholders in connection with their Annual Meeting of Shareholders to be held
on May 17, 2001 are incorporated by reference into Part III of this Annual
Report.
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IXIA
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 43
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 43
SIGNATURES 48
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PART I
ITEM 1. 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 year ended December 31, 2000, optical interface cards
accounted for 60.7% of our net revenues. Our systems are highly modular,
scalable and easy to use.
Since our inception in May 1997, we have sold our systems to over
240 customers. Based on revenues for the year ended December 31, 2000, our
largest customers by category include:
o Leading network equipment manufacturers such as Cisco
Systems, Extreme Networks and Nortel Networks;
o Internet and network service providers such as Cable &
Wireless and WorldCom;
o Communications chip manufacturers such as Broadcom and
Intel; and
o 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
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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%.
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:
o 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.
o 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.
o 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
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and development costs, customer service charges and
losses resulting from the return of products.
o 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:
o Throughput is the maximum rate at which a network device
or network can transmit distinct units of data, called
packets, without loss of packets;
o Latency is the time that it takes a packet to travel
through a network device or network;
o Loss is the percentage of packets lost during
transmission through a network device or network;
o Jitter is the variation in the time intervals between
packets transmitted through a network device or network;
o Integrity checking confirms that the user information
transmitted through a network device or network has not
been corrupted; and
o 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 and Gigabit
Ethernet, has also resulted in the need for performance verification systems
that are easy to use with minimal training and set-up.
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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-192c, 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. Our systems can be configured to
generate either packets of data or pseudo random bit streams. When configured to
generate packets of data, our systems analyze each discrete packet of
information on a packet-by-packet basis, allowing 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. When configured to generate pseudo random bit streams,
our systems analyze each individual bit to measure the bit error rate of test
sequences, allowing our customers to precisely measure critical physical
transport characteristics of their networks. 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 up to 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.
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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.
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, Juniper
Networks and Nortel 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.
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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:
o developing and offering new and innovative systems that
meet our existing and potential customers' needs;
o expanding our sales and marketing efforts; and
o 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.
The operator can utilize our analysis systems in either test labs or
within networks. Our systems are operated through standard computer peripheral
devices. These devices include a monitor, keyboard and mouse. The operator of
our systems sets up test parameters for the performance analysis by inputting
data using the keyboard and mouse. The operator observes the results of the
performance analysis using the monitor.
The operator configures our systems based on the specific interfaces
of the network equipment being tested. For example, if the operator wanted to
analyze the performance of a router with Ethernet interfaces, the operator would
insert Ethernet interface cards into our system.
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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.
We also offer the IXIA 100 Quality of Service Performance Tester
which features an integrated global positioning system, or GPS, receiver that
provides a precise time stamp for each packet that it generates. Internet
service providers are able to deploy IXIA 100 units in multiple geographic
locations in their networks and synchronize all of these units by utilitzing
the GPS-provided time stamp. By doing so, they are able to accurately validate
network performance and measure the quality of service parameters specified in
service level agreements with their customers.
INTERFACE CARDS
Each one of our optical and electrical 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 either packets of information or pseudo random
bit streams, and a real-time receive analysis engine capable of analyzing the
packets or bit streams as they are being received. The transmit stream engine
generates millions of Internet protocol data packets or continuous test
sequences at wire speed that are transmitted through the network and received by
the analysis engine. When data packets have been generated, the analysis engine
then measures throughput, latency, loss and jitter, and checks data integrity
and packet sequence on a packet-by-packet basis. When bit streams have been
generated, the analysis engine measures the bit error rate of test sequences.
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.
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OPTICAL INTERFACE CARDS
NUMBER OF PORTS PER
OUR PRODUCT NAMES FIBER TYPE TRANSMISSION SPEED INTERFACE CARD
- --------------------------------- ----------- ------------------ --------------------
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
OC-192c Single-mode 9.953 Gbps 1 or 2
BIT ERROR RATE TESTING
OC-48c Single-mode 2.488 Gbps 1
OC-192c Single-mode 9.953 Gbps 1 or 2
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 fiber-type Multi-mode 1.25 Gbps 2
transceivers) Single-mode
ETHERNET AND FAST ETHERNET
100FX Multi-mode 100 Mbps 4
ELECTRICAL INTERFACE CARDS
NUMBER OF PORTS PER
OUR PRODUCT NAMES TRANSMISSION SPEED INTERFACE CARD
- --------------------------------- ----------- ------------------ --------------------
GIGABIT ETHERNET
1000T5 10/100/1000 Mbps 2
ETHERNET AND FAST ETHERNET
100TX3 10/100 Mbps 4
100TX 10/100 Mbps 4
ETHERNET AND UNIVERSAL SERIAL BUS
USB1 10/12 Mbps 4
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.
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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 and OSPF, both standard industry routing protocols, 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.
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
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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.
Server Load Balancer Test Suite. The Server Load Balancer Test Suite offers
tests which establish thousands of transmission control protocol, or TCP,
sessions to measure the performance of Web server load balancers which
distribute traffic among multiple Web servers. This test suite supports 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 new products
include a family of 10 Gigabit per Second Ethernet interface cards which will
operate at a transmission speed of 10.3 gigabits per second.
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 "Business
- -- Research and Development" on page 17 and "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 29.
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
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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 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 December
31, 2000, we shipped our systems to over 240 customers. No customer other than
Cisco Systems accounted for more than 10% of our net revenues in 2000 or 1999.
Our five largest customers collectively accounted for 48.3% of our net revenues
in 2000 and 51.0% of our net revenues in 1999. To date, we have sold our systems
primarily to network equipment manufacturers.
Our customers may reduce or discontinue their purchases at any time.
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Customers who purchased more than $250,000 of our products during
the 12-month period ended December 31, 2000 include:
3COM Entridia Network Peripherals
ADC Extreme Networks Nokia
Alcatel Genuity Nortel Networks
Alidian Networks Hewlett Packard ONI Systems
Allied Telesyn International IBM Pacific Broadband Communications
Appian Communications Intel Qwest
Arris Interactive IronBridge Networks Redback Networks
AT&T Juniper Networks River Delta Networks
Broadcom Lucent Technologies Sycamore Networks
Cable & Wireless Luminous Networks Telseon
Cabletron Systems LuxN Terabeam
Caspian Networks LVL7 Systems TyCom
Cisco Systems Motorola UUNET
Dynarc Nbase-Xyplex Verizon Communications
Electro Rent Native Networks WorldCom
Ellacoya Networks
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 and Spirent
Communications. We also compete with start-up companies, such as Antara and
gnubi, which are focused on network performance 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:
o timeliness of new product introductions;
o product quality, reliability and performance;
o ease of installation, integration and use;
o breadth of product offerings and features;
o price and overall cost of product ownership;
o customer service and technical support; and
o company reputation and size.
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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.
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 $12.1 million in 2000, $3.2
million in 1999 and $565,000 in 1998. Our direct sales force maintains close
contact with our customers and provides technical support to our manufacturers'
representatives and distributors.
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:
o participating in industry trade shows and technical
conferences;
o advertising in trade journals; and
o communicating through our corporate Web site.
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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:
o offers our customers customized solutions for their
performance validation needs;
o develops custom applications at our company
headquarters;
o can be deployed to customer sites on short notice; and
o 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 components through purchase orders and have no guaranteed
or long-term supply arrangements with our respective suppliers. In addition, the
availability of many 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, or 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.
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.
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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.
We plan to continue to make significant investments in research and
development. Our research and development expenditures, excluding stock-based
compensation, were $7.2 million in 2000, $2.8 million in 1999 and $1.6 million
in 1998.
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 trademark, trade secret and
copyright 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 patents will be issued 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 several 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. 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
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provisions that are in place may not provide us with adequate protection in all
circumstances. Further, we have not included copyright notices on all of our
copyrightable intellectual property.
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 to our business. We have not conducted a search to determine
whether the technology we have in our products infringes or misappropriates
intellectual property held by third parties. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which could relate to our products. 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.
EMPLOYEES
As of December 31, 2000, we had approximately 146 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.
Item 2. Properties
Our corporate headquarters are located in Calabasas, California,
where currently 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
Richardson, Texas and for our sales support office in the United Kingdom. We
believe that our
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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.
ITEM 3. LEGAL PROCEEDINGS
On June 21, 2000, one of our competitors, Netcom Systems, a
subsidiary of Spirent, 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. In an effort to
resolve their differences without further litigation, Mr. Karoly and Netcom
Systems participated in a mediation on March 16, 2001. At the mediation, Netcom
Systems and Mr. Karoly agreed to enter into a settlement agreement that will
result in the dismissal with prejudice of the lawsuit. The settlement agreement
does not require that either party make any payments to the other and places no
restrictions on Mr. Karoly's ability to continue his employment as Ixia's Vice
President, Marketing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Ixia's common stock has traded on the Nasdaq National Market since
October 18, 2000 under the symbol "XXIA." The following table sets forth the
high and low closing sales prices of our common stock as reported on the Nasdaq
National Market.
HIGH LOW
------- -------
2000
Fourth quarter (from October 18, 2000) $ 30.75 $ 16.00
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On March 9, 2001 the last sale price reported for our common stock
was $18.50 per share, and as of that date there were approximately 65
shareholders of record.
We have never declared or paid cash dividends on our common stock
and do not anticipate paying any dividends in the foreseeable future.
From January 1, 2000 to October 18, 2000, we issued 1,931,949
unregistered shares of common stock pursuant to the exercise of stock options at
exercise prices ranging from $0.01 to $0.37 per share. All of these stock
options were granted and exercised prior to the Company's initial public
offering under the Company's 1997 Stock Option Plan, as amended. The Company's
issuance of these shares upon the exercise of options was exempt from
registration pursuant to Section 4(2) of, or Rule 701 promulgated under, the
Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read 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. The statement of operations
data set forth below for the period from May 27, 1997, the date of the Company's
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, the Company audited consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. The
balance sheet data as of December 31, 1997 are derived from the Company's
consolidated financial statements not included in this Annual Report on Form
10-K.
MAY 27, 1997
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
2000 1999 1998 1997
-------- -------- -------- ------------
STATEMENT OF INCOME DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
Net revenues $ 76,044 $ 24,499 $ 4,916 $ --
Cost of revenues(1) 14,825 4,944 1,309 --
-------- -------- -------- --------
Gross profit 61,219 19,555 3,607 --
Operating expenses(1):
Research and development 14,421 3,449 1,672 513
Sales and marketing 17,411 4,892 1,002 --
General and administrative 8,709 2,389 509 110
-------- -------- -------- --------
Total operating expenses 40,541 10,730 3,183 623
-------- -------- -------- --------
Income from operations 20,678 8,825 424 (623)
Interest income, net 1,552 88 14 7
-------- -------- -------- --------
Income before income taxes 22,230 8,913 438 (616)
Income tax expense 14,245 4,103 118 (294)
-------- -------- -------- --------
Net income $ 7,985 $ 4,810 $ 320 $ (322)
======== ======== ======== ========
Earnings per share:
Basic $ 0.17 $ 0.11 $ 0.01 $ (0.01)
Diluted $ 0.15 $ 0.10 $ 0.01 $ (0.01)
Weighted average number of common and common equivalent shares outstanding:
Basic 47,244 43,574 43,200 43,041
Diluted 53,777 45,970 44,576 43,041
(1) Stock-based compensation included in:
Cost of revenues $ 948 $ 38 $ 8 $ --
Research and development 7,182 669 92 --
Sales and marketing 4,695 449 62 --
General and administrative 3,807 729 -- --
-------- -------- -------- --------
$ 16,632 $ 1,885 $ 162 $ --
======== ======== ======== ========
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DECEMBER 31,
--------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents $ 85,066 $ 8,733 $ 1,124 $ 304
Working capital 104,025 7,500 1,232 691
Total assets 121,682 15,822 3,266 669
Total shareholders' equity 108,051 8,610 1,760 578
ITEM 7. 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 years ended December 31, 2000, 1999
and 1998 are not necessarily indicative of the results that may be expected for
any other future period. The following discussion should be read in conjunction
with the consolidated financial statements and the notes thereto included in
Item 8 of this Annual Report on Form 10-K and in conjunction with the "Risk
Factors" described below.
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:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
PRODUCTS 2000 1999 1998
-------------------- -------------------- --------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Optical interface cards $46,132 60.7% $12,672 51.7% $ 2,060 41.9%
Electrical interface cards 21,222 27.9 8,757 35.8 2,248 45.7
Chassis, software and other products 8,690 11.4 3,070 12.5 608 12.4
------- ----- ------- ----- ------- -----
Total $76,044 100.0% $24,499 100.0% $ 4,916 100.0%
======= ===== ======= ===== ======= =====
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Sales to our five largest customers collectively accounted for
approximately $36.7 million, or 48.3%, of our net revenues in 2000, $12.5
million, or 51.0%, in 1999 and $3.0 million, or 62.0%, in 1998. 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 have sold our systems to a wide variety of customers. Through
December 31, 2000 we had shipped our systems to over 240 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, revenue from
product sales is recognized upon shipment. 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.
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:
o demand for our products;
o new product introductions by us and by our competitors;
o changes in our pricing policies and those of our
competitors;
o the mix of our products sold;
o the mix of sales channels through which our products are
sold; and
o the pricing we are able to obtain from our component
suppliers and contract manufacturers.
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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.
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
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 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 and warrants and the
sale of restricted stock, we recorded deferred stock-based compensation of $36.2
million in 2000, $6.6 million in 1999 and $422,000 in 1998. 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 or 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 to the respective operating expense categories $16.6 million
of deferred stock-based compensation in 2000, $1.9 million in 1999 and $162,000
in 1998. Based on the unvested options, warrants and stock subject to repurchase
as of December 31, 2000, we expect to record additional stock-based compensation
expense relating to deferred stock-based compensation approximately as follows:
$13.9 million during 2001, $6.6 million during 2002, $2.9 million during 2003
and $532,000 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.
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RESULTS OF OPERATIONS
The following table sets forth certain statement of income data as a
percentage of net revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
----- ----- -----
STATEMENT OF INCOME DATA:
Net revenues 100.0% 100.0% 100.0%
Cost of revenues(1) 19.5 20.2 26.6
----- ----- -----
Gross profit 80.5 79.8 73.4
----- ----- -----
Operating expenses(1):
Research and development 19.0 14.1 34.0
Sales and marketing 22.9 20.0 20.4
General and administrative 11.4 9.7 10.4
----- ----- -----
Total operating expenses 53.3 43.8 64.8
----- ----- -----
Income from operations 27.2 36.0 8.6
Interest income, net 2.0 0.4 0.3
----- ----- -----
Income before income taxes 29.2 36.4 8.9
Income tax expense 18.7 16.8 2.4
----- ----- -----
Net income 10.5% 19.6% 6.5%
===== ===== =====
(1) Stock-based compensation included in:
Cost of revenues 1.2% 0.2% 0.2%
Research and development 9.4 2.7 1.9
Sales and marketing 6.2 1.8 1.2
General and administrative 5.0 3.0 0.0
----- ----- -----
21.8% 7.7% 3.3%
===== ===== =====
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Revenues. In 2000, net revenues increased 210% to $76.0 million
from the $24.5 million recorded in 1999. This increase reflects increased unit
sales across our product lines and sales to new customers. Sales to our five
largest customers collectively accounted for approximately $36.7 million or
48.3% of our net revenues in 2000 compared to $12.5 million or 51.0% of net
revenues in 1999.
Gross Profit. Gross profit increased 213% to $61.2 million in 2000
from $19.6 million in 1999. Our gross margin increased to 80.5% in 2000 from
79.8% in 1999. This increase in gross margin primarily reflects purchasing and
volume manufacturing efficiencies as production and sales volumes increased.
Research and Development Expenses. Research and development expenses
increased to $14.4 million in 2000 from $3.4 million in 1999. Stock-based
compensation included in research and development expense increased to $7.2
million in 2000 from $669,000 in 1999.
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Excluding stock-based compensation, research and development expense increased
to $7.2 million in 2000 from $2.8 million in 1999. This increase was primarily
due to higher compensation and related benefit costs due to the addition of
engineering personnel.
Sales and Marketing Expenses. Sales and marketing expenses increased
to $17.4 million in 2000 from $4.9 million in 1999. Stock-based compensation
included in sales and marketing expense increased to $4.7 million in 2000 from
$449,000 in 1999. Excluding stock-based compensation, sales and marketing
expense increased to $12.7 million in 2000 from $4.4 million in 1999. This
increase was primarily due to increases in commissions paid and increases in the
number of direct sales and marketing personnel.
General and Administrative Expenses. General and administrative
expenses increased to $8.7 million in 2000 from $2.4 million in 1999.
Stock-based compensation included in general and administrative expense
increased to $3.8 million in 2000 from $729,000 in 1999. Excluding stock-based
compensation, general and administrative expense increased to $4.9 million in
2000 from $1.7 million in 1999. This increase is due to increased staffing and
increased expenses for professional services, primarily legal, recruiting and
accounting.
Interest Income, Net. Interest income, net increased to $1.6 million
in 2000 from $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. Income tax expense increased to $14.2 million in
2000 from $4.1 million in 1999. The income tax expense was based on an annual
effective tax rate of 64.1% in 2000 and 46.0% in 1999. The annual effective tax
rate in 2000 and 1999 differs from the statutory rate primarily due to
nondeductible stock-based compensation charges and state taxes offset by
research and development tax credits. Excluding the effects of deferred
stock-based compensation, the effective tax rate in 2000 and 1999 would have
been 38.2%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Revenues. We commenced product shipments in April 1998 and had
net revenues of $24.5 million in 1999 and $4.9 million in 1998. The 398%
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 $12.5 million or 51.0% of net revenues in 1999 compared to $3.0
million or 62.0% of net revenues in 1998.
Gross Profit. Gross profit increased 442% to $19.6 million in 1999
from $3.6 million in 1998. Our gross margin increased to 79.8% in 1999 from
73.4% in 1998. This increase in gross margin primarily reflects purchasing and
volume manufacturing efficiencies as production and sales volumes increased.
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Research and Development Expenses. Research and development expenses
increased to $3.4 million in 1999 from $1.7 million in 1998. Stock-based
compensation included in research and development expense increased to $669,000
in 1999 from $92,000 in 1998. Excluding stock-based compensation, research and
development expense increased to $2.8 million in 1999 from $1.6 million in 1998.
This increase was primarily due to higher compensation and related benefit costs
due to the addition of engineering personnel.
Sales and Marketing Expenses. In 1998, we incurred sales and
marketing expenses of $1.0 million as we began sales and marketing activities.
These expenses increased to $4.9 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 20.0% in 1999 and 20.4% in 1998.
Excluding stock-based compensation, sales and marketing expense increased to
$4.4 million in 1999 from $940,000 million in 1998.
General and Administrative Expenses. General and administrative
expenses increased to $2.4 million in 1999 from $509,000 in 1998. Stock-based
compensation included in general and administrative expense increased to
$729,000 in 1999 from $0 in 1998. Excluding stock-based compensation, general
and administrative expense increased to $1.7 million in 1999 from $509,000 in
1998. This increase is due to increased staffing and increased expenses for
personnel and professional services, primarily legal, recruiting and accounting.
Interest Income, Net. Interest income, net increased to $88,000 from
$14,000 in 1998. 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 to $4.1 million in
1999 from $118,000 in 1998. The income tax expense was based on an annual
effective tax rate of 46.0% in 1999 and 26.9% in 1998. The annual effective tax
rate in 1999 and 1998 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 1999 would have been 38.2% and the effective tax rate in
1998 would have been 14.8%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000 we had cash and cash equivalents of $85.1
million, compared to $8.7 million as of December 31, 1999.
Net cash provided by operating activities was $16.3 million in 2000,
$9.0 million in 1999 and $45,000 in 1998. Net cash generated from operations in
2000, 1999 and 1998 was primarily provided by net income adjusted for
significant non-cash expenses and changes in working capital requirements.
Additionally, for 1999, $4.5 million of the $9.0 million of cash provided by
operations relates to the timing of payments for our 1999 estimated income tax
liability. Due
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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 accrued $4.5 million in 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 $20.9 million in 2000.
Cash used in investing activities was $14.7 million in 2000, $1.0
million in 1999 and $425,000 in 1998. Of the $14.7 million total for 2000, $11.0
million related to the purchase of short-term investments and $3.7 million
related to the acquisition of property and equipment. Cash used in investing
activities in 1999 and 1998 consisted exclusively of capital expenditures for
property and equipment.
Financing activities provided net cash of $74.8 million in 2000,
used net cash of $336,000 in 1999 and provided net cash of $1.2 million in 1998.
We completed our initial public offering in October 2000, which raised net
proceeds of $74.4 million. Additional financing activities in 2000, 1999 and
1998 consisted of a $700,000 capital contribution and proceeds from a $500,000
note issued to a shareholder, which has been repaid, and cash proceeds from the
sale of common stock and stock option exercises.
As of December 31, 2000, we had no material commitments for capital
expenditures. As of December 31, 2000, we had total minimum lease obligations of
$8.5 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
and cash flow expected to be generated from our operations will be sufficient to
meet our cash needs 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.
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 was 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, and clarifies the
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application of APB Opinion 25 for various matters. The adoption of this guidance
has not had a material impact on our financial position or results of
operations.
RISK FACTORS
In addition to the other information in this Annual Report on Form
10-K, the following risk factors should be carefully considered in evaluating
the Company and its business.
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 the other risks discussed in this "Risk Factors"
section.
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 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:
o rapid technological change such as the recent
development of optical fiber and wireless technologies;
o frequent new product introductions such as higher speed
and more complex routers;
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o evolving industry standards such as new Internet
protocols;
o changing customer needs such as the increase in the
levels of service agreed to between network service
providers and their customers; and
o 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:
o anticipate technological changes and industry trends;
o properly identify customer needs;
o innovate and develop new technologies and applications;
o hire and retain necessary technical personnel;
o successfully commercialize new technologies in a timely
manner;
o timely obtain key components for the manufacture of new
products;
o manufacture and deliver our products in sufficient
volumes and on time;
o price our products competitively; and
o 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
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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.
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 our suppliers or significant changes in
market demand for necessary 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
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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 and Spirent Communications. We also compete with start-up companies
such as Antara and gnubi, 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 December
31, 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.
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 network equipment manufacturing
customers has accounted for a significant portion of our net revenues. Sales to
our five largest customers represented 48.3% of our net revenues in 2000, 51.0%
of our net revenues in 1999 and 62.0% our net revenues in 1998. Sales to Cisco
Systems, our largest customer, accounted for 29.5% of our net revenues in 2000,
30.8% of our net revenues in 1999 and 31.6% of our net revenues in 1998. 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.
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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 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 SALES 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 84.1%
of our net revenues in 2000 and 86.9% of our net revenues in 1999. 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. We only have limited international sales
experience and
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believe that the growth of our sales outside of the United States will be
subject to a number of additional risks and uncertainties, including:
o adoption of different local technical and regulatory
standards;
o the need to maintain and establish new relationships
with distributors and the sales performance of these
distributors, who may not be as effective or loyal as
our employees;
o the costs and complexity of staffing and managing more
widely dispersed foreign sales activities, including the
ability to identify, attract and retain qualified
managers and sales personnel, overcoming cultural,
linguistic and nationalistic barriers and adapting to
foreign business practices;
o longer payment cycles of foreign customers compared with
customers in the United States;
o seasonal reductions in business activities in some parts
of the world, such as during the summer months in
Europe;
o legal uncertainties regarding liability, export and
import restrictions, tariffs and other trade barriers;
o potential political and economic instability; and
o inadequate protection of intellectual property in some
countries.
Any of these factors could significantly harm our international
sales 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
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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.
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
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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. Such claims could also
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 President and Chief Executive Officer. 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.
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
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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, trademark and
copyright 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. Further, we have not included copyright notices
on all of our copyrightable intellectual property. 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 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.
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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. We cannot provide assurance
that others will not claim that we are infringing their intellectual property
rights or that we do not in fact infringe those intellectual property rights. We
have not conducted a search to determine whether the technology we have in our
products infringes or misappropriates intellectual property held by third
parties. In addition, because patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been filed
which could relate to our products.
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:
o be time-consuming;
o result in costly litigation;
o divert the efforts of our technical and management
personnel;
o require us to develop alternative technology, thereby
causing product shipment delays and the loss or deferral
of revenues;
o require us to cease selling the products containing the
infringing intellectual property;
o require us to pay substantial damage awards;
o damage our reputation; or
o 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
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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 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:
o problems assimilating the acquired operations,
technologies or products;
o unanticipated costs associated with the acquisition;
o diversion of management's attention from our core
business;
o adverse effects on existing business relationships with
suppliers, contract manufacturers, customers and
industry experts;
o risks associated with entering markets in which we have
no or limited prior experience; and
o 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.
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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.
PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND AN AGREEMENT WITH OUR
PRINCIPAL SHAREHOLDER MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US,
DESPITE THE POSSIBLE BENEFITS TO OUR SHAREHOLDERS
Our board of directors has 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 are 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.
Technology Capital Group S.A., our principal shareholder, and
Stephane Ratel, the principal shareholder of Technology Capital Group, and our
principal beneficial shareholder, have agreed to some restrictions on the sale
of their shares. Technology Capital Group has agreed that until October 13,
2001, it will not sell or otherwise dispose of its shares of our common stock in
private transactions without our prior consent. In addition, Mr. Ratel has
agreed that during the same period he will not sell or otherwise dispose of his
shares of Technology Capital Group without our prior consent. These consent
requirements may discourage third parties from attempting to acquire the shares
of our common stock held beneficially by Mr. Ratel during that period.
Technology Capital Group, but not Mr. Ratel, has also agreed that
for an additional period of three years beyond October 2001 or until any earlier
time that it owns less than 25% of the outstanding shares of our common stock,
it will provide us with at least 30 days advance notice before agreeing to a
sale or other disposition of one percent or more of our outstanding shares in a
private transaction. This notice requirement may delay a third party's
acquisition of the shares of our common stock held by Technology Capital Group
and also provide us with an opportunity to propose other buyers for the shares
who may be more acceptable to us, to propose to repurchase the shares proposed
to be sold or to propose to register the shares for sale in an underwritten
public offering. This notice requirement may also discourage third parties from
attempting to acquire the shares of our common stock held by Technology Capital
Group during
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42
that period. Mr. Ratel has not agreed to comparable restrictions with respect to
his shares of Technology Capital Group.
These provisions of our articles of incorporation and bylaws and
this agreement 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.
ITEM 7A. 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company
required by this Item are provided in the consolidated financial statements of
the Company included in this Annual Report on Form 10-K and listed in Item 14(a)
of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to information appearing in the Company's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 17, 2001, which
information appears under the captions entitled "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance." Such Proxy Statement will be filed with the Commission within 120
days after the Company's last fiscal year-end, December 31, 2000.
42
43
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference to information appearing in the Company's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 17, 2001, which
information appears under the captions "Election of Directors - Compensation of
Directors," "Executive Compensation and Other Information," "Board of Directors
and Compensation Committee Reports on Executive Compensation" and "Performance
Graph." Such Proxy Statement will be filed with the Commission within 120 days
after the Company's last fiscal year-end, December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by
reference to information appearing in the Company's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 17, 2001, which
information appears under the caption "Common Stock Ownership of Principal
Shareholders and Management." Such Proxy Statement will be filed with the
Commission within 120 days after the Company's last fiscal year-end, December
31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to information appearing in the Company's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 17, 2001, which
information appears under the caption "Certain Relationships and Related
Transactions." Such Proxy Statement will be filed with the Commission within 120
days after the Company's last fiscal year-end, December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this
Report:
(1) Consolidated Financial Statements
The consolidated financial statements listed in the
accompanying Index to Consolidated Financial Statements
are filed as part of this report.
(2) Financial Statement Schedule
The financial statement schedule listed in Schedule II
is filed as part of this report.
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44
Schedules which are not listed above have been omitted because they
are not applicable or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
(3) Exhibits
3.1 Amended and Restated Articles of Incorporation, as
amended(1)
3.2 Bylaws, as amended(2)
10.1* 1997 Stock Option Plan, as amended(3)
10.1.1* Amendment No. 4 to 1997 Stock Option Plan(4)
10.2* Director Stock Option Plan(5)
10.3* Employee Stock Purchase Plan(6)
10.4* Officer Severance Plan(7)
10.5* Form of Indemnity Agreement between Ixia and its
directors and executive officers(8)
10.6 Guarantee dated October 25, 1999 issued by Ixia in favor
of UBS AG(9)
10.7* Subscription Agreement dated August 20, 1999 between
Ixia and Errol Ginsberg(10)
10.8* Subscription Agreement dated August 20, 1999 between
Ixia and Joel Weissberger(11)
10.9* Subscription Agreement dated September 8, 1999 between
Ixia and Mark MacWhirter(12)
10.10 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(13)
10.11* Warrants dated August 2, 2000 to Purchase 80,000 Shares
of Common Stock issued to Robert W. Bass(14)
10.12 Registration Rights and Stock Transfer Restriction
Agreement dated as of September 1, 2000 among Ixia,
Technology Capital Group S.A. and Stephane Ratel(15)
10.13* 2000 Bonus Plan(16)
10.14 Promissory Note dated July 7, 2000, in the principal
amount of $78,433.33 issued by Mark MacWhirter in favor
of Ixia(17)
10.15* Agreement dated as of September 26, 2000 between Ixia
and Eran Karoly(18)
23.1 Consent of PricewaterhouseCoopers LLP
- ---------------
(*) Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report
on Form 10-K.
(1) Incorporated by reference to Exhibit No. 3.1 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(2) Incorporated by reference to Exhibit No. 3.2 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 19, 2000.
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45
(3) Incorporated by reference to Exhibit No. 10.1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(4) Incorporated by reference to Exhibit No. 10.1.1 to Amendment No. 3
to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 27, 2000.
(5) Incorporated by reference to Exhibit No. 10.2 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(6) Incorporated by reference to Exhibit No. 10.3 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(7) Incorporated by reference to Exhibit No. 10.4 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(8) Incorporated by reference to Exhibit No. 10.5 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(9) Incorporated by reference to Exhibit No. 10.7 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(10) Incorporated by reference to Exhibit No. 10.11 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(11) Incorporated by reference to Exhibit No. 10.12 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(12) Incorporated by reference to Exhibit No. 10.13 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(13) Incorporated by reference to Exhibit No. 10.14 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-42678) filed with
the Commission on July 31, 2000.
(14) Incorporated by reference to Exhibit No. 10.15 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 5, 2000.
(15) Incorporated by reference to Exhibit No. 10.17 to Amendment No. 3 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 27, 2000.
(16) Incorporated by reference to Exhibit No. 10.16 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 19, 2000.
(17) Incorporated by reference to Exhibit No. 10.18 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 19, 2000.
(18) Incorporated by reference to Exhibit No. 10.19 to Amendment No. 3 to
the Registrant's Registration Statement on Form S-1 (Reg. No.
333-42678) filed with the Commission on September 27, 2000.
(b) REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter
ended December 31, 2000.
(c) EXHIBITS
See the list of Exhibits under Item 14(a)(3) of this Annual Report
on Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES
See the Schedule under Item 14(a)(2) of this Annual Report on Form
10-K.
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Ixia:
Our audits of the consolidated financial statements of Ixia and its subsidiary
referred to in our report dated January 31, 2001, included on page 50 in this
Annual Report on Form 10-K, also included an audit of the financial statement
schedules listed in Item 14 of this Form 10-K. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Woodland Hills, California
January 31, 2001
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IXIA
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
BALANCE AT CHARGED TO REVERSALS TO BALANCE AT
BEGINNING COST AND COST AND END OF
DESCRIPTION OF PERIOD EXPENSES EXPENSES DEDUCTION PERIOD
----------- --------------- ----------- ------------- --------------- ----------
Allowance for doubtful accounts
2000 $ 89 $ 171 $ -- $ -- $ 260
1999 25 217 -- (153) 89
1998 -- 25 -- -- 25
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48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2001 IXIA
/s/ ERROL GINSBERG
Errol Ginsberg
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ ERROL GINSBERG President, Chief Executive Officer and Director March 30, 2001
- ----------------------------------- (Principal Executive Officer)
Errol Ginsberg
/s/ THOMAS B. MILLER Chief Financial Officer March 30, 2001
- ----------------------------------- (Principal Financial and Accounting Officer)
Thomas B. Miller
/s/ JEAN-CLAUDE ASSCHER Chairman of the Board March 30, 2001
- -----------------------------------
Jean-Claude Asscher
/s/ ROBERT W. BASS Director March 30, 2001
- -----------------------------------
Robert W. Bass
/s/ HOWARD ORINGER Director March 30, 2001
- -----------------------------------
Howard Oringer
/s/ JON F. RAGER Director March 30, 2001
- -----------------------------------
Jon F. Rager
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IXIA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 50
Consolidated Balance Sheets as of December 31, 2000 and 1999 51
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 52
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 53
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 54
Notes to Consolidated Financial Statements 55
49
50
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 income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Ixia and its
subsidiary at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. 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 of America, which require that we plan and perform the audit 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 our opinion.
PricewaterhouseCoopers LLP
Woodland Hills, California
January 31, 2001
50
51
IXIA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 85,066 $ 8,733
Short-term investments 11,000 --
Accounts receivable, net 11,874 4,357
Inventories 5,589 746
Deferred income taxes 3,321 585
Prepaid expenses and other current assets 806 291
--------- ---------
Total current assets 117,656 14,712
Property and equipment, net 3,561 952
Deferred income taxes 263 27
Other assets, net 202 131
--------- ---------
Total assets $ 121,682 $ 15,822
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,641 $ 1,087
Accrued expenses 5,492 1,382
Deferred revenue 1,469 270
Income taxes payable 2,029 4,473
--------- ---------
Total liabilities 13,631 7,212
Commitments and contingencies (Note 5)
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 December 31, 2000 and December 31, 1999, respectively,
53,883 and 45,626 shares issued and outstanding as of December 31, 2000
and December 31,
1999, respectively 75,454 783
Additional paid-in capital 44,007 8,294
Deferred stock-based compensation (23,941) (4,947)
Notes receivable from shareholders (262) (328)
Retained earnings 12,793 4,808
--------- ---------
Total shareholders' equity 108,051 8,610
--------- ---------
Total liabilities and shareholders' equity $ 121,682 $ 15,822
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
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IXIA
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
Net revenues $ 76,044 $ 24,499 $ 4,916
Cost of revenues (1) 14,825 4,944 1,309
-------- -------- --------
Gross profit 61,219 19,555 3,607
Operating expenses(1):
Research and development 14,421 3,449 1,672
Sales and marketing 17,411 4,892 1,002
General and administrative 8,709 2,389 509
-------- -------- --------
Total operating expenses 40,541 10,730 3,183
-------- -------- --------
Income from operations 20,678 8,825 424
Interest income, net 1,552 88 14
-------- -------- --------
Income before income taxes 22,230 8,913 438
Income tax expense 14,245 4,103 118
-------- -------- --------
Net income $ 7,985 $ 4,810 $ 320
======== ======== ========
Earnings per share:
Basic $ 0.17 $ 0.11 $ 0.01
Diluted $ 0.15 $ 0.10 $ 0.01
Weighted average number of common and common equivalent shares outstanding:
Basic 47,244 43,574 43,200
Diluted 53,777 45,970 44,576
(1) Stock-based compensation included in:
Cost of revenues $ 948 $ 38 $ 8
Research and development 7,182 669 92
Sales and marketing 4,695 449 62
General and administrative 3,807 729 --
-------- -------- --------
$ 16,632 $ 1,885 $ 162
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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IXIA
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Notes
Common Stock Additional Deferred Receivable
----------------------- Paid-In Stock-based From
Shares Amount Capital Compensation Shareholders
-------- -------- ---------- ------------ ----------
Balance as of December 31, 1997 43,200 $ 300 $ 600 $ -- $ --
Additional contribution of capital 700
Deferred stock-based compensation 422 (422)
Amortization of deferred stock-based compensation 162
Net income
-------- -------- -------- -------- --------
Balance as of December 31, 1998 43,200 300 1,722 (260) --
Exercise of stock options 776 15
Issuance of common stock 1,650 468 (319)
Deferred stock-based compensation 6,572 (6,572)
Amortization of deferred stock-based compensation 1,885
Interest receivable from shareholders
Net income (9)
-------- -------- -------- -------- --------
Balance as of December 31, 1999 45,626 783 8,294 (4,947) (328)
Exercise of stock options 1,932 239
Deferred stock-based compensation 36,169 (36,169)
Amortization of deferred stock-based compensation 16,783
Forfeiture of stock options (543) 392
Stock option tax benefit 87
Issuance of common stock in conjunction with 6,325 74,432
initial public offering (net of issuance costs
of $7,793)
Repayment of note receivable 90
Interest receivable from shareholders (24)
Net income
-------- -------- -------- -------- --------
Balance as of December 31, 2000 53,883 $ 75,454 $ 44,007 $(23,941) $ (262)
======== ======== ======== ======== ========
Retained
Earnings
(Deficit) Total
--------- --------
Balance as of December 31, 1997 $ (322) $ 578
Additional contribution of capital 700
Deferred stock-based compensation --
Amortization of deferred stock-based compensation 162
Net income 320 320
-------- --------
Balance as of December 31, 1998 (2) 1,760
Exercise of stock options 15
Issuance of common stock 149
Deferred stock-based compensation --
Amortization of deferred stock-based compensation 1,885
Interest receivable from shareholders (9)
Net income 4,810 4,810
-------- --------
Balance as of December 31, 1999 4,808 8,610
Exercise of stock options 239
Deferred stock-based compensation --
Amortization of deferred stock-based compensation 16,783
Forfeiture of stock options (151)
Stock option tax benefit 87
Issuance of common stock in conjunction with 74,432
initial public offering (net of issuance costs
of $7,793)
Repayment of note receivable 90
Interest receivable from shareholders (24)
Net income 7,985 7,985
-------- --------
Balance as of December 31, 2000 $ 12,793 $108,051
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
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IXIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,985 $ 4,810 $ 320
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,097 452 105
Stock-based compensation 16,632 1,885 162
Interest receivable from shareholders (24) (9) --
Deferred income tax (2,972) (422) 104
Changes in operating assets and liabilities:
Accounts receivable, net (7,517) (3,231) (1,126)
Inventories (4,843) (342) (404)
Prepaid expenses and other current assets (515) (271) (18)
Other assets (71) (112) (12)
Accounts payable 3,554 595 419
Accrued expenses 4,110 955 408
Deferred revenue 1,199 197 73
Income taxes payable (2,357) 4,459 14
-------- -------- --------
Net cash provided by operating activities 16,278 8,966 45
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (3,706) (1,021) (425)
Purchases of short-term investments (11,000) -- --
-------- -------- --------
Cash used in investing activities (14,706) (1,021) (425)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of issuance costs 74,432 149 --
Exercise of stock options 239 15 --
Contributed capital from shareholder -- -- 700
Proceeds from related-party note receivable 90 -- --
Proceeds (repayment) of related-party note payable -- (500) 500
-------- -------- --------
Net cash provided by (used in) financing activities 74,761 (336) 1,200
-------- -------- --------
Net increase in cash and cash equivalents 76,333 7,609 820
Cash and cash equivalents at beginning of period 8,733 1,124 304
-------- -------- --------
Cash and cash equivalents at end of period $ 85,066 $ 8,733 $ 1,124
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period
for:
Income taxes $ 19,557 $ 66 $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Issuance of shareholder notes receivable $ -- $ 319 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
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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.
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 $74.4 million, net of offering costs of approximately $7.8
million.
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.
Short-Term Investments
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. To date, all short-term investments have been classified as
held-to-maturity, are carried at cost and mature in less than one year. Realized
gains and losses on held-to-maturity investments are included in interest income
and were not significant in 2000. The cost of securities sold is based on
specific identification. Premiums and discounts are amortized over the period
from acquisition to maturity and are included in investment income, along with
interest and dividends.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 sheets.
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
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition."
The Company's products are fully functional at the time of shipment. The
software components of the Company's products do 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"), is 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 related to 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 Company has
not capitalized any 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
$484,000, $256,000 and $52,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
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
57
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
underlying stock and the purchase price or the exercise price at the date of
grant. The Company has provided additional disclosures 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
The Company has 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, other than net income.
Segments
The Company has 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 years ended, December 31, 2000, 1999 and
1998. All of the Company's long-lived assets were located in the United States
as of December 31, 1999 and 1998. The amount of the Company's long-lived assets
located outside of the United States as of December 31, 2000 was not
significant.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 presentation.
58
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 was 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
clarifies the application of APB No. 25 for various matters. The adoption of
this guidance has not had a material impact on the Company's financial position
or results of operations.
2. CONCENTRATIONS
Credit Risk
Financial instruments that 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 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 were as follows (in
thousands except percentages):
Year Ended December 31,
--------------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
% of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues
------- ------- ------- ------- ------- -------
Customer A $22,426 30% $ 7,549 31% $ 1,522 32%
Customer B -- -- -- -- 493 10
------- ------- ------- ------- ------- -------
As of December 31, 2000, 1999 and 1998, the Company had receivable
balances from Customer A approximating 31%, 16% and 24%, of total accounts
receivable, respectively.
International Revenues
Net revenues from international product shipments were $12.1 million in
2000, $3.2 million in 1999 and $565,000 in 1998.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 components on comparable terms. A change in 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 consisted of the following:
December 31, December 31,
2000 1999
----------- ------------
Trade accounts receivable $ 12,134 $ 4,446
Allowance for doubtful accounts (260) (89)
-------- --------
$ 11,874 $ 4,357
======== ========
Inventories
Inventories consisted of the following:
December 31, December 31,
2000 1999
------------ ------------
Raw materials $2,612 $ 506
Work in process 2,039 179
Finished goods 938 61
------ ------
$5,589 $ 746
====== ======
Property and Equipment, Net
Property and equipment, net consisted of the following:
December 31, December 31,
2000 1999
------------ ------------
Computer equipment $ 770 $ 232
Computer software 382 155
Demonstration equipment 2,470 1,021
Furniture and other equipment 1,365 110
Leasehold improvements 237 --
------- -------
5,224 1,518
Accumulated depreciation (1,663) (566)
------- -------
$ 3,561 $ 952
======= =======
Accrued Expenses
Accrued expenses consisted of the following:
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, December 31,
2000 1999
----------- -----------
Accrued payroll $ 277 $ 95
Accrued commissions 811 393
Accrued bonuses 2,456 414
Accrued warranty 334 140
Accrued sales tax 752 132
Other 862 208
------ ------
$5,492 $1,382
====== ======
4. INCOME TAXES
Income tax expense consisted of the following (in thousands):
Year Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Current:
Federal $ 13,973 $ 3,685 $ 13
State 3,219 840 1
Deferred:
Federal (2,544) (445) 134
State (403) 23 (30)
-------- -------- --------
$ 14,245 $ 4,103 $ 118
======== ======== ========
The net effective income tax rate differed from the federal statutory
income tax rate as follows (in thousands):
Year Ended December 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory expense: $ 7,781 $ 3,030 $ 149
State taxes, net of federal benefit 1,277 520 25
Research and development credits (970) (156) (125)
Nondeductible stock-based compensation 6,049 702 53
Other 108 7 16
-------- -------- --------
Income tax expense $ 14,245 $ 4,103 $ 118
======== ======== ========
Net effective income tax rate 64.1% 46.0% 26.9%
61
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The primary components of temporary differences that gave rise to deferred
taxes were as follows (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Deferred tax assets:
State income taxes $ 978 $ 261
Allowance for doubtful accounts 114 38
Depreciation and amortization 82 29
Research and development credit carryforward 145 --
Warranty accruals 147 60
Deferred revenue 644 116
Stock-based compensation 692 58
Inventory adjustments 320 19
Other 462 31
------ ------
Total deferred tax assets 3,584 612
Current 3,321 585
------ ------
Non-current $ 263 $ 27
====== ======
Realization of the December 31, 2000 deferred tax assets 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 facilities and certain computer equipment under
noncancelable operating leases for varying periods through January 2007,
excluding options to renew. The following are the future minimum commitments
under these leases (in thousands):
Year Ending December 31,
2001 $ 1,309
2002 1,306
2003 1,301
2004 1,305
2005 1,336
Thereafter 1,945
------------
$ 8,502
============
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $871,000, $67,000 and 19,000, respectively.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
An employee of the Company was a named defendant in an action taken by the
employee's former employer Netcom Systems ("Netcom," a subsidiary of Spirent)
who alleged that the employee misappropriated trade secrets and wrongfully
solicited Netcom's employees. Netcom sought damages and an injunction. The
courts twice denied Netcom's application for a temporary restraining order. The
Company was not a named defendant in this matter. In March 2001, a settlement
agreement was entered into that resulted in the dismissal with prejudice of the
lawsuit. The settlement agreement did not require that either party make any
payments to the other and placed no restrictions on the employee's ability to
continue his employment with the Company.
6. SHAREHOLDERS' EQUITY
Contribution of Capital
During the year ended December 31, 1998, the Company's then principal
shareholder contributed additional cash to the Company of $700,000. 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.
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.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $559,000
and $323,000 was recognized as stock-based compensation expense for the years
ended December 31, 2000 and 1999, respectively. As of December 31, 2000, 225,000
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. This stock award is a variable award and has
resulted in deferred stock-based compensation of approximately $2,044,000 and
$1,002,000 during the years ended December 31, 2000 and 1999, respectively, of
which approximately $1,654,000 and $275,000 were recognized as stock-based
compensation expense for the years ended December 31, 2000 and 1999,
respectively. As of December 31, 2000, approximately 56,000 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 vested
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 years ended December 31, 2000 and 1999 was $149,000
and $98,000, respectively. As of December 31, 2000, approximately 206,000 of
these shares were unvested.
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 which totaled
$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. During
September 2000, the non-employee shareholder promissory note was paid in full.
As of December 31, 2000, the two remaining notes totaled $262,000. For the year
ended December 31, 2000 and 1999, the Company recorded interest income of
approximately $24,000 and $9,000, respectively, relating to these notes
receivable.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrants
In August 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
deemed fair value of these warrants for accounting purposes was determined to be
$777,000, resulting in deferred stock-based compensation totaling $217,000, of
which approximately $108,000 was recognized as stock-based compensation expense
for the year ended December 31, 2000.
Stock Options
The Company's 1997 Stock Option Plan, as amended (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 shares 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. As of December 31, 2000, the Company has reserved
17,000,000 shares of its common stock for issuance under the 1997 Plan,
3,519,000 of which were available for future grant as of such date.
The Company's Director Plan (the "Director Plan") was approved by our
shareholders in September 2000 and provides for the issuance of stock-based
awards to Company directors. The Company has 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 plan will terminate in September
2010, unless terminated sooner by the Board of Directors. As of December 31,
2000 no options had been granted under this plan.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information relating to stock option
activity under the above plans for the years ended December 31, 2000, 1999 and
1998 (in thousands, except per share data):
Outstanding Weighted
Options Average
Number of Exercise Price
Shares Per Share
----------- --------------
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 6,636 4.30
Exercised (1,932) 0.12
Canceled (179) 3.79
--------
Options Outstanding as of December 31, 2000 10,773 $ 2.67
========
Options granted for the years ended December 31, 2000, 1999 and 1998
resulted in total deferred stock-based compensation of $33,908,000, $3,982,000
and $422,000, respectively, which was recorded as deferred compensation in
shareholders' equity. The deferred stock-based compensation represented the
difference between the exercise price of the options and the deemed fair value
of the Company's common stock for accounting purposes at the date of grant. The
deferred stock-based compensation is recognized as stock-based compensation
expense in the statements of income over the related vesting periods of the
options.
For the years ended December 31, 2000, 1999 and 1998, stock-based
compensation expense related to stock option grants included in the accompanying
statements of income was approximately $14,162,000, $1,010,000 and $162,000,
respectively. Annual amortization of deferred stock-based compensation as of
December 31, 2000 is expected to be $13,944,000, $6,590,000, $2,875,000 and
$532,000 for the years ending December 31, 2001, 2002, 2003 and 2004,
respectively.
Additional information with respect to stock options outstanding as of
December 31, 2000 is as follows (in thousands, except per share data):
66
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options Oustanding Options Exercisable
----------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Outstanding Price
-------------------- ----------- ----------- --------------- ----------- --------
$ 0.01 to $ 0.02 871 6.98 $ 0.02 269 $ 0.01
0.05 to 0.07 377 7.38 0.07 100 0.06
0.13 to 0.17 473 7.79 0.16 92 0.16
0.23 to 0.34 2,531 8.51 0.29 577 0.30
0.37 to 0.37 2,418 9.14 0.37 -- --
2.00 to 3.00 1,207 9.39 2.42 -- --
3.50 to 5.00 372 9.50 3.55 -- --
7.00 to 11.00 2,383 9.65 8.38 46 9.06
18.38 to 29.38 141 9.88 19.83 -- --
---------- ---------
$0.01 to $29.38 10,773 8.86 $ 2.67 1,084 $ 0.57
========== =========
The average deemed fair value for accounting purposes of options granted
was $11.64, $1.69 and $0.25 per share for the years ended December 31, 2000,
1999 and 1998, respectively. There were no options exercised subject to
repurchase as of December 31, 2000.
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:
Year Ended December 31,
-------------------------------------
2000 1999 1998
---------- ---------- ---------
Expected lives (in years) 10 10 10
Risk-free interest rates 6.00% 6.00% 5.75%
Dividend yield 0% 0% 0%
Expected volatility 80% 0% 0%
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):
67
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reported Pro Forma
------------ ------------
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 year ended December 31, 2000:
Net income $ 7,985 $ 6,011
Earnings per share--- Basic $ 0.17 $ 0.13
Earnings per share--- Diluted $ 0.15 $ 0.11
Employee Stock Purchase Plan
The employee stock purchase plan was adopted and approved in September
2000. The plan became effective upon the closing of the Company's initial public
offering. The Company has 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 of each year.
The plan permits eligible employees to purchase common stock, subject to
limitations as set in the plan agreement, through payroll deductions, which may
not exceed 15% of an employee's compensation or $25,000 per annum.
Unless the Board of Directors determines otherwise, the plan has been
implemented in a series of overlapping 24-month offering periods with new
offering periods commencing on May 1 and November 1 of each year. Each offering
period is divided into four consecutive six-month purchase periods. All
participants in an offering period are granted an option on the first day of the
offering period, and the option is automatically exercised on the last day of
each purchase period throughout the offering period. The purchase price of the
Company's common stock for each purchase period within an offering period is 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.
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):
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Basic Presentation
Numerator:
Net income $ 7,985 $ 4,810 $ 320
Denominator:
Weighted average common shares 48,060 44,029 43,200
Adjustment for common shares subject to repurchase (816) (455) --
-------- -------- --------
Adjusted weighted average common shares 47,244 43,574 43,200
======== ======== ========
Basic net income per share $ 0.17 $ 0.11 $ 0.01
======== ======== ========
Diluted presentation
Denominator:
Shares used above 48,060 44,029 43,200
Weighted average effect of dilutive securities:
Stock options 4,901 1,486 1,376
Common shares subject to repurchase 816 455 --
-------- -------- --------
Denominator for diluted calculation 53,777 45,970 44,576
======== ======== ========
Diluted net income per share $ 0.15 $ 0.10 $ 0.01
======== ======== ========
The diluted per share computations for the year ended December 31, 2000,
excludes 161,000 options which were antidilutive. There were no shares excluded
from the diluted earnings computation for the years ended December 31, 1999 and
1998.
8. RETIREMENT PLAN
The Company provides a 401(k) Retirement Plan (the "Plan") to eligible
employees who 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. These matching contributions vest based on the
employee's years of service with the Company. For the years ended December 31,
2000, 1999 and 1998, the Company expensed and made contributions to the Plan in
the amount of approximately $143,000, $59,000 and $18,000, respectively.
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.
Revenues from companies in which a director/shareholder of the Company is
a significant shareholder totaled $1,820,000, $436,000 and $95,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Related party accounts
receivable as of December 31, 2000, 1999 and 1998 were $66,000, $28,000 and
$81,000, respectively.
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IXIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Three Months Ended
--------------------------------------------------------------------------------------------------
Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31
1999 1999 1999 1999 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
STATEMENT OF INCOME DATA:
Net revenues $ 3,062 $ 5,152 $ 7,128 $ 9,157 $11,193 $17,075 $21,263 $26,513
Gross profit 2,573 4,229 5,596 7,157 9,052 13,590 17,251 21,326
Income before income taxes 1,210 1,902 2,729 3,072 3,547 4,217 6,004 8,462
Net income 724 1,026 1,472 1,588 1,347 940 1,555 4,143
Earning per share:
Basic $ 0.02 $ 0.02 $ 0.03 $ 0.04 $ 0.03 $ 0.02 $ 0.03 $ 0.08
Diluted 0.02 0.02 0.03 0.03 0.03 0.02 0.03 0.07
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
23.1 Consent of PricewaterhouseCoopers LLP