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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

[X]  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended  June 30, 2014

           

OR

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 000-31523

 

IXIA

(Exact name of Registrant as specified in its charter)

  

California

  

95-4635982

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer 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)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):          

Large accelerated filer [X ]   

Accelerated filer [ ] 

Non-accelerated filer (Do not check if a smaller reporting company) [ ] 

Smaller reporting company [ ] 

                                        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes [ ]      No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock

  

78,015,212

(Class of Common Stock)

  

(Outstanding at September 08, 2014)

 



 

 
1

 

   

IXIA

 

TABLE OF CONTENTS 

 

 

 

Page 

Number

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

  

 

  

  

  

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 

3

 

  

  

  

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

4

 

  

  

  

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2014 and 2013

5

 

 

  

  

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

6

 

  

  

  

 

 

Notes to Condensed Consolidated Financial Statements

7

 

  

  

  

 

  

  

  

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

  

  

  

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

  

  

  

 

Item 4.

Controls and Procedures

35

 

 

 

 

 

  

  

  

PART II.

OTHER INFORMATION

  

 

  

  

  

 

Item 1.

Legal Proceedings

40

 

  

  

  

 

Item 1A.

Risk Factors

40

 

  

  

  

 

Item 5.

Other Information

40

 

  

  

  

 

Item 6.

Exhibits

40

 

  

  

  

 

 

 

 

SIGNATURES 

41

 

 

 
2

 

 

PART I.           FINANCIAL INFORMATION

 

ITEM 1.          Financial Statements (unaudited)

 

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
                 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 39,030     $ 34,189  

Short-term investments in marketable securities

    57,933       51,507  

Accounts receivable, net of allowances of $763 and $840 as of June 30, 2014 and December 31, 2013, respectively

    97,816       109,590  

Inventories

    45,986       47,136  

Prepaid expenses and other current assets

    59,394       48,514  

Total current assets

    300,159       290,936  
                 

Property and equipment, net

    37,042       35,932  

Intangible assets, net

    166,525       189,949  

Goodwill

    339,214       338,836  

Other assets

    28,095       32,070  

Total assets

  $ 871,035     $ 887,723  
                 
                 

Liabilities and Shareholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 18,858     $ 19,011  

Accrued expenses and other

    43,904       53,748  

Deferred revenues

    103,753       89,217  

Total current liabilities

    166,515       161,976  
                 

Deferred revenues

    14,627       15,106  

Other liabilities

    12,682       11,529  

Convertible senior notes

    200,000       200,000  

Total liabilities

    393,824       388,611  
                 
Commitments and contingencies (Note 12)                
                 

Shareholders’ equity:

               

Common stock, without par value; 200,000 shares authorized at June 30, 2014 and December 31, 2013; 77,792 and 76,849 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

    183,668       178,347  

Additional paid-in capital

    199,068       191,976  

Retained earnings

    94,617       129,166  

Accumulated other comprehensive loss

    (142 )     (377 )

Total shareholders’ equity

    477,211       499,112  
                 

Total liabilities and shareholders’ equity

  $ 871,035     $ 887,723  

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 

 
3

 

 

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Revenues:

                               

Products

  $ 76,393     $ 83,794     $ 157,558     $ 179,305  

Services

    33,129       28,210       65,697       54,158  

Total revenues

    109,522       112,004       223,255       233,463  
                                 

Costs and operating expenses:(1)

                               

Cost of revenues – products (2)

    23,591       21,088       49,002       42,475  

Cost of revenues – services

    4,172       3,311       8,120       6,336  

Research and development

    30,032       29,068       60,067       58,780  

Sales and marketing

    39,874       32,983       78,713       68,024  

General and administrative

    16,690       11,507       34,572       23,565  

Amortization of intangible assets

    12,447       10,055       25,082       20,193  

Acquisition and other related

    866       1,093       2,798       2,365  

Restructuring

    481             4,045       58  

Total costs and operating expenses

    128,153       109,105       262,399       221,796  
                                 

(Loss) income from operations

    (18,631 )     2,899       (39,144 )     11,667  

Interest income and other, net

    292       3,431       629       3,638  

Interest expense

    (1,943 )     (1,943 )     (3,886 )     (3,886 )

(Loss) income before income taxes

    (20,282 )     4,387       (42,401 )     11,419  

Income tax (benefit) expense

    (5,205 )     1,370       (7,852 )     582  

Net (loss) income

  $ (15,077 )   $ 3,017     $ (34,549 )   $ 10,837  
                                 

(Loss) earnings per share:

                               

Basic

  $ (0.19 )   $ 0.04     $ (0.45 )   $ 0.14  

Diluted

  $ (0.19 )   $ 0.04     $ (0.45 )   $ 0.14  
                                 

Weighted average number of common and common equivalent shares outstanding:

                               

Basic

    77,479       75,667       77,511       75,194  

Diluted

    77,479       77,178       77,511       76,974  

 

 

 

(1)   Stock-based compensation included in:

                               

       Cost of revenues - products

  $ 88     $ 128     $ 136     $ 281  

       Cost of revenues - services

    33       49       51       107  

       Research and development

    1,424       1,578       3,303       4,026  

       Sales and marketing

    1,493       1,628       3,421       3,643  

       General and administrative

    48       1,159       993       3,364  

 

(2)   Cost of revenues – products excludes amortization of intangible assets, related to product lines and purchased technologies of $7.9 million and $16.1 million for the three and six months ended June 30, 2014, respectively, and $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, which is included in Amortization of intangible assets.

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 

 
4

 

 

IXIA

Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

(unaudited)

  

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 
                                 

Net (loss) income

  $ (15,077 )   $ 3,017     $ (34,549 )   $ 10,837  
                                 

Unrealized gain (loss) on investments, net of tax

    5       (1,708 )     39       (1,564 )

Foreign currency translation adjustment

    61       (186 )     196       (509 )
                                 

Other comprehensive income (loss)

    66       (1,894 )     235       (2,073 )
                                 

Comprehensive (loss) income

  $ (15,011 )   $ 1,123     $ (34,314 )   $ 8,764  

    

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

  

 
5

 

  

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Six months ended

 
   

June 30,

 
   

2014

   

2013

 
                 

Cash flows from operating activities:

               

Net (loss) income

  $ (34,549

)

  $ 10,837  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation

    7,946       7,636  

Amortization of intangible assets

    25,082       20,193  

Realized gain on available-for-sale securities

    (59 )     (3,169 )

Stock-based compensation

    7,904       11,421  

Deferred income taxes

    (813

)

    (786

)

Tax benefit from stock option transactions

    -       833  

Excess tax benefits from stock-based compensation

    -       (923

)

Amortization of deferred issuance costs

    600

 

    -  

Amortization of investment premiums

    (33

)

    -  

Changes in operating assets and liabilities, net of effect of acquisitions:

               

Accounts receivable, net

    11,774       12,375  

Inventories

    (4,179

)

    839  

Prepaid expenses and other current assets

    (11,329

)

    (8,685

)

Other assets

    3,713       1,409  

Accounts payable

    (335

)

    2,003  

Accrued expenses and other

    (10,103

)

    (14,415

)

Deferred revenues

    14,017       7,914  

Other liabilities

    1,165       3,683  
                 

Net cash provided by operating activities

    10,801       51,165  
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (3,443

)

    (9,352

)

Purchases of available-for-sale securities

    (51,176

)

    (110,037

)

Proceeds from available-for-sale securities

    44,881       62,175  

Purchases of other intangible assets

    (369

)

    (453

)

Payments in connection with acquisitions, net of cash acquired

    (895

)

    401  
                 

Net cash used in investing activities

    (11,002

)

    (57,266

)

                 

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    5,321       13,360  

Cash paid for shares withheld for taxes

    (279

)

    -  

Excess tax benefits from stock-based compensation

    -       923  
                 

Net cash provided by financing activities

    5,042       14,283  
                 

Net increase in cash and cash equivalents

    4,841       8,182  

Cash and cash equivalents at beginning of period

    34,189       47,508  

Cash and cash equivalents at end of period

  $ 39,030     $ 55,690  
                 

Supplemental disclosure of non-cash investing activities:

               

Purchased and unpaid property and equipment

  $ 995     $ 2,768  

Transfers of inventory to property and equipment

  $ 5,455     $ 4,111  

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 
6

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.    Business

 

Ixia was incorporated on May 27, 1997 as a California corporation. We are a leading provider of converged Internet Protocol (IP) network test and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, 3G and 4G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services. We operated within one business segment during the periods presented in the accompanying condensed consolidated financial statements. 

 

2.    Basis of Presentation and Recent Accounting Pronouncements

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of our financial position, operating results, and cash flows for the interim periods presented. Certain retrospective adjustments were made to the prior period consolidated balance sheet that was reported in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on June 23, 2014 (the “2013 Form 10-K”). These retrospective adjustments were measurement period purchase accounting adjustments related to our purchase of Net Optics. See Note 3 for additional information. The results of operations for the three and six months ended June 30, 2014 presented are not necessarily indicative of results to be expected for the full year ending December 31, 2014 or any other future period.

 

These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2013 has been derived from our audited consolidated financial statements included in our 2013 Form 10-K (before the retrospective measurement period purchase accounting adjustments described in Note 3), but does not include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2013 Form 10-K.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period, which provides new guidance regarding share-based compensation. The new guidance clarified that share-based compensation performance targets that could be achieved after the requisite service period should be treated as a performance condition that affects vesting, rather than a condition that affects the grant-date fair value of the award. The standard will be effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. We have not evaluated the impact of the adoption of this accounting standard update on our consolidated financial statements.

 

During May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We have not evaluated the impact of the adoption of this accounting standard update on our consolidated financial statements.

 

 

 
7

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In July 2013, the FASB issued changes to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Previously, there was diversity in practice as no explicit guidance existed. The effective date for this disclosure guidance is for fiscal years beginning after December 15, 2013. The adoption of this accounting standard update did not have a significant impact on our consolidated financial statements.

 

3.     Acquisitions

 

Net Optics, Inc.

 

On December 5, 2013, we completed our acquisition of all of the outstanding shares of common stock and all other equity interests of Net Optics, Inc. (“Net Optics”). Net Optics is a leading provider of total application and network visibility solutions. With this acquisition, we have expanded our product portfolio, strengthened our service provider and enterprise customer base, and broadened our sales channel and partner programs. In addition, we expect to realize certain operational synergies and leverage Net Optics’ existing sales channels, partner relationships and assembled workforce, including its experienced product development team in Santa Clara, California and its global sales force. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Net Optics’ net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

 

The aggregate purchase price totals $187.7 million, and reflects certain post-closing adjustments, related to the final determination of the Net Optics’ closing working capital under the purchase agreement. However, the aggregate purchase price is still subject to a post-closing adjustment based on the final amount of the tax reimbursements to the sellers that will be determined upon the filing of certain pre-acquisition tax returns. The acquisition was funded from our existing cash and sale of investments.

 

Acquisition and other related costs, including integration activities, approximated $908,000 and $2.8 million for the three and six months ended June 30, 2014, respectively. These acquisition and other related costs have been expensed as incurred and have been included within the Acquisition and other related line item on our condensed consolidated statements of operations included in this Quarterly Report on Form 10-Q (this “Form 10-Q”).

 

During the first quarter of 2014, we reduced our aggregate purchase price for Net Optics from $193.8 million to $187.7 million due to a measurement period adjustment to finalize certain post-closing adjustments, including the net working capital calculation. The finalization of the net working capital calculation resulted in a decrease to the aggregate purchase price of $6.1 million and a corresponding reduction to goodwill. This adjustment was applied retrospectively to the acquisition date (i.e., December 5, 2013). Additionally, during the first quarter of 2014, a measurement period adjustment was recorded to finalize the previous purchase accounting estimates resulting from the update to the tax basis of certain intangible assets. This resulted in an increase to deferred tax assets of $26.9 million and a corresponding decrease to goodwill, which were retrospectively adjusted to the acquisition date (i.e., December 5, 2013). These measurement period adjustments are reflected in the table below.

 

 

 
8

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and cash equivalents

  $ 1,967  

Accounts receivable

    9,253  

Inventories

    6,543  

Prepaid and other assets

    1,742  

Fixed assets,

    2,976  

Deferred tax asset

    26,915  

Identifiable intangible assets

    72,858  

Goodwill

    79,069  

Total assets acquired

    201,323  

Accounts payable, accrued expenses and other liabilities

    (8,441

)

Deferred revenues

    (5,170

)

Net assets acquired

  $ 187,712  

 

 

The identifiable intangible assets of $72.9 million consist of $50.0 million of acquired technology, $15.8 million of customer relationships and related service agreements, $3.7 million related to non-compete agreements, $3.0 million for the trade name, and $0.4 million of other identifiable intangible assets. The fair values of the identifiable intangible assets have been estimated using the income approach, which includes the discounted cash flow and relief-from-royalty methods. These intangible assets will be amortized using a straight-line method over their expected useful lives ranging from four months to seven years. The goodwill recorded in connection with this transaction is tax deductible for U.S. income tax purposes.

  

Pro Forma and Post Acquisition Results (Unaudited)

 

The following table summarizes the unaudited pro forma total revenues and net income of the combined entities, including Ixia, had the acquisition of Net Optics occurred on January 1, 2012 (in thousands):

 

      Three Months Ended       Six Months Ended  
       June 30, 2013        June 30, 2013  
                 

Total revenues

  $ 126,099     $ 259,635  

Net income

    1,575       6,964  

 

The pro forma combined results in the table above have been prepared for comparative purposes only and include acquisition-related adjustments for, among others items, reductions in revenues related to the estimated fair value adjustment to deferred revenues, certain acquisition related costs, amortization of identifiable intangible assets, and the related income tax effects of these adjustments.

 

The pro forma combined results, as well as those of Net Optics included in our results subsequent to the acquisition date, do not purport to be indicative of the results of operations which would have resulted had the acquisition been effective at the beginning of the period noted above, or of the future results of operations of the combined entity.

 

4.    Restructuring

 

During the third quarter of 2012, our management approved, committed to and initiated a plan to restructure our operations following our August 24, 2012 acquisition of BreakingPoint Systems, Inc. (“BreakingPoint Restructuring”). The BreakingPoint Restructuring included a net reduction in force of approximately 29 positions (primarily impacting our research and development team in Melbourne, Australia). The BreakingPoint Restructuring was substantially completed during the fourth quarter of 2012. As of June 30, 2014, the balance remaining in the Accrued expenses and other line item in our condensed consolidated balance sheets was $364,000. The remaining accrual relates primarily to lease termination costs which are expected to be paid by the end of the second quarter of 2015.

 

 

 
9

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

During the fourth quarter of 2013, our management approved, committed to and initiated a plan to restructure our Test operations (“Test Restructuring”). The Test Restructuring included a net reduction in force of approximately 120 positions (primarily impacting our research and development team in Bangalore, India), which represented approximately 6.5% of our worldwide work force. As of June 30, 2014, there was no remaining balance in the Accrued expenses and other line item in our condensed consolidated balance sheets. The Test Restructuring was substantially completed during the fourth quarter of 2013.

 

During the first quarter of 2014, our management approved, committed to and initiated a plan to restructure our operations following our December 5, 2013 acquisition of Net Optics (“Net Optics Restructuring”). The Net Optics Restructuring included a net reduction in force of approximately 45 positions (primarily impacting our research and development team in Israel and Santa Clara, California), which represented approximately 2.3% of our worldwide work force. For the three months ended June 30, 2014, we recognized additional restructuring costs of approximately $481,000 related to one-time expenses for employee termination benefits, and six months ended June 30, 2014, we recognized restructuring costs of $2.8 million related to one-time expenses for employee termination benefits, $1.1 million related to costs required to terminate our lease in Israel and approximately $149,000 for other related costs. These restructuring costs were recorded to the Restructuring line item in our condensed consolidated statements of operations included in this Form 10-Q. As of June 30, 2014, the balance remaining in the Accrued expenses and other line item in our condensed consolidated balance sheets was $822,000, which primarily relates to severance and other employee related costs and was paid by the end of the third quarter of 2014. The Net Optics Restructuring was substantially completed during the second quarter of 2014.

 

Activities related to our restructuring plans are as follows (in thousands): 

 

           

BreakingPoint

   

Test

   

Net Optics

 
   

Total

   

Restructuring

   

Restructuring

   

Restructuring

 

Accrual at December 31, 2012

  $ 1,026     $ 1,026     $ -     $ -  

Charges

    1,833       51       1,782       -  

Payments

    (1,161

)

    (474

)

    (687

)

    -  

Non-cash items

    (191

)

    (191

)

    -       -  

Accrual at December 31, 2013

    1,507       412       1,095       -  

Charges

    4,045       -       134       3,911  

Payments

    (4,396

)

    (78

)

    (1,229

)

    (3,089

)

Non-cash items

    30       30       -       -  

Accrual at June 30, 2014

  $ 1,186     $ 364     $ -     $ 822  

 

5.     Long Term Debt

 

Convertible Senior Notes

 

 On December 7, 2010, we issued $200 million in aggregate principal amount of 3.00% Convertible Senior Notes due December 15, 2015 unless earlier repurchased or converted (the “Notes”). The unsecured Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Notes are governed by the terms of an indenture (the “Indenture”) dated December 7, 2010, which was filed with the SEC on December 8, 2010.

 

The Notes bear interest at a rate of 3.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, which payments began on June 15, 2011. We may in certain instances be required to pay additional interest if the Notes are not freely tradable by the holders thereof (other than our affiliates) beginning six months after the date of issuance and in connection with events of default, including events of default relating to our failure to comply with our reporting obligations to the trustee under the Indenture and to the SEC. After a default under the Indenture, if the trustee or the holders of at least 25% in aggregate principal amount of the Notes give us notice of, and direct us to cure, the default and the default is not cured within 60 days thereafter, then unless a waiver is obtained from the holders of more than 50% in aggregate principal amount of the Notes, an event of default will occur under the Indenture. Upon any such event of default, we may elect that for the first 180 days (or such lesser amount of time during which the event of default continues), the sole remedy be the payment of additional interest at an annual rate equal to 0.50%. In the event that such additional interest becomes payable because of our failure to timely file certain reports with the SEC and the trustee, the filing of such reports will cure the event of default and the interest rate will be reduced (so long as no other events of default then exist). If we elect to pay such additional interest and the event of default is not cured within the 180-day period, or if we do not make such an election to pay additional interest when the event of default first occurs, the trustee or the holders of at least 25% in aggregate principal amount of the Notes may declare the Notes to be due and payable immediately.

 

 

 
10

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Amortization recorded to interest expense pertaining to deferred issuance costs for the three months ended June 30, 2014 and 2013 was $0.3 million and $0.3 million, respectively. Amortization recorded to interest expense pertaining to deferred issuance costs for the six months ended June 30, 2014 and 2013 was $0.6 million and $0.6 million, respectively.

 

The Notes are convertible at any time prior to the close of business on the third business day immediately preceding the maturity date at the holder’s option, into shares of our common stock at an initial conversion rate of 51.4536 shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $19.43 per share. The conversion rate is subject to adjustment for certain events that occur prior to maturity, such as a change in control transaction as defined in the Indenture.

 

We may not redeem the Notes prior to the maturity date. If a fundamental change (such as a change in control event or if our Common Stock ceases to be listed or quoted on any of the New York Stock Exchange, the Nasdaq Global Select Market or the Nasdaq Global Market or any of their respective successors) occurs prior to the maturity date, holders may require us to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

 

The Indenture provides for customary events of default (subject in certain cases to grace and cure periods) including, without limitation, (i) the failure to pay amounts due under the Notes, (ii) the failure to deliver the shares of our Common Stock due upon conversion of any Note, (iii) our failure to comply with other agreements contained in the Indenture or in the Notes, (iv) payment defaults on, or acceleration of, other indebtedness, (v) the failure to pay certain judgments, and (vi) certain events of bankruptcy, insolvency or reorganization with respect to the Company. An event of default under the Indenture (other than an event of default related to certain events of bankruptcy, insolvency or reorganization) will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Notes to cause the acceleration of the Notes. An event of default related to certain events of bankruptcy, insolvency or reorganization with respect to the Company will automatically cause the acceleration of the Notes, subject to the Company’s right, as described above, to elect to pay additional interest as a sole remedy for a period of up to 180 days.

 

On July 16, 2014, the trustee provided us with notice that we were in default under the Indenture because we had not timely filed with the trustee the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the "2014 First Quarter Form 10-Q"). In accordance with the terms of the Indenture, we had 60 days to cure such default. Such cure period expired on or about September 14, 2014, at which time the default became an event of default and gave the trustee and the holders of the Notes the right to exercise various remedies, including acceleration of the Notes. In accordance with the terms of the Indenture, by delivery of notice to the trustee, the paying agent and the holder(s) of the Notes, we intend to elect to pay additional interest at a rate equal to 0.50% as the sole remedy available to the holders of the Notes for the up to 180 day period commencing on or about September 14, 2014. We will cure such default and subsequent event of default by filing the 2014 First Quarter Form 10-Q with the SEC on or about the date of the filing of this Form 10-Q with the SEC. Such filing of the 2014 First Quarter Form 10-Q will, pursuant to the terms of the Indenture, also be deemed a filing with the trustee, at which point we will no longer be required to pay the additional interest on the Notes.

 

On September 3, 2014, the trustee provided us with notice that we were in default under the Indenture because we had not timely filed this Form 10-Q with the trustee. We will cure such default by the filing of this Form 10-Q with the SEC, which filing will, pursuant to the terms of the Indenture, also be deemed a filing with the trustee.

 

Because we have been delinquent in the filing of certain of our periodic financial reports with the SEC, since November 19, 2013, we have not been in compliance with the Nasdaq listing rule that requires us to timely file such reports with the SEC. On May 2, 2014, the Listing Qualifications Department of The NASDAQ Stock Market LLC (“Nasdaq”) notified us that, due to our delay in filing with the SEC our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “2013 Third Quarter Form 10-Q”) and our 2013 Form 10-K, our common stock would be delisted unless we timely requested a hearing before a Nasdaq Hearings Panel (a “Panel”). On May 15, 2014, Nasdaq advised us that the delayed filing of our 2014 First Quarter Form 10-Q served as an additional basis for the delisting determination. On August 19, 2014, Nasdaq advised us that our delayed filing of this Form 10-Q served as a further basis for the delisting determination.

 

Upon receiving the May 2, 2014 notice from Nasdaq, we timely requested a hearing before a Panel, and the hearing was held on June 12, 2014. At the hearing, we presented a plan to regain compliance with the listing rule and requested an extension of time in which to do so Thereafter, on June 23, 2014, we filed with the SEC certain delinquent reports that included our 2013 Third Quarter Form 10-Q and 2013 Form 10-K.  

 

 

 
11

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On July 9, 2014, we received a letter from Nasdaq indicating that the Panel had determined to continue the listing of our common stock subject to the condition that, on or before September 12, 2014, we became current in our periodic filings with the SEC. The letter further indicated that we would also be required to demonstrate that we are in compliance with all other requirements for continued listing on The Nasdaq Stock Market. The Panel indicated that in the event we were unable to satisfy such conditions, our common stock would be delisted.

 

On September 5, 2014, following our requests that the Panel extend the September 12th date, we were notified that the Panel had extended our date to become current in our periodic filings with the SEC to November 13, 2014. With the filing of our 2014 First Quarter Form 10-Q and this Form 10-Q, we will become current with respect to our periodic filing obligations with the SEC on or before the November 13, 2014 date specified by the Panel.

 

As of June 30, 2014, the estimated fair value of our Notes was approximately $202.0 million. The fair value of the Notes was estimated using market prices of the Notes, which are based on Level 2 inputs (i.e. inputs, other than the quoted prices in active markets that are observable either directly or indirectly).

 

Senior Secured Revolving Credit Facility 

 

On December 21, 2012, we entered into a credit agreement (the “Credit Facility Agreement”) establishing a senior secured revolving credit facility (the “Credit Facility”) with certain institutional lenders and Bank of America, N.A., as administrative agent and lender, that provides for an aggregate loan amount of up to $150 million. The Credit Facility is expected to mature on December 21, 2016, but may mature on September 14, 2015 if beginning on June 15, 2015 we do not have available liquidity (domestic cash and investments, plus availability under the Credit Facility) of $25 million in excess of the amount required to repay our Notes of $200 million in full. If we satisfy this requirement between June 15, 2015 and September 14, 2015, but fail to do so after September 15, 2015 and prior to December 15, 2015, the maturity date is the date on which the requirement is no longer satisfied.

 

The Credit Facility includes a sublimit of up to $25 million for the issuance of standby letters of credit and a swingline facility of up to $15 million, to be used, among other things, to fund our working capital needs, to fund capital expenditures and for other general corporate purposes (including acquisitions), stock repurchases and any partial refinancing of our Notes. We may from time to time request an increase to the Credit Facility by an amount of up to $50 million, which increase would be subject to the consent of the lender or lenders (if any) assuming the increased obligations.

 

Borrowings under the Credit Facility bear interest at either (i) the base rate, which is equal to the highest of (a) the administrative agent’s prime rate, (b) the federal funds rate plus 0.50% and (c) the London Interbank Offered Rate ("LIBOR") for a one month interest period plus 1.00% or (ii) LIBOR plus the applicable margin. The applicable margin ranges are from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, and depends on the Company’s total leverage ratio (as defined in the Credit Facility Agreement). Interest is payable quarterly. No amounts were drawn down under this Credit Facility as of June 30, 2014.

 

Our obligations under the Credit Facility are guaranteed by Net Optics, Inc., Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation and VeriWave, Inc., all of which are wholly owned domestic subsidiaries of Ixia, by Net Optics IL, LLC, which is a wholly owned domestic subsidiary of Net Optics, and by any future domestic or foreign subsidiaries of Ixia or such guarantors, provided that no foreign subsidiary will be required to become a guarantor to the extent the guaranty would result in a material adverse tax consequence to the Company. The Credit Facility is secured by a first priority security interest in substantially all existing and after acquired tangible and intangible personal property of Ixia and of the guarantors and by the pledge by Ixia and by the guarantors of all outstanding equity securities of their respective domestic subsidiaries and 65% of the outstanding equity securities of directly owned foreign subsidiaries.

 

Amortization recorded to interest expense pertaining to deferred issuance for the three months ended June 30, 2014 and 2013 was $58,000 and $68,000, respectively. Amortization recorded to interest expense pertaining to deferred issuance for the six months ended June 30, 2014 and 2013 was $116,000 and $136,000, respectively.

 

We are required to pay a commitment fee on the unused portion of the Credit Facility of up to a maximum of $450,000 or 0.30% depending on the Company’s total leverage ratio.

 

 

 
12

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Credit Facility Agreement requires the Company to comply with certain covenants, including maintaining (i) an interest coverage ratio (as defined in the Credit Facility Agreement) of greater than 3.50 to 1.00, measured quarterly on a trailing twelve months basis and (ii) a maximum leverage ratio (as defined in the Credit Facility Agreement) of not greater than 3.50 to 1.00 through June 30, 2014 and 3.00 to 1.00 thereafter, measured quarterly on a trailing twelve months basis. The Credit Facility Agreement also requires us to timely provide certain periodic financial statements to the lenders. In connection with the delayed delivery to the lenders of our financial statements for the quarters ended September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014 and of our audited financial statements for the fiscal year ended December 31, 2013, we entered into agreements with the lenders that amended the Credit Facility Agreement to extend the dates for such deliveries. As of the date of the filing of this Form 10-Q, we have completed all such deliveries other than the delivery of our financial statements for the quarter ended June 30, 2014. The lenders’ waiver of that late delivery expired on August 29, 2014, as discussed in more detail below.

 

On May 15, 2014, we entered into an amendment and waiver agreement with the lenders that included a waiver from the lenders of any breach of the Credit Facility Agreement (which requires us to comply with the Indenture governing our Notes) arising out of our failure to comply with the covenant in the Indenture that requires us to timely file with the trustee the 2014 First Quarter Form 10-Q. This waiver is only effective as long as (i) no event of default occurs under the Indenture due to our failure to complete any necessary remedial action in respect of the delayed filing within 60 days of receipt of notice from either the trustee under the Indenture or the holders of 25% of the aggregate principal amount of our Notes demanding such remedial action (such a notice was received by the Company from the trustee on or about July 16, 2014) and (ii) no delisting of our common stock from the Nasdaq Global Select Market occurs. Our need for this waiver expired upon the filing of our 2014 First Quarter Form 10-Q with the SEC. This waiver expired on or about September 14, 2014 in connection with the occurrence of an event of default under our Indenture as described above.

 

Under an amendment to the Credit Facility Agreement dated June 27, 2014, the date for delivery of our financial statements for the quarter ended June 30, 2014 was extended to August 29, 2014. We did not, however, deliver the financial statements on or before that date. On August 29, 2014, the administrative agent provided us with notice that we were in default under the Credit Facility Agreement because we had not timely provided the administrative agent with our financial statements for the quarter ended June 30, 2014 and a related compliance certificate and because we were in default under the Indenture for failing to timely file this Form 10-Q with the trustee. The administrative agent’s notice expressly reserved the rights of the administrative agent and the lenders to exercise their respective rights, powers, privileges and remedies in connection with such event or events of default. Due to the occurrence of such event or events of defaults, the Company is blocked from borrowing and obtaining letters of credit under the credit facility provided under the Credit Agreement. The administrative agent also has the right (with the consent of a majority of the lenders based on total credit exposure) or obligation (at the request of such a majority of the lenders) to terminate the Credit Facility Agreement, accelerate any amounts due thereunder and exercise all other available remedies. We do not have a contractual right to cure these defaults, and the defaults may be waived only with the consent of a majority of the lenders based on total credit exposure. As of the date of the filing of this Form 10-Q, no amounts are outstanding under the Credit Facility Agreement.

 

The Credit Facility Agreement also provides for customary events of default (subject to grace and cure periods in certain cases) including, without limitation, (a) failure to pay (with no grace period for the nonpayment of principal); (b) defaults under other documents executed and delivered in connection with the Credit Facility Agreement; (c) bankruptcy or the commencement of insolvency proceedings, including the appointment of a receiver; (d) changes of control; and (e) failure to perform or observe covenants contained in the Credit Facility Agreement or related documents. Upon the occurrence of an event of default, the principal and accrued interest under the Credit Facility then outstanding may be declared due and payable, the Credit Facility Agreement may under circumstances be terminated, and the administrative agent and the lenders may exercise all other available remedies. An event of default related to certain events of bankruptcy, insolvency or reorganization with respect to the Company will automatically cause the acceleration of payment of the unpaid principal and accrued interest on all outstanding loans.

   

 

 
13

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

6.    Selected Balance Sheet Data

 

Investments in Marketable Securities

 

Investments in marketable securities as of June 30, 2014 consisted of the following (in thousands):

 

   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Available-for-sale – short-term:

                               

U.S. Treasury, government and agency debt securities

  $ 29,540     $ 24     $ (2 )   $ 29,562  

Corporate debt securities

    28,286       88       (3 )     28,371  

Total

  $ 57,826     $ 112     $ (5 )   $ 57,933  

 

Investments in marketable securities as of December 31, 2013 consisted of the following (in thousands):

 

   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
    Cost     Gains     Losses     Value  

Available-for-sale – short-term:

                               

U.S. Treasury, government and agency debt securities

  $ 31,717     $ 26     $ (1 )   $ 31,742  

Corporate debt securities

    19,720       56       (11 )     19,765  

Total

  $ 51,437     $ 82     $ (12 )   $ 51,507  

 

 

As of June 30, 2014 and December 31, 2013, our available-for-sale securities had a weighted remaining contractual maturity of 1.75 and 1.87 years, respectively. For the three and six months ended June 30, 2014, gross realized gains and gross realized losses were not significant. For the three and six months ended June 30, 2013, gross realized gains and gross realized losses were $3.2 million and $0, respectively. See Note 8 for information on the unrealized holding gains (losses) on available-for-sale securities reclassified out of accumulated other comprehensive (loss) income into the condensed consolidated statements of operations.

 

The amortized cost and fair value of our investments at June 30, 2014, by contractual years-to-maturity, are as follows (in thousands): 

 

   

Amortized Cost

   

Fair Value

 

Due in less than 1 year

  $ 8,440     $ 8,452  

Due within 1-2 years

    28,744       28,790  

Due within 2-5 years

    20,642       20,691  

Total

  $ 57,826     $ 57,933  

 

 

 
14

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Inventories

 

Inventories consist of the following (in thousands):

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
                 

Raw materials

  $ 7,113     $ 7,468  

Work in process

    17,069       15,166  

Finished goods

    21,804       24,502  
    $ 45,986     $ 47,136  

 

Accrued expenses and other

 

As of June 30, 2014 and December 31, 2013, accrued vacation totaled $9.2 million and $9.3 million, respectively

 

7.    Goodwill and Other Intangible Assets

 

The following table presents the activity for our goodwill (in thousands):

 

Balance at December 31, 2013:

  $ 338,836  

Other

    378  

Balance at June 30, 2014

  $ 339,214  

 

During the first quarter of 2014, we identified measurement period adjustments to previous purchase accounting estimates for the December 5, 2013 acquisition of Net Optics, which were retrospectively adjusted to the acquisition date. The differences from estimated values resulted from our updated preliminary assessment of the tax basis of certain intangible assets and the finalization of the Net Optics’ net working capital adjustment. These adjustments resulted in a decrease to goodwill of $32.9 million and are reflected in the December 31, 2013 goodwill balance in the above table. See Note 3 for additional information.

 

We have not had any historical goodwill impairment charges.

  

The following table presents our purchased intangible assets (in thousands) as of June 30, 2014:

 

   

Weighted

Average

Useful Life

(in years)

   

Gross

   

Accumulated

Amortization

   

Net

 
                                 

Other intangible assets:

                               

Technology

    5.5     $ 185,665     $ (95,676

)

  $ 89,989  

Customer relationships

    6.0       71,700       (34,925

)

    36,775  

Service agreements

    6.2       36,200       (12,329

)

    23,871  

Non-compete agreements

    4.1       9,000       (3,641

)

    5,359  

Trademark

    5.1       11,300       (4,049

)

    7,251  

Other

    4.1       4,581       (1,301

)

    3,280  
            $ 318,446     $ (151,921

)

  $ 166,525  

 

 

 
15

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents our purchased intangible assets (in thousands) as of December 31, 2013:

 

   

Weighted

Average

Useful Life

(in years)

   

Gross

   

Accumulated

Amortization

   

Net

 
                                 

Other intangible assets:

                               

Technology

    5.5     $ 184,377     $ (81,876

)

  $ 102,501  

Customer relationships

    6.0       71,700       (28,911

)

    42,789  

Service agreements

    6.2       36,200       (9,398

)

    26,802  

Non-compete agreements

    4.1       9,000       (2,545

)

    6,455  

Trademark

    5.1       11,300       (3,066

)

    8,234  

Other

    3.7       4,211       (1,043

)

    3,168  
            $ 316,788     $ (126,839

)

  $ 189,949  

 

The estimated future amortization expense of purchased intangible assets as of June 30, 2014 is as follows (in thousands):

 

Remaining in 2014

  $ 21,974  

2015

    42,292  

2016

    39,026  

2017

    31,933  

2018

    20,536  

2019

    7,516  

Thereafter

    3,248  
    $ 166,525  

 

8.    Shareholders’ Equity

 

Share Cancellation

 

Certain of the Company’s performance-based equity awards include a forfeiture provision that provides for the forfeiture of the unvested portion of such equity awards in the event that the Company concludes that it is required to restate its previously issued financial statements to reflect a less favorable financial condition and/or less favorable results of operations. On April 2, 2013, the Company concluded to restate certain previously issued unaudited condensed consolidated financial statements, and, due to such forfeiture-provisions, we have for accounting purposes deemed such equity awards to have been automatically forfeited and subsequently re-granted. As a result, we recorded a reversal of stock-based compensation expenses for the deemed cancellation of $4.0 million during the quarter ended June 30, 2013.

 

On June 24, 2014, certain performance-based equity awards that, for accounting purposes, were deemed to have been automatically forfeited as a result of the aforementioned restatement were deemed to have been re-granted. As a result, we recorded additional stock-based compensation expense related to these deemed re-grants. Stock-based compensation expenses for all of the deemed re-grants were $743,000 and $755,000 for the three and six months ended June 30, 2014.

 

 

 
16

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Accumulated Other Comprehensive (Loss) Income

 

The following table summarizes, as of each balance sheet date, the changes in our accumulated other comprehensive (loss) income, by component, net of income taxes (in thousands):

 

   

Gains and

Losses on

Available-for-

Sale

Securities (a)

   

Foreign

Currency

Items (a)

   

Total

 

Beginning balance, December 31, 2013

  $ 42     $ (419 )   $ (377 )

Other comprehensive income before reclassifications

    75       196       271  

Amounts reclassified from accumulated other comprehensive loss (b)

    (36

)

    -       (36

)

Net current-period other comprehensive income

    39       196       235  

Ending balance, June 30, 2014

  $ 81     $ (223

)

  $ (142

)

 

(a)

All amounts are net-of-tax. Amounts in parentheses indicate reductions.

(b)

Amount represents gain on the sale of securities and is included as a component of Interest income and other, net in the condensed consolidated statements of operations.

 

Amounts reclassified from Accumulated other comprehensive (loss) income, net to Net (loss) income for realized gains or losses on Available-for-sale securities are recorded in Interest income and other, net.

 

  

9.    (Loss) Earnings Per Share

 

Basic net (loss) earnings per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) earnings per common share is computed by giving effect to all potential dilutive common shares, including stock awards.

 

The following table sets forth the computation of basic and diluted (loss) earnings per share for the three and six months ended June 30, 2014 and 2013 (in thousands, except per share data):  

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Basic presentation:

                               

Numerator for basic (loss) earnings per share:

                               

Net (loss) income

  $ (15,077 )   $ 3,017     $ (34,549 )   $ 10,837  

Denominator for basic (loss) earnings per share:

                               

Weighted average common shares outstanding

    77,479       75,667       77,511       75,194  
                                 

Basic (loss) earnings per share

  $ (0.19 )   $ 0.04     $ (0.45 )   $ 0.14  
                                 

Diluted presentation:

                               

Numerator for diluted (loss) earnings per share:

                               

Net (loss) income

  $ (15,077 )   $ 3,017     $ (34,549 )   $ 10,837  

Interest expense on convertible senior notes, net of tax

                       

Net (loss) income used for diluted (loss) earnings per share

  $ (15,077 )   $ 3,017     $ (34,549 )   $ 10,837  
                                 

Denominator for dilutive (loss) earnings per share:

                               

Weighted average common shares outstanding

    77,479       75,667       77,511       75,194  

Effect of dilutive securities:

                               

Stock options and other share-based awards

    -       1,511       -       1,780  

Convertible senior notes

                       

Dilutive potential common shares

    77,479       77,178       77,511       76,974  
                                 

Diluted (loss) earnings per share

  $ (0.19 )   $ 0.04     $ (0.45 )   $ 0.14  

   

 

 
17

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The diluted (loss) per share computation for the three and six months ended June 30, 2014 excludes (i) the weighted average number of shares underlying our outstanding 3.00% Convertible Senior Notes due December 15, 2015 of 10.3 million shares as such shares are considered anti-dilutive because the related interest expense on a per common share “if converted” basis exceeds basic (loss) per share and (ii) the weighted average number of shares underlying our employee stock options and other share-based awards of 4.3 million shares and 4.4 million shares, respectively, which are anti-dilutive because, in general, the exercise prices of these awards (to the extent such awards have exercise prices) exceeds the average closing sales price per share of our common stock during the applicable period or were anti-dilutive because the Company reported a net loss for the applicable period.

 

The diluted earnings per share computation for the three and six months ended June 30, 2013 excludes (i) the weighted average number of shares underlying our outstanding 3.00% Convertible Senior Notes due December 15, 2015 of 10.3 million shares as such shares are considered anti-dilutive because the related interest expense on a per common share “if converted” basis exceeds basic earnings per share and (ii) the weighted average number of shares underlying our employee stock options and other share-based awards of 2.2 million shares and 1.3 million shares, respectively, which are anti-dilutive because, in general, the exercise prices of these awards (to the extent such awards have exercise prices) exceeds the average closing sales price per share of our common stock during the applicable period.

 

10.    Concentrations

 

Revenue by Product Line

 

We have two product lines: Network Test Solutions and Network Visibility Solutions. Our Network Test products include our multi-slot test chassis and appliances, our traffic generation interface cards, our suite of test applications, and the related technical support, warranty and software maintenance services, including our Application and Threat Intelligence (ATI) service. Our Network Visibility products include our network packet brokers, bypass switches, virtual and physical taps and the related technical support, warranty and software maintenance services. The following table presents revenue by product line (in thousands):

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Network Test Solutions

  $ 83,674     $ 91,257     $ 173,199     $ 186,374  

Network Visibility Solutions

    25,848       20,747       50,056       47,089  
    $ 109,522     $ 112,004     $ 223,255     $ 233,463  

 

 

 
18

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Significant Customers

 

The following customers accounted for more than 10% of total revenue for the three and six months ended June 30, 2013, in the case of Customer A, and for the six months ended June 30, 2013, in the case of Customer B. There were no customers that accounted for more than 10% of total revenue for the three and six months ended June 30, 2014.

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Customer A

   

*

      15.7 %     *       17.2 %
                                 

Customer B

    *       *       *       10.4 %

 

 * Less than 10%

 

As of June 30, 2014 and December 31, 2013, the percentage of total receivables for Customer A and Customer B were below 10%.

 

International Data

   

For the three and six months ended June 30, 2014 and 2013, the percentages of total revenues consisting of international revenues based on customer location consisted of the following:

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

International revenues

    39.8 %     33.7 %     40.4 %     35.8 %

 

As of June 30, 2014 and December 31, 2013, our property and equipment, net were geographically located as follows (in thousands):

 

   

June 30, 2014

   

December 31, 2013

 

United States

  $ 23,349     $ 22,614  

India

    4,631       5,300  

Romania

    5,749       4,715  

Other

    3,313       3,303  

Total

  $ 37,042     $ 35,932  

 

 

 
19

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

11.  Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1.

Observable inputs such as quoted prices in active markets;

 

 

Level 2.

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

 

 

Level 3.

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Financial assets carried at fair value as of June 30, 2014 and December 31, 2013 are classified in the table below in one of the three categories described above (in thousands):

 

   

June 30, 2014

   

December 31, 2013

 
   

Fair

Value

   

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

   

Fair

Value

   

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

                                                               

Money market funds

  $ 517     $ 517     $     $     $ 30     $ 30     $     $  

Corporate debt securities

    3,199             3,199             5,898             5,898        

Short-term investments:

                                                               

U.S. Treasury, government and agency debt securities

    29,562             29,562             31,742             31,742        

Corporate debt securities

    28,371             28,371             19,765             19,765        

Total financial assets

  $ 61,649     $ 517     $ 61,132     $     $ 57,435     $ 30     $ 57,405     $  

  

Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

To estimate the fair value of our money market funds, U.S. treasury, government and agency debt securities and corporate debt securities, we use the estimated fair value shown in our investment brokerage/custodial statements. To the extent deemed necessary, we may also obtain non-binding market quotes to corroborate the estimated fair values reflected in our investment brokerage/custodial statements.

 

There were no transfers of assets between levels within the fair value hierarchy for the three and six month periods ended June 30, 2014 and there were no Level 3 assets held at June 30, 2014.

 

 

 
20

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

12.  Commitments and Contingencies

 

Securities Class Action

 

On November 14, 2013, a purported securities class action complaint captioned Felix Santore v. Ixia, Victor Alston, Atul Bhatnagar, Thomas B. Miller, and Errol Ginsberg was filed against us and certain of our current and former officers and directors in the U.S. District Court for the Central District of California. The lawsuit purports to be a class action brought on behalf of purchasers of the Company’s securities during the period from April 10, 2010 through October 14, 2013. The complaint alleges that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making materially false and misleading statements concerning the Company’s recognition of revenues related to its warranty and software maintenance contracts and the academic credentials and employment history of the Company’s former President and Chief Executive Officer, Vic Alston. The complaint also alleges that the defendants made false and misleading statements, and failed to make certain disclosures, regarding the Company’s business, operations and prospects, including regarding the financial statements and internal financial controls that were the subject of the Company’s April 2013 restatement of certain of its prior period financial statements. The complaint alleges that the Company lacked adequate internal financial controls and issued materially false and misleading financial statements for the fiscal years ended December 31, 2010 and 2011, and the fiscal quarters ended March 31, 2011, June 30, 2011, September 30, 2011, March 31, 2012, June 30, 2012 and September 30, 2012. The complaint, which purports to assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, seeks, on behalf of the purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief.

 

On January 14, 2014, four sets of plaintiffs filed motions for appointment of lead plaintiff. On March 24, 2014, the court issued a minute order appointing Oklahoma Firefighters Pension & Retirement System and Oklahoma Law Enforcement Retirement System (the “Oklahoma Group”) as lead Plaintiffs.

 

On June 11, 2014, the Oklahoma Group filed an amended complaint, asserting claims against the same defendants under the same legal theories as were set forth in the initial complaint. The amended complaint also contains allegations that certain of the individual defendants increased their trading in the Company’s stock during February, March, April and May of 2011 and during February and March of 2013, and that the defendants sought to inflate the Company’s reported deferred revenues during the period of February 4, 2011 through April 3, 2013 (the “Class Period”). The amended complaint purports to be brought on behalf of purchasers of the Company’s securities.

 

On July 18, 2014, all named defendants moved to dismiss count I of the amended complaint, which purports to assert a claim against all named defendants for violation of Section 10(b) of the Exchange Act and its implementing regulation, Rule 10b-5. Additionally, the individual defendants separately filed motions to dismiss count II of the amended complaint, which purports to assert a claim for violation of Section 20(a) of the Exchange Act against only the individual defendants, as well as advancing certain additional arguments in support of dismissing count I against the individual defendants. The Oklahoma Group’s omnibus opposition to the July 18, 2014 motions to dismiss was filed on August 18, 2014, while the defendants’ replies were filed on September 8, 2014. A hearing on the motions to dismiss is scheduled for October 6, 2014.

 

Although the Company denies the material allegations of the amended complaint and intends to vigorously pursue its defenses, we are in the very early stages of this litigation, and are unable to predict the outcome of the case or to estimate the amount of or potential range of loss with respect to this case. However, the ultimate disposition of the case could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

 

Shareholder Derivative Actions

 

Two derivative actions by purported shareholders of the Company, which were recently consolidated into one action, are pending in the U.S. District Court for the Central District of California. The lawsuits are captioned (i) Erie County Employees' Retirement System, Derivatively on Behalf of Nominal Defendant IXIA v. Victor Alston, Errol Ginsberg, Laurent Asscher, Jonathan Fram, Gail Hamilton, Jon Rager, Atul Bhatnagar, and Thomas B. Miller, defendants, and Ixia, nominal defendant and (ii) Colleen Witmer, derivatively on behalf of Ixia v. Victor Alston, Atul Bhatnagar, Thomas B. Miller, Errol Ginsberg, Jonathan Fram, Laurent Asscher, Gail Hamilton, Jon F. Rager, Christopher Lee Williams, Alan Grahame, Raymond De Graaf, Walker H. Colston II, and Ronald W. Buckly, defendants, and Ixia, nominal defendant. The consolidated action is now captioned In re Ixia Shareholder Derivative Litigation. The Erie County and Witmer actions were previously filed in the Superior Court of the State of California in January 2014 and February 2014, respectively, but were subsequently dismissed and thereafter refiled in the U.S. District Court in May 2014.

 

 

 
21

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Pursuant to a scheduling order issued by the District Court, on September 2, 2014, the two plaintiffs filed a consolidated complaint. The complaint includes many allegations similar to those made in the purported class action complaint described above. Among other things, the complaint alleges that some or all (depending upon the claim) of the defendants breached their fiduciary duties to the Company by causing or allowing the Company to disseminate misleading financial statements, ignoring problems with the Company’s financial controls, making stock sales on the basis of material, non-public information, and violating the Company’s code of conduct. As relief, among other things, the complaint seeks an unspecified amount of monetary damages, disgorgement and restitution of stock sale proceeds and an award under California Corporations Code Sections 24502 and 25502.5, as well as unspecified equitable relief and declaratory relief.

 

The Company, on whose behalf the derivative action claims have purportedly been brought, intends to move to dismiss the consolidated complaint on the grounds that the derivative plaintiffs did not file the claims in accordance with applicable laws governing the filing of derivative actions. As we are in the very early stages of this litigation, we are unable to predict the outcome of the litigation or to estimate the amount of or potential range of loss with respect to the consolidated complaint.

 

SEC Investigation

 

In July 2014, the Staff of the SEC’s Division of Enforcement requested that the Company produce certain documents and information in connection with an investigation of the Company. Based on the documents requested by the Staff, the Company believes that the investigation relates to the matters addressed by (i) the previously disclosed accounting-related investigation conducted by the Audit Committee of the Company’s Board of Directors (the “Board”) that was completed in February 2014 and (ii) a separate internal investigation conducted by a Special Committee of the Board of stock sales during February and March 2013 by then current executive officers and directors of the Company. The Special Committee, which completed its investigation in June 2014, did not find with respect to such sales that there had been any insider trading based upon material non-public information. The Special Committee, however, made no finding with respect to the Company's former President and Chief Executive Officer, Victor Alston, because he declined to be interviewed by the Special Committee's counsel (both the Special Committee and the Audit Committee were assisted by independent counsel in their investigations). The Company is cooperating fully with the Staff in this matter. The Company cannot predict the duration, scope or outcome of the Staff’s investigation.

 

13.  Income Taxes

 

The Company accounts for its provision for income taxes in accordance with Accounting Standard Codification (“ASC”) 740, Income Taxes. In accordance with ASC 740, the Company uses an estimate of its annual effective rate for the full fiscal year in computing the year-to-date provision for income taxes for the interim periods, including federal, foreign, state and local income taxes.

 

During the first quarter of 2014, a measurement period adjustment was recorded to finalize the previous purchase accounting estimates resulting from the update to the tax basis of certain intangible assets for the December 5, 2013 acquisition of Net Optics (See Note 3 for additional information). The differences from estimated values resulted in an increase to deferred tax assets of $26.9 million, and a corresponding decrease to goodwill, which were retrospectively adjusted to the acquisition date (i.e., December 5, 2013).

 

As of June 30, 2014 and December 31, 2013, current deferred tax assets totaled $14.7 million and $14.0 million, respectively, and were included within the Prepaid expenses and other current assets line item on our condensed consolidated balance sheets. As of June 30, 2014 and December 31, 2013, long-term deferred tax assets totaled $7.0 million and $19.8 million, respectively, and were included within the Other assets line item on our condensed consolidated balance sheets. The reduction in long-term deferred tax assets in the first quarter of 2014 was due to the inter-company transfer of intellectual property to a foreign jurisdiction.  As of June 30, 2014 and December 31, 2013, long-term deferred tax liabilities totaled $1.4 million and were included within the Other liabilities line item on our condensed consolidated balance sheets.

 

 

 
22

 

 

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

14.  Subsequent Events

 

On August 1, 2014, the Company committed to and implemented a company-wide restructuring initiative to better align the Company’s operating costs with its business opportunities. The restructuring plan includes the elimination of approximately 5% to 6% of the Company’s worldwide employee base as of June 30, 2014, the rationalization of certain facility costs, and the reduction of other discretionary costs. The Company estimates that the total cost of the restructuring will be approximately $3.5 million to $4.5 million in pre-tax charges primarily for employee severance and related costs, and is expected to be substantially completed in the third quarter of 2014.

 

On August 21, 2014, the Company announced that its Board of Directors (the “Board”) has appointed Bethany Mayer as the Company’s President and Chief Executive Officer and as a member of the Board effective the day after the Company becomes current in making its periodic filings with the SEC.

 

Ms. Mayer will be paid an annual base salary of $650,000 and a guaranteed cash bonus for 2014 of $500,000. The Company will also pay to Ms. Mayer, who as of the date of the filing of this Form 10-Q is the senior vice president and general manager of the Network Functions Virtualization business of Hewlett-Packard Company (“HP”), an additional cash bonus in an amount equal to the in-the-money value of her unvested HP equity awards that would have vested between the termination date of her employment at HP and December 31, 2014 had she remained with HP. The amount of this additional cash bonus, which will paid within five calendar days following the commencement of her employment with the Company, will be calculated based on the closing sales price of a share of HP common stock on the termination date of Ms. Mayer’s employment with HP. Based on the closing sales price of HP common stock on August 20, 2014, the Company estimates that the bonus will be in the amount of approximately $2,400,000. If Ms. Mayer’s employment with the Company terminates prior to October 1, 2015, under certain circumstances, then she will be required to repay a pro rata portion of such bonus based on the number of months of Ms. Mayer’s service to the Company.

 

Within 30 days after the commencement of Ms. Mayer’s employment with the Company, Ms. Mayer will also be granted, pursuant to the Company’s Second Amended and Restated 2008 Equity Incentive Plan and subject to the approval of the Compensation Committee of the Company’s Board of Directors, non-statutory stock options (“NSOs”) to purchase 700,000 shares of the Company’s common stock. Additionally, the Company expects to grant to Ms. Mayer in 2015 an annual equity incentive award in the range of from 300,000 to 400,000 option equivalents.

 

 

 
23

 

 

ITEM 2     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

 

BUSINESS OVERVIEW

 

We are a leading provider of converged Internet Protocol (IP) network test and network visibility solutions. Equipment manufacturers, service providers, enterprises, and government agencies use our solutions to design, verify, and monitor a broad range of Ethernet, Wi-Fi, 3G and 4G/LTE equipment and networks. Our product solutions consist of our hardware platforms, such as our chassis, interface cards and appliances, software application tools, and services, including our warranty and maintenance offerings and professional services.

 

Our cash, cash equivalents and investments in the aggregate increased by $5.3 million to $97.0 million at June 30,2014 from the $91.7 million reported three months earlier at March 31, 2014, and increased $11.3 million from the $85.7 million reported at December 31, 2013. Total revenues decreased 2.2% to $109.5 million during the three months ended June 30, 2014, from $112.0 million during the three months ended June 30, 2013 due mostly to lower shipments of our legacy network visibility products in the U.S., partially offset by revenues associated with the acquisition of Net Optics in December 2013. While we remain confident in our competitive position and our opportunities for long-term growth in both network test and visibility, we believe that there continue to be some concerns that are creating uncertainty in the market, such as the capital spending plans of large service providers and equipment manufacturers. This uncertainty may adversely impact our sales, results of operations and financial position over the near term.   

 

Acquisition of Net Optics, Inc. On December 5, 2013, we completed our acquisition of all of the outstanding shares of common stock and other equity interests of Net Optics, Inc. (“Net Optics”). The aggregate cash consideration paid totaled $187.7 million, or $185.7 million net of Net Optics’ existing cash and investment balances at the time of the acquisition. The aggregate purchase price reflects certain finalized post-closing adjustments, related to the final determination of the Net Optics’ closing working capital under the purchase agreement. The acquisition was funded from our existing cash and sale of investments. Net Optics is a leading provider of total application and network visibility solutions. The acquisition of Net Optics solidifies our position as a market leader with a comprehensive product offering that includes network packet brokers, comprehensive physical and virtual taps and application aware capabilities. Additionally, the acquisition has expanded our product portfolio, strengthens our service provider and enterprise customer base and broadens our sales channel and partner programs. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Net Optics’ net identifiable assets acquired, and, as a result, we have recorded goodwill in connection with this transaction. The results of operations of Net Optics have been included in our condensed consolidated statements of operations and cash flows since the date of the acquisition. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q for additional information regarding the Net Optics acquisition.

 

Revenues. Our revenues are principally derived from the sale and support of our test and visibility systems.

 

Our network test hardware products primarily consist of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards.  Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include an integrated, purpose-built hardware appliance with essential proprietary software.  Our software products consist of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms.  Our software products are typically installed on and work with these hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

 

 

 
24

 

 

Our service revenues primarily consist of technical support, warranty and software maintenance services revenues related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty and software maintenance services include assistance with the set-up, configuration and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include our Application and Threat Intelligence (ATI) service, which provides a comprehensive suite of application protocols, software updates and technical support. Our ATI service provides full access to the latest security attacks and application updates for use in real-world test and assessment scenarios. Our customers may purchase the ATI service for annual or multi-year periods. Service revenues also include training and other professional services revenues.

 

 Sales to our two largest customers, AT&T and Cisco Systems, accounted for $18.3 million, or 16.7% and $28.0 million, or 25.0% of our total revenues for the three months ended June 30, 2014 and 2013, respectively and $36.6 million, or 16.4% and $64.5 million or 27.6% of our total revenues for the six months ended June 30, 2014 and 2013, respectively. To date, we have generated the majority of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect to continue to have some customer concentration with network equipment manufacturers for the foreseeable future, we expect to continue to see further declines as a percentage of total revenues from sales to such customers, which will be mitigated by selling our products to a wider variety and increasing number of service provider, enterprise and government customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. We also expect that our 2013 acquisition of Net Optics will continue to further diversify our customer base.

 

From a geographic perspective, we generated revenues from shipments to international locations of $43.5 million, or 39.8%, and $90.2 million, or 40.4%, of our total revenues for the three and six months ended June 30, 2014, respectively, and $37.7 million, or 33.7%, and $83.7 million, or 35.8%, of our total revenues for the three and six months ended June 30, 2013, respectively. The increase in the percentage of our revenues from shipments to international locations was primarily due to lower shipments to service providers in the U.S. during the six months ended June 30, 2014.

   

Stock-Based Compensation. Share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are required to be recognized in our financial statements based on the estimated fair values for accounting purposes on the grant date. For the three and six months ended June 30, 2014, stock-based compensation expense was $3.1 million and $7.9 million, respectively. For the three and six months ended June 30, 2013, stock-based compensation expense was $4.5 million and $11.4 million, respectively. The decrease in stock-based compensation expense in the three and six months ended June 30, 2014 as compared to the same periods in 2013 is due to the departure of our former CFO and certain other employees and the cancellation of their stock-based awards during the period. The aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2014 through 2018 related to unvested share-based awards as of June 30, 2014 was approximately $19.3 million. To the extent that we grant additional share-based awards, future expense will increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the amount of share-based awards granted and the then current fair values of such awards for accounting purposes.

 

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes cost of materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations personnel. We outsource the majority of our manufacturing operations, and we conduct supply chain management, quality assurance, documentation control, shipping and some final assembly and testing at our facilities in Calabasas, California; Austin, Texas; and Penang, Malaysia. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services, and extended warranty and maintenance services. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $7.9 million and $16.1 million for the three and six months ended June 30, 2014, respectively, and $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, which are included within our Amortization of intangible assets line item on our condensed consolidated statements of operations included in this Form 10-Q.

 

 

 
25

 

 

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:

 

●     our pricing policies and those of our competitors;

 

●     the pricing we are able to obtain from our component suppliers and contract manufacturers;

 

●     the mix of customers and sales channels through which our products are sold;

 

●     the mix of our products sold, such as the mix of software versus hardware product sales;

 

●     new product introductions by us and by our competitors;

 

●     demand for and quality of our products; and

 

●     shipment volume.

 

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat to current levels, we expect to continue to experience pricing pressure on larger transactions and from larger customers as a result of competition.

 

Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, general and administrative, amortization of intangible assets, acquisition and other related costs and restructuring expenses. In dollar terms, we expect total operating expenses, excluding stock-based compensation expense discussed above and amortization of intangible assets, acquisition and other related, and restructuring costs discussed below, to decrease for the remainder of 2014 when compared to the first half of 2014 as a result of the company-wide restructuring announced in August 2014.

   

 

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes.

 

 

Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

 

 

General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs, and other general corporate expenses.

 

 

Amortization of intangible assets consists of the purchase price of various intangible assets over their estimated useful lives. We evaluate our identifiable definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that a potential impairment may exist. An impairment charge would be recorded to the extent that the carrying value of the intangible asset exceeds its undiscounted cash flows and its estimated fair value in the period that the impairment circumstances occurred. We also evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies or product lines or are required to record impairment charges related to our acquired intangible assets.

 

 

 
26

 

 

 

Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation and other related services, change in control payments, amortization of deferred compensation, consulting fees, required regulatory costs, certain employee, facility and infrastructure transition costs, and other related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.

 

 

Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations. See Note 4 to the condensed consolidated financial statements included in this Form 10-Q. We expect to record additional restructuring expenses in the third and fourth quarters of 2014 of between approximately $3.5 million and $4.5 million related to the company-wide restructuring initiative announced in August 2014. See Note 14 to the condensed consolidated financial statements included in this Form 10-Q.

 

Interest Income and Other, Net. Our interest income and other, net represents interest on cash and a variety of securities, including money market funds, U.S. Treasury government and government agency debt securities, corporate debt securities and auction rate securities, realized gains/losses on the sale of investment securities, certain foreign currency gains and losses, and other non-operating items.

 

Interest Expense. Our interest expense consists of interest due to the holders of our 3.00% Convertible Senior Notes due December 15, 2015, in the aggregate principal amount of $200 million that were issued in December 2010, as well as the amortization of the associated debt issuance costs. See Note 5 to the condensed consolidated financial statements included in this Form 10-Q.

 

Income tax. Our income tax is determined based on the amount of earnings and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and changes to valuation allowance set against certain deferred tax assets. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.

 

Our effective tax rate differs from the federal statutory rate of 35% due primarily to benefits associated with the differential in tax rates for certain foreign operations, state taxes, and significant permanent differences. Significant permanent differences arise primarily due to research and development credits and certain stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation expense on grants to foreign employees, offset by tax benefits from disqualifying dispositions, intercompany royalties and amortization. Federal research credits were not available to be recorded in our Annual Report on Form 10-K for the year ended December 31, 2012. During the 2013 first quarter, the federal research credit was retroactively renewed for 2012, and such benefits for the 2012 fiscal year were recorded at that time. The federal research credit expired on December 31, 2013, and is therefore not available to be recorded in our 2014 financial statements.

 

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Management has concluded it is more likely than not that all of its U.S. deferred tax assets, with the exception of its deferred tax assets for capital loss carryforwards, will be realized. Any reversal of our valuation allowance will favorably impact our results of operations in the period of the reversal.

 

 

 
27

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete or excess inventory, income taxes, acquisition purchase price allocation, impairments of long-lived assets, goodwill and marketable securities, stock-based compensation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates has significantly changed from those reflected in our 2013 Form 10-K. Critical accounting policies and estimates are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.

 

 
28

 

 

RESULTS OF OPERATIONS 

 

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.

 

   

Three months ended

   

Six months ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Revenues:

                               

Products

    69.8 %     74.8 %     70.6 %     76.8 %

Services

    30.2       25.2       29.4       23.2  

Total revenues

    100.0       100.0       100.0       100.0  
                                 

Costs and operating expenses:(1)

                               

Cost of revenues – products (2)

    21.5       18.8       21.9       18.2  

Cost of revenues – services

    3.8       3.0       3.6       2.7  

Research and development

    27.4       26.0       26.9       25.2  

Sales and marketing

    36.4       29.4       35.3       29.1  

General and administrative

    15.2       10.3       15.5       10.1  

Amortization of intangible assets

    11.4       9.0       11.2       8.6  

Acquisition and other related

    0.8       1.0       1.3       1.0  

Restructuring

    0.4             1.8        

Total costs and operating expenses

    116.9       97.4       117.5       95.0  
                                 

(Loss) income from operations

    (16.9 )     2.6       (17.5 )     5.0  

Interest income and other, net

    0.3       3.1       0.3       1.6  

Interest expense

    (1.8 )     (1.7 )     (1.7 )     (1.7 )

(Loss) income before income taxes

    (18.4 )     3.9       (18.9 )     4.9  

Income tax (benefit) expense

    (4.8 )     1.2       (3.5 )     0.2  

Net (loss) income

    (13.6 )%     2.7 %     (15.4 )%     4.6 %

 


(1) Stock-based compensation included in:

                               

Cost of revenues – products

    0.1 %     0.1 %     0.1 %     0.1 %

Cost of revenues – services

    0.0       0.0       0.0       0.0  

Research and development

    1.3       1.4       1.5       1.7  

Sales and marketing

    1.4       1.5       1.5       1.6  

General and administrative

    0.0       1.0       0.4       1.4  

 

(2) Cost of revenues – products excludes amortization of intangible assets related to product lines and purchased technologies of $7.9 million and $16.1 million for the three and six months ended June 30, 2014, respectively, and $6.4 million and $12.9 million for the three and six months ended June 30, 2013, respectively, which is included in Amortization of intangible assets.

 

Comparison of Three and Six Months Ended June 30, 2014 and 2013

 

As result of our acquisition of Net Optics in the fourth quarter of 2013, our 2014 results of operations include the financial results of Net Optics from its acquisition date. To assist the readers of our financial statements in reviewing our year-over-year consolidated operating results, we have included the impacts of this acquisition for the applicable periods in the related statement of operations sections below.

 

 

 
29

 

 

Revenues. During the three months ended June 30, 2014, total revenues decreased 2.2% to $109.5 million from the $112.0 million recorded in the three months ended June 30, 2013. Revenues for the three months ended June 30, 2014 included $13.3 million related to the 2013 acquisition of Net Optics. Excluding the revenues of Net Optics, total revenues decreased by $15.8 million, or 14.1%, to $96.2 million in the three months ended June 30, 2014, from $112.0 million in the three months ended June 30, 2013. The year-over-year decrease was primarily due to lower shipments to U.S. customers, which was attributable to a $18.2 million decrease in shipments of our hardware products (primarily our network visibility Net Tool Optimizer product, and to a lesser extent, our core network test Gigabit and 10 Gigabit Ethernet interface cards), partially offset by a $4.9 million increase in revenues recognized on technical support, warranty and software maintenance services.

 

During the six months ended June 30, 2014, total revenues decreased 4.4% to $223.3 million from the $233.5 million recorded in the six months ended June 30, 2014. Revenues for the six months ended June 30, 2014 included $23.9 million related to the 2013 acquisition of Net Optics. Excluding the revenues of Net Optics, total revenues decreased by $34.1 million, or 14.6%, to $199.4 million in the six months ended June 30, 2014 from $233.5 million in the six months ended June 30, 2013. The year-over-year decrease was primarily due to lower shipments to U.S. customers, which was attributable to a $41.1 million decrease in shipments of our hardware and software products (primarily our network visibility Net Tool Optimizer product, and to a lesser extent, our core network test Gigabit and 10 Gigabit Ethernet interface cards), partially offset by a $11.5 million increase in revenues recognized on technical support, warranty and software maintenance services.

 

Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 25.3% during the three months ended June 30, 2014 from 21.8% in the three months ended June 30, 2013. The increase in our total cost of revenues as a percentage of total revenues was primarily due to the increase in our cost of product revenues as a percentage of total revenues, which was 21.5% in the three months ended June 30, 2014 as compared to 18.8% in the three months ended June 30, 2013. The increase in cost of product revenues as a percentage of total revenues was primarily driven by higher material-related costs relative to the sales price for certain products. 

 

As a percentage of total revenues, our total cost of revenues increased to 25.5% in the six months ended June 30, 2014 from 20.9% in the six months ended June 30, 2013. The increase in our total cost of revenues as a percentage of total revenues was primarily due to the increase in our cost of product revenues as a percentage of total revenues, which was 21.9% in the six months ended June 30, 2014 as compared to 18.2% in the six months ended June 30, 2013. The increase in cost of product revenues as a percentage of total revenues was primarily driven by larger year-over-year percentage increases in charges for excess inventory and higher material-related costs relative to the sales price for certain products. 

 

Research and Development Expenses. During the three months ended June 30, 2014, research and development expenses increased 3.3% to $30.0 million from $29.1 million in the three months ended June 30, 2013. Research and development expenses attributable to Net Optics were approximately $2.2 million for the three months ended June 30, 2014. Research and development costs included stock-based compensation expense of $1.4 million and $1.6 million during the three months ended June 30, 2014 and 2013, respectively.

 

Excluding the activities of Net Optics and stock-based compensation, research and development expenses in the three months ended June 30, 2014 decreased 4.1% to $26.4 million compared to $27.5 million in the three months ended June 30, 2013. This decrease was primarily driven by a decrease in compensation and related employee costs of approximately $966,000, which was a result of a reduction in headcount from the restructuring activities that occurred during the fourth quarter of 2013.

 

During the six months ended June 30, 2014, research and development expenses increased 2.2% to $60.1 million from $58.8 million in the six months ended June 30, 2013. Research and development expenses attributable to Net Optics were approximately $5.7 million for the six months ended June 30, 2014. Research and development costs included stock-based compensation expense of $3.3 million and $4.0 million during the six months ended June 30, 2014 and 2013, respectively.

 

Excluding the activities of Net Optics and stock-based compensation, research and development expenses in the six months ended June 30, 2014 decreased 7.2% to $51.1 million compared to $54.8 million in the six months ended June 30, 2013. This decrease was primarily due to decreases in compensation and related employee costs of $2.5 million and a reduction in costs to develop prototypes. The decrease in compensation and related employee costs was primarily a result of a reduction in headcount from the restructuring activities that occurred during the fourth quarter of 2013.

 

Sales and Marketing Expenses. During the three months ended June 30, 2014, sales and marketing expenses increased 20.9% to $39.9 million from $33.0 million in the three months ended June 30, 2013. Sales and marketing expenses attributable to Net Optics were approximately $3.0 million for the three months ended June 30, 2014. Sales and marketing costs included stock-based compensation expense of $1.5 million and $1.6 million for the three months ended June 30, 2014 and 2013, respectively.

 

 

 
30

 

 

Excluding the activities of Net Optics and stock-based compensation, sales and marketing expenses in the three months ended June 30, 2014 increased 11.3% to $35.3 million compared to $31.4 million in the three months ended June 30, 2013. This increase was primarily due to an increase in net compensation and related employee costs, including travel, of $2.7 million, trade show costs of approximately $465,000 and a net increase to bad debt expenses of approximately $551,000. The increase in compensation and related employee costs was primarily due to increased headcount in sales and marketing personnel.

 

During the six months ended June 30, 2014, sales and marketing expenses increased 15.7% to $78.7 million from $68.0 million in the six months ended June 30, 2013. Sales and marketing expenses attributable to Net Optics were approximately $6.2 million for the six months ended June 30, 2014. Sales and marketing costs included stock-based compensation expense of $3.4 million and $3.6 million for the six months ended June 30, 2014 and 2013, respectively.

 

Excluding the activities of Net Optics and stock-based compensation, sales and marketing expenses in the six months ended June 30, 2014 increased 6.8% to $69.1 million compared to $64.4 million in the six months ended June 30, 2013. This increase was primarily due to an increase in net compensation and related employee costs, including travel, of $3.9 million and trade show costs of approximately $749,000. The increase in compensation and related employee costs was primarily due to increased headcount in sales and marketing personnel.

 

General and Administrative Expenses. During the three months ended June 30, 2014, general and administrative expenses increased 45.0% to $16.7 million from $11.5 million in the three months ended June 30, 2013. General and administrative expenses attributable to Net Optics were approximately $618,000 for the three months ended June 30, 2014. General and administrative expenses included stock-based compensation expense of $48,000 and $1.2 million for the three months ended June 30, 2014 and 2013, respectively.

 

Our general and administrative expenditures in the three months ended June 30, 2014 included charges of $4.9 million related to (i) internal investigations and related remediation efforts, (ii) the restatement of our financial statements for the first quarter of 2013 and for the three and six months ended June 30, 2013, and (iii) the securities class action against the company and certain of its current and former officers and directors as well as shareholder derivative actions. These costs consisted primarily of legal and accounting costs and expenses, recruiting and consulting expenses, severance and retention costs, and related expenses.

 

Excluding the activities of Net Optics, stock-based compensation and other charges noted above, general and administrative expenses in the three months ended June 30, 2014 increased 6.7% to $11.1 million compared to $10.3 million in the three months ended June 30, 2013. This increase was primarily due to an increase in net compensation and related employee costs of approximately $611,000 and higher depreciation and amortization costs for property and equipment. The increase in compensation and other related costs was primarily due to an increase in general and administrative headcount.

 

During the six months ended June 30, 2014, general and administrative expenses increased 46.7% to $34.6 million from $23.6 million in the six months ended June 30, 2013. General and administrative expenses attributable to Net Optics were approximately $2.0 million for the six months ended June 30, 2014. General and administrative expenses included stock-based compensation expense of approximately $993,000 and $3.4 million for the six months ended June 30, 2014 and 2013, respectively.

 

Our general and administrative expenditures in the six months ended June 30, 2014 included charges of $10.1 million related to (i) internal investigations and related remediation efforts, (ii) the restatement of our financial statements for the first quarter of 2013 and for the three and six months ended June 30, 2013, and (iii) the securities class action against the company and certain of its current and former officers and directors as well as shareholder derivative actions. These costs consisted primarily of legal and accounting costs and expenses, recruiting and consulting expenses, severance and retention costs, and related expenses.

 

Our general and administrative expenditures in the six months ended June 30, 2013 included $1.2 million of proceeds realized from the settlement of a legal matter partially offset by $1.0 million in costs related to the April 2013 restatement of certain of our previously filed financial statements.

 

 

 
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Excluding the activities of Net Optics, stock-based compensation and other charges noted above, general and administrative expenses in the six months ended June 30, 2014 increased 5.1% to $21.4 million compared to $20.4 million in the six months ended June 30, 2013. This increase was primarily due to an increase in net compensation and related employee costs of approximately $913,000 and higher depreciation and amortization costs for property and equipment. The increase in compensation and other related costs was primarily due to an increase in general and administrative headcount.

 

Amortization of Intangible Assets. During the three and six months ended June 30, 2014, amortization of intangible assets increased to $12.5 million and $25.0 million from $10.1 million and $20.2 million in the three and six months ended June 30, 2013. This increase was primarily due to the incremental amortization of intangibles related to our 2013 acquisition of Net Optics.

 

Acquisition and Other Related Expenses. During the three months ended June 30, 2014, acquisition and other related expenses decreased 20.8% to approximately $866,000 from $1.1 million in the three months ended June 30, 2013.  Acquisition and other related costs for the three months ended June 30, 2013 and 2014 primarily related to integration activities associated with the acquisitions of BreakingPoint Systems and Net Optics, respectively. Acquisition and other related costs primarily consisted of transaction and integration-related costs such as professional fees for legal, accounting and tax services, integration-related consulting fees, certain employee, facility and infrastructure costs, and other acquisition-related costs.

 

During the six months ended June 30, 2014, acquisition and other related expenses increased 18.3% to $2.8 million from $2.4 million in the six months ended June 30, 2013. Acquisition and other related costs for the six months ended June 30, 2013 and 2014 primarily related to integration activities associated with the acquisitions of BreakingPoint Systems and Net Optics, respectively. Acquisition and other related costs primarily consisted of transaction and integration-related costs such as professional fees for legal, accounting and tax services, integration-related consulting fees, certain employee, facility and infrastructure costs, and other acquisition-related costs.

 

Restructuring. Restructuring expenses were approximately $481,000 for the three months ended June 30, 2014 and $0 for the three months ended June 30, 2013. Restructuring expenses were $4.0 million for the six months ended June 30, 2014 and $58,000 for the six months ended June 30, 2013. Restructuring costs for the three months ended June 30, 2014 were primarily related to one-time expenses for employee termination benefits consisting of severance and other related costs associated with the Net Optics restructuring. Restructuring costs for the six months ended June 30, 2014 were primarily related to one-time expenses for employee termination benefits consisting of severance and other related costs and costs required to terminate the Net Optics facility lease in Israel. The Net Optics restructuring was initiated in the first quarter of 2014 and was substantially completed as of June 30, 2014. The restructuring included a net reduction in force of approximately 45 positions (primarily impacting our research and development team in Israel and Santa Clara, California), which represented approximately 2.3% of our worldwide work force.

 

Interest Income and Other, Net. Interest income and other, net was approximately $292,000 and $629,000 for the three and six months ended June 30, 2014, respectively, as compared to $3.4 million and $3.6 million for the three and six months ended June 30, 2013. These decreases were primarily due to a $2.9 million realized gain recorded during the second quarter of 2013 on the sale of certain of our auction rate securities that were previously written-down and a decrease in foreign currency translation gains.

 

Interest Expense. Interest expense, including the amortization of debt issuance costs, was $1.9 million and $3.9 million for the three and six months ended June 30, 2014 and June 30, 2013. Interest expense relates to our convertible senior notes, as well as the amortization of deferred issuance costs and commitment fees related to our credit facility which we established in December 2012. For additional information, see Note 5 to the condensed consolidated financial statements included in this Form 10-Q.

 

Income Tax. Income tax benefit was $5.2 million, or an effective rate of (25.7%), for the three months ended June 30, 2014 as compared to an income tax expense of $1.4 million, or an effective rate of 31.2%, for the three months ended June 30, 2013. Income tax benefit was $7.9 million, or an effective rate of (18.5%), for the six months ended June 30, 2014 as compared to an income tax expense of approximately $582,000, or an effective rate of 5.1%, for the six months ended June 30, 2013. The lower effective tax rate for the three and six months ended June 30, 2014, when compared to the same periods in 2013 was primarily the result of the Company generating pre-tax losses in 2014 compared to pre-tax earnings in 2013.

 

 

 
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LIQUIDITY AND CAPITAL RESOURCES

 

Our cash, cash equivalents and short-term investments increased to $97.0 million as of June 30, 2014 from $85.7 million as of December 31, 2013 which was primarily due to $10.8 million in net cash provided by our operating activities and $5.3 million of proceeds from exercises of share-based awards, partially offset by an increase in net purchases of available for sale securities of $6.3 million and capital expenditures of $4.7 million.

 

Of our total cash, cash equivalents and short-term investments, $29.6 million and $25.3 million were held outside of the United States in various foreign subsidiaries as of June 30, 2014 and December 31, 2013, respectively. Under current tax laws and regulations, if our cash, cash equivalents or investments associated with the subsidiaries’ undistributed earnings were to be repatriated in the form of dividends or deemed distributions, we would be subject to additional U.S. income taxes and foreign withholding taxes. We consider these funds to be indefinitely reinvested in our foreign operations and do not intend to repatriate them. We had no exposure to European sovereign debt as of June 30, 2014.

 

The following table sets forth our summary cash flows for the six months ended June 30, 2014 and 2013 (in thousands): 

 

   

Six Months Ended

June 30,

 
   

2014

   

2013

 
                 

Net cash provided by operating activities

  $ 10,801     $ 51,165  

Net cash used in investing activities

    (11,002

)

    (57,266

)

Net cash provided by financing activities

    5,042       14,283  

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $10.8 million during the six months ended June 30, 2014 and $51.2 million during the six months ended June 30, 2013. This decrease in cash flow generated from operations was primarily driven by a net loss of $34.5 million for the six months ended June 30, 2014 compared to net income of $10.8 million for the six months ended June 30, 2013. The decrease in cash flow from operations was partially offset by approximately $186,000 increase related to net working capital changes during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The working capital changes were due the timing of payments of accrued liabilities and an increase in deferred revenues during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due to a higher volume of technical support, warranty and software maintenance contracts.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was $11.0 million during the six months ended June 30, 2014 and $57.3 million during the six months ended June 30, 2013. The decrease in net cash used in investing activities was primarily a result of lower net purchases of available for sale securities and lower purchases of property and equipment during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities was $5.0 million during the six months ended June 30, 2014 compared to $14.3 million during the six months ended June 30, 2013. This decrease in cash provided by financing activities was primarily due to a $8.0 million decrease in proceeds from the exercise of share-based awards during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

 

We believe that our existing balances of cash and cash equivalents, investments, and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next 12 months.

 

Our Credit Facility, under which we currently are unable to borrow or obtain letters of credit (see discussion below), is expected to mature on December 21, 2016, but may mature on September 14, 2015 if we do not have available liquidity (domestic cash and investments, plus availability under the Credit Facility) of $25 million in excess of the amount required to repay in full our 3.00% Convertible Senior Notes due December 15, 2015 in the aggregate principal amount of $200 million (the “Notes”) beginning on June 15, 2015. If we satisfy this requirement between June 15, 2015 and September 14, 2015, but fail to do so after September 14, 2015 and prior to December 15, 2015, the maturity date is the date on which the requirement is no longer satisfied. 

 

 

 
33

 

 

We have received extensions from the lenders under the Credit Facility in connection with the delayed delivery to the lenders of our financial statements for the quarters ended September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014 and of our audited financial statements for the fiscal year ended December 31, 2013 and we entered into agreements with the lenders that amended the Credit Facility Agreement to extend the dates for such deliveries. As of the date of the filing of this Form 10-Q, we have completed all such deliveries other than the delivery of our financial statements for the quarter ended June 30, 2014. The lenders’ waiver of the late delivery of our 2014 second quarter financial statements expired on August 29, 2014, as discussed in more detail below.

 

Under an amendment to the Credit Facility Agreement dated June 27, 2014, the date for delivery of our financial statements for the quarter ended June 30, 2014 was extended to August 29, 2014. We did not, however, deliver the financial statements on or before that date. On August 29, 2014, the administrative agent provided us with notice that we were in default under the Credit Facility Agreement because we had not timely provided the administrative agent with our financial statements for the quarter ended June 30, 2014 and a related compliance certificate and because we were in default under the Indenture for failing to timely file this Form 10-Q with the trustee. The administrative agent’s notice expressly reserved the rights of the administrative agent and the lenders to exercise their respective rights, powers, privileges and remedies in connection with such event or events of default. Due to the occurrence of such event or events of defaults, the Company is blocked from borrowing and obtaining letters of credit under the credit facility provided under the Credit Agreement. The administrative agent also has the right (with the consent of a majority of the lenders based on total credit exposure) or obligation (at the request of such a majority of the lenders) to terminate the Credit Facility Agreement, accelerate any amounts due thereunder and exercise all other available remedies. We do not have a contractual right to cure these defaults, and the defaults may be waived only with the consent of a majority of the lenders based on total credit exposure. As of the date of the filing of this Form 10-Q, no amounts are outstanding under the Credit Facility Agreement. See Note 5 to the condensed consolidated financial statements included herein.

 

To the extent that any breach of the Indenture resulting from our delayed filings with the SEC other than this Form 10-Q (i.e., the delayed filings of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “2013 Third Quarter Form 10-Q”), the 2013 Form 10-K, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “2014 First Quarter Form 10-Q”) and a Current Report on Form 8-K/A relating to our acquisition of Net Optics on December 5, 2013) may have constituted an event of default under the Credit Facility Agreement, we have obtained waivers from the lenders.

 

We may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; there can be no assurance that such funds, if needed, will be available on favorable terms, if at all.

 

Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various factors, including the conditions in U.S. capital markets and the timely filing of our periodic reports with the SEC. Our failure to timely file our 2013 Third Quarter Form 10-Q, our 2013 Form 10-K, Form 8-K/A, our 2014 First Quarter Form 10-Q and this Form 10-Q with the SEC currently limits our ability to access the capital markets using short-form registration.

 

Our Notes were issued under an Indenture dated as of December 21, 2010 (the “Indenture”) that includes various default provisions, which, under certain circumstances, could result in the acceleration of our repayment obligations under the Notes and/or an increase for up to 180 days in the overall interest rate charged on the Notes. Under the Indenture, if we do not cure a default within 60 days after our receipt of such a notice and unless we obtain a waiver from the holders of more than 50% in aggregate principal amount of the Notes, an “event of default” would occur under the Indenture. Upon an event of default, we could, and would intend to, elect that for the first 180 days thereafter (or such lesser amount of time during which the event of default continues), the sole remedy would be the payment to the holders of the Notes of additional interest at an annual rate equal to 0.50%. If we elect to pay additional interest and the event of default is not cured within 180 days, or if we do not make such an election when an event of default first occurs, the trustee or the holders of at least 25% in aggregate principal amount of the Notes may declare the principal amount of the Notes to be due and payable immediately. Our filing of this Form 10-Q with the SEC will cure the default that was the subject of the trustee’s notice dated September 3, 2014.

 

In a notice dated July 16, 2014, the trustee under the Indenture provided us with notice that we were in default under the Indenture of our obligation to timely file this Form 10-Q with the trustee and directed us to cure such default. In accordance with the terms of the Indenture, we had 60 days to cure such default. Such cure period expired on or about September 14, 2014, at which time the default became an event of default and gave the trustee and the holders of the Notes the right to exercise various remedies, including acceleration of the Notes. In accordance with the terms of the Indenture, by delivery of notice to the trustee, the paying agent and the holder(s) of the Notes, we intend to elect to pay additional interest at a rate equal to 0.50% as the sole remedy available to the holders of the Notes for the up to 180-day period commencing on or about September 14, 2014. Our filing of our 2014 First Quarter Form 10-Q with the SEC will cure the default and subsequent event of default that was the subject of the trustee's notice dated July 16, 2014, at which point we will no longer be required to pay the additional interest on the Notes.

 

On September 3, 2014, the trustee provided us with notice that we were in default under the Indenture because we had not timely filed this Form 10-Q with the trustee. Our filing of this Form 10-Q with the SEC will cure the default that was the subject of the trustee's notice dated September 3, 2014.

 

The Indenture also provides that if our common stock ceases to be listed on the Nasdaq Global Select Market, then any holder of the Notes could require us to repurchase the holder’s Notes in accordance with the terms of the Indenture. On May 2, 2014, the Listing Qualifications Department of The NASDAQ Stock Market LLC (“Nasdaq”) notified us that due to our delay in filing with the SEC our 2013 Third Quarter Form 10-Q and 2013 Form 10-K, our common stock would be delisted unless we timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”). On May 15, 2014, Nasdaq advised us that the delayed filing of the 2014 First Quarter Form 10-Q served as an additional basis for the delisting determination. On August 19, 2014, Nasdaq advised us that our delayed filing of this Form 10-Q served as a further basis for the delisting determination.

 

 
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Upon receiving the May 2, 2014 notice from Nasdaq, we timely requested a hearing before a Panel, and the hearing was held on June 12, 2014. At the hearing, we presented a plan to regain compliance with the listing rule and requested an extension of time in which to do so Thereafter, on June 23, 2014, we filed with the SEC certain delinquent reports that included our 2013 Third Quarter Form 10-Q and 2013 Form 10-K.

 

On July 9, 2014, we received a letter from Nasdaq indicating that the Panel had determined to continue the listing of our common stock subject to the condition that, on or before September 12, 2014, we became current in our periodic filings with the SEC. We would also be required to demonstrate at such time that we are in compliance with all other requirements for continued listing on the Nasdaq Global Select Market. The Panel indicated that in the event we were unable to satisfy such conditions, our common stock would be delisted.

 

On September 5, 2014, following our request that the Panel extend the September 12th date, we  were notified that the Panel had extended our date to become current in our periodic filings with the SEC to November 13, 2014. With the filing of this Form 10-Q, we became fully current with respect to our periodic filing obligations with the SEC.

 

Any acceleration of our repayment obligations or requirement that we pay additional interest under the Notes, or any requirement that we offer to repurchase the Notes, could materially and adversely impact our liquidity.

  

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Statements that are not historical facts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q may be deemed to be forward-looking statements within the meaning of the Exchange Act, and are subject to the safe harbor created by that Section. Words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. These risks, uncertainties and other factors may cause our future results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements and include, among other things: anticipated benefits and synergies of our 2012 acquisitions of Anue and BreakingPoint, and our 2013 acquisition of Net Optics, will not be realized, recent and future changes in management, changes in the global economy, competition, consistency of orders from significant customers, our success in developing, producing and introducing new products, our success in developing new sales channels and customers, market acceptance of our products, war, terrorism, political unrest, natural disasters and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain and/or impact the delivery of our products, material weaknesses in our internal controls, the 2013 and 2014 restatements of certain of our prior period financial statements, the securities class action, and shareholder derivative action currently pending against us and certain of our current and former officers and directors, any future default under our Credit Facility Agreement or the Indenture governing our Notes, and any delisting of our common stock if we are not in compliance with Nasdaq’s listing rules by November 13, 2014. The factors that may cause future results to differ materially from our current expectations also include, without limitation, the risks identified in our 2013 Form 10-K, in Item 1A, “Risk Factors,” in this Form 10-Q and in our other filings with the SEC.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2013 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2013.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Acting Chief Executive Officer and our Acting Chief Financial Officer, of the effectiveness, as of the end of the period covered by this report (i.e., as of June 30, 2014), of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, our Acting Chief Executive Officer and our Acting Chief Financial Officer concluded that due to material weaknesses in our internal control over financial reporting, our disclosure controls and procedures, as of June 30, 2014, were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Acting Chief Executive Officer and our Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

 
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Notwithstanding the ineffectiveness of our disclosure controls and procedures as of June 30, 2014 and the material weaknesses in our internal control over financial reporting that are identified in Part II, Item 9A of our 2013 Form 10-K, and that are discussed below, management believes that (i) this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Form 10-Q and (ii) the condensed consolidated financial statements, and other financial information, included in this Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

 

Material Weaknesses

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

As reported in our 2013 Form 10-K, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2013 because of certain material weaknesses in our internal control over financial reporting as of December 31, 2013 as follows:

 

 

Control Environment – The control environment, which includes the Company’s Code of Conduct and its Ethics Policy, is the responsibility of senior management, sets the tone of our organization, influences the control consciousness of employees, and is the foundation for the other components of internal control over financial reporting. Given the Audit Committee’s determination in October 2013 that our former President and Chief Executive Officer (the “Former CEO”), had misstated his academic credentials, age and early employment history, we determined that the Company did not have sufficient background check policies to validate the age, education and employment history of existing employees that were subsequently promoted to senior management positions or of acquired employees placed in senior management positions. Further, the results of the Audit Committee Investigation concluded that the aggressive tone at the top set by the Former CEO, and the Company’s former Chief Financial Officer’s lack of leadership in terms of counterbalancing that aggressive tone at the top, contributed to an ineffective control environment. We believe that the Former CEO and the former Chief Financial Officer provided insufficient attention to key controls. We also believe that controls over whistleblower allegation investigations were improperly designed to perform timely investigations into all whistleblower matters with appropriate scope, procedures and conclusions reached. In addition, the Company also does not have controls that are operating effectively to appropriately segregate duties within certain areas of the organization. Finally, in light of the Company’s recent growth and the relative complexity of its transactions, together with the results of the Audit Committee Investigation, we believe the Company lacks certain monitoring controls necessary to detect circumstances in which management may override controls or deviate from expected standards of conduct. Such monitoring controls are often addressed through the use of an internal audit function. This ineffective control environment contributed significantly to the material weaknesses described below.

 

 

Sufficiency of Accounting Department Resources –The Company has insufficient competent and diligent accounting department resources to develop and operate effective internal controls over financial reporting. The lack of certain appropriate resources in the Company’s accounting department led to widespread control deficiencies in the Company’s financial reporting process and contributed significantly to the Company’s inability to properly identify and assess revenue recognition as described below.

 

 

 
36

 

 

 

Revenue Recognition – The Company’s internal controls were not designed to: (i) appropriately identify and assess the accounting impact of certain multiple-element arrangements that were executed as separate sales transactions, (ii) identify and account for all deliverables in certain multiple-element arrangements for which certain future deliverables existed and were not considered and (iii) properly identify and account for arrangements that included payment terms that extended beyond the Company’s customary terms. The Company has also insufficiently trained its accounting department, sales force and other personnel involved in the sales process with respect to the Company’s revenue recognition policies and procedures. In addition, the Company has not adequately designed controls to ensure the proper assessment of sales arrangements documented in foreign languages. As a result of these design defects, our policies and controls related to the Company’s revenue recognition practices were not effective in ensuring that revenue was recorded in the correct period and that the accounting department was informed of all elements and deliverables of certain arrangements. In addition, the Company lacked appropriate controls to ensure the completeness and accuracy of data within certain data warehouse reports used to support the revenue recognition process. The Company also did not have effective general information technology controls around the data warehouse and licensing systems.

 

 

Manual Journal Entries – The Company’s internal controls over manual journal entries were not designed to prevent inappropriate manual journal entries from being recorded in its books and records. Further, management’s review process over recorded manual journal entries did not include the appropriate level of approval or evidence of such approval and, at times, lacked the appropriate journal entry supporting documentation.

 

The control deficiencies described above resulted in errors to our product and services revenues and deferred revenues (current and non-current) that necessitated the restatement of our unaudited condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013. Additionally, these control deficiencies could result in a material misstatement of our annual and interim consolidated financial statements that would not be prevented or detected. Accordingly, we have determined that these control deficiencies constitute material weaknesses.

 

Remediation Efforts to Address Material Weaknesses

 

As reported in our 2013 Form 10-K, our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are designed and operating effectively. Since identifying the material weaknesses in our internal control over financial reporting, we have corrected the identified errors in our previously issued financial statements. We have developed and are continuing to develop remediation plans to fully address these control deficiencies. If not remediated, these control deficiencies could result in material misstatements to our financial statements. Our Board of Directors and management take internal controls over financial reporting and the integrity of the Company’s financial statements seriously and believe that the remediation steps described below, including with respect to personnel changes, are essential to maintaining strong and effective internal controls over financial reporting and a strong internal control environment. The following steps are among the measures that have been implemented or will be implemented as soon as practicable after the date of this filing:

Control Environment

 

 

Our Former CEO, Victor Alston, is no longer employed by the Company. The Company’s Chief Innovation Officer and Chairman of the Board, who previously served as the Company’s principal executive officer from May 1997 until March 2008, currently also serves as our Acting CEO. As reported by the Company in its Current Report on Form 8-K filed with the SEC on August 21, 2014, the Board has appointed Bethany Mayer as the Company’s new President and Chief Executive Officer. Her appointment will become effective on the day following the date on which the Company becomes current in the filing of its periodic reports with the SEC. The Company expects that date to be the day after the Company filed this Form 10-Q with the SEC.

 

 

We are developing and preparing to implement a training program, to be led by our Acting CEO and Acting CFO (and reinforced by senior accounting personnel with the appropriate level of expertise), for executives, finance and accounting personnel, operations personnel, sales personnel and other personnel involved in the sales process to enhance awareness and understanding of the Company’s revenue recognition policies and procedures, as well as the importance of financial reporting integrity and the Company’s Code of Conduct and Ethics Policy.

 

 

We are developing a program to enhance the visibility of the Company’s whistleblower hotline, as well as the process, policies and procedures to assess, evaluate and communicate matters arising from whistleblower communications, including the Audit Committee’s direct oversight and monitoring of senior management’s actions undertaken to assess, evaluate and resolve whistleblower matters. We are in the process of implementing an independent internal audit function reporting directly to the Audit Committee.

 

 

 
37

 

 

 

We will develop a roles and responsibilities matrix for the key accounting and operations personnel to incorporate segregation of duties considerations.

 

Sufficiency of Accounting Department Resources

 

 

We have enhanced and plan to continue to enhance the Company’s finance and accounting department staff, in terms of both number and competency of personnel and particularly in the area of revenue recognition. Specifically:

 

 

1.

We have hired two full-time revenue recognition accountants reporting to our Worldwide Revenue Manager. The Company also plans on hiring three additional revenue recognition accountants in 2014.

 

 

2.

We have hired an Assistant Corporate Controller to assist with the development of more effective accounting policies and procedures globally.

 

 

3.

We have hired a Director of Financial Reporting to lead and oversee our SEC reporting function.

 

 

4.

We have hired a new North American Controller to lead the accounting functions for the U.S. and Canada.

 

 

We will develop, implement and deliver to all existing and new accounting department personnel a technical revenue recognition training course led by our Acting CFO and Corporate Controller, supplemented by outside experts as deemed appropriate.

 

Revenue Recognition

 

 

The Company has reassessed the responsibilities of and, based on that reassessment, has realigned reporting relationships for, those having responsibilities impacting revenue recognition. For example, the revenue team (i.e., the team responsible for reviewing sales transactions and recording revenue) now reports directly to the Corporate Controller, who was hired in September 2013 and has extensive revenue recognition experience in the technology field.

 

 

We have recently purchased a revenue recognition system to help streamline the Company’s revenue recognition processes. The Company plans to fully implement the system over the next twelve months.

 

 

In December 2013, the Company began the process of establishing a deal desk. The deal desk is led by the Corporate Controller and is staffed by the Company’s revenue recognition personnel, all of whom are knowledgeable about revenue recognition accounting principles. The deal desk has been and will continue to implement and utilize systems and processes designed to detect and then direct non-standard sales transactions, proposed or executed, to a central location where revenue recognition personnel will assess and then account for the related revenues accordingly. The deal desk personnel will regularly communicate with sales, technical support, order management, legal and operations personnel regarding sales transactions, proposed or executed, to proactively identify non-standard sales transactions. The Company will continue to enhance the deal desk function.

 

 

We have enhanced and will continue to enhance the documentation, oversight and monitoring of accounting policies and procedures relating to revenue recognition.

 

 

We will develop, implement and deliver revenue recognition training to executives, finance and accounting personnel, our sales force and other personnel involved in the sales process (as also noted above under “Sufficiency of Accounting Department Resources”). Revenue training will include new hire mandatory training (also required for personnel that transfer into one of the foregoing job categories), at least one annual “refresher” training and ongoing training on specific topics pertaining to revenue recognition.

 

 

 
38

 

 

 

We will implement revised quarterly representations by our sales department personnel and other personnel involved in the sales process to assist in evaluating compliance with the Company’s revenue recognition policies and procedures.

 

Manual Journal Entries

 

 

We will establish and document a more detailed accounting policy and procedures regarding (i) the documentation required to support manual journal entries and (ii) the storage of the supporting documentation for manual journal entries.

 

 

We will implement a process to require accounting supervisors and/or managers to review and approve all manual journal entries and to ensure proper supporting evidence is maintained.

 

 

A manual journal entry log will be maintained and used to facilitate the controller level review of manual journal entries.

 

The Audit Committee has directed management to develop a detailed plan and timetable for the completion of the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as to our policies and procedures in order to improve the overall effectiveness of internal control over financial reporting.

 

We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls when they are fully implemented. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our Acting Chief Executive Officer and our Acting Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control will be met. The design of controls must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all controls, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

 
39

 

 

PART II.     OTHER INFORMATION

 

 

ITEM 1.        Legal Proceedings

 

Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 12, “Commitments and Contingencies,” included in this Form 10-Q, and should be considered an integral part of this Part II, Item 1, “Legal Proceedings.”

 

ITEM 1A.     Risk Factors

 

Information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our 2013 Form 10-K and in certain of our other filings with the SEC. There have been no material changes to our risk factors previously disclosed in the 2013 Form 10-K.

 

 

ITEM 5.       Other Information

 

Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the SEC under the Exchange Act. Our directors, officers and employees may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or expiration of any such plans.

   

ITEM 6.       Exhibits

 

See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with or incorporated by reference as part of this report, which Exhibit Index is incorporated herein by reference.

 

  

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

 

 

 

 

IXIA

 

 

 

 

 

 

 

 

 

 

 

 

Date:

September 15, 2014

By:

/s/     Errol Ginsberg

  

  

  

Errol Ginsberg

Acting Chief Executive Officer

 

 

Date:

September 15, 2014

By:

/s/     Brent Novak

  

  

  

Brent Novak

Acting Chief Financial Officer

  

 

 
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EXHIBIT INDEX

 

  

Exhibit No.

Description

  

  

31.1*

Certification of Acting Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2*

Certification of Acting Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1*

Certifications of Acting Chief Executive Officer and Acting Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   

10.1

Second Amendment to Credit Agreement dated as of February 14, 2014, among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL, LLC and VeriWave, Inc., as the Guarantors, Bank of America, N.A., as Administrative Agent and Lender, and the Other Lenders a Party Thereto (1)

   

10.2

Third Amendment to Credit Agreement and Waiver dated as of March 17, 2014, among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL, LLC and VeriWave, Inc., as the Guarantors, Bank of America, N.A., as Administrative Agent and Lender, and the Other Lenders a Party Thereto (2)

   

10.3

Seventh Amendment to Credit Agreement dated as of June 27, 2014, among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation, Net Optics, Inc., Net Optics IL, LLC and VeriWave, Inc., as the Guarantors, Bank of America, N.A., as Administrative Agent and Lender, and the Other Lenders a Party Thereto (3)

   

 

 

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Document

101.LAB**

XBRL Taxonomy Label Linkbase Document

101.PRE**

XBRL Taxonomy Presentation Linkbase Document

                


     

*

Filed herewith.

 

 

 

 

** 

The following financial information in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, is formatted in Extensible Business Reporting Language (XBRL) and electronically submitted herewith: (i) unaudited condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013, (ii) unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013, (iii) unaudited condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and 2013, (iv) unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013, and (v) notes to unaudited condensed consolidated financial statements. 

   

(1)

Incorporated by reference to Exhibit 10.1.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 0-31523) filed with the Commission on June 23, 2014.

   

(2)

Incorporated by reference to Exhibit 10.1.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 0-31523) filed with the Commission on June 23, 2014.

   
(3) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on September 5, 2014.

 

 

 

42