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, 2003 | ||
| 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
| California (State or other jurisdiction of incorporation or organization) |
95-4635982 (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 [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock (Class of Common Stock) |
58,354,200 (Outstanding at August 6, 2003) |
IXIA
TABLE OF CONTENTS
| Page Number | ||||||||||||||||
| PART I. | FINANCIAL INFORMATION | |||||||||||||||
| Item 1. | Financial Statements (unaudited) |
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| Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 |
3 | |||||||||||||||
| Condensed Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 |
4 | |||||||||||||||
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 |
5 | |||||||||||||||
| Notes to Condensed Consolidated Financial Statements |
6 | |||||||||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
14 | ||||||||||||||
| Item 4. | Controls and Procedures |
15 | ||||||||||||||
| PART II. | OTHER INFORMATION |
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| Item 4. | Submission of Matters to a Vote of Security Holders |
15 | ||||||||||||||
| Item 5. | Other Information |
16 | ||||||||||||||
| Item 6. | Exhibits and Reports on Form 8-K |
16 | ||||||||||||||
| SIGNATURES |
17 | |||||||||||||||
2
IXIA
Condensed Consolidated Balance Sheets
(in thousands)
| June 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (unaudited) | ||||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 61,548 | $ | 58,865 | ||||||
Short-term investments in securities |
21,317 | 12,050 | ||||||||
Accounts receivable, net of allowance for
doubtful accounts of $311 and $161 as of June
30, 2003 and December 31, 2002, respectively |
12,814 | 9,351 | ||||||||
Inventories |
5,890 | 5,121 | ||||||||
Prepaid expenses and other current assets |
5,912 | 6,232 | ||||||||
Total current assets |
107,481 | 91,619 | ||||||||
Investments in securities |
45,524 | 51,306 | ||||||||
Property and equipment, net |
6,976 | 7,003 | ||||||||
Goodwill |
1,592 | 1,592 | ||||||||
Intangible assets, net |
3,805 | 4,030 | ||||||||
Other assets, net |
2,096 | 2,111 | ||||||||
Total assets |
$ | 167,474 | $ | 157,661 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 1,345 | $ | 960 | ||||||
Accrued expenses |
5,590 | 4,049 | ||||||||
Deferred revenues |
3,467 | 1,958 | ||||||||
Income taxes payable |
1,709 | 1,527 | ||||||||
Total liabilities |
12,111 | 8,494 | ||||||||
Shareholders’ equity: |
||||||||||
Common stock, without par value; 200,000 shares
authorized, 58,278 and 57,595 shares issued and
outstanding as of June 30, 2003 and December
31, 2002, respectively |
80,177 | 79,206 | ||||||||
Additional paid-in capital |
46,517 | 47,045 | ||||||||
Deferred stock-based compensation |
(1,261 | ) | (3,036 | ) | ||||||
Retained earnings |
29,930 | 25,952 | ||||||||
Total shareholders’ equity |
155,363 | 149,167 | ||||||||
Total liabilities and shareholders’ equity |
$ | 167,474 | $ | 157,661 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
IXIA
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
| Three months ended | Six months ended | ||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Net revenues |
$ | 20,036 | $ | 17,254 | $ | 38,849 | $ | 32,696 | |||||||||||
Cost of revenues(1) |
3,773 | 3,382 | 7,082 | 6,360 | |||||||||||||||
Gross profit |
16,263 | 13,872 | 31,767 | 26,336 | |||||||||||||||
Operating expenses: (1) |
|||||||||||||||||||
Research and development |
5,466 | 5,139 | 11,007 | 9,954 | |||||||||||||||
Sales and marketing |
5,757 | 5,470 | 12,051 | 9,970 | |||||||||||||||
General and administrative |
2,335 | 1,973 | 4,445 | 3,938 | |||||||||||||||
Amortization of purchased intangible
assets |
237 | 258 | 465 | 426 | |||||||||||||||
Total operating expenses |
13,795 | 12,840 | 27,968 | 24,288 | |||||||||||||||
Income from operations |
2,468 | 1,032 | 3,799 | 2,048 | |||||||||||||||
Interest income, net |
818 | 740 | 1,613 | 1,379 | |||||||||||||||
Income before income taxes |
3,286 | 1,772 | 5,412 | 3,427 | |||||||||||||||
Income tax expense |
820 | 709 | 1,434 | 1,396 | |||||||||||||||
Net income |
$ | 2,466 | $ | 1,063 | $ | 3,978 | $ | 2,031 | |||||||||||
Earnings per share: |
|||||||||||||||||||
Basic |
$ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.04 | |||||||||||
Diluted |
$ | 0.04 | $ | 0.02 | $ | 0.07 | $ | 0.03 | |||||||||||
Weighted average number of common and
common equivalent shares outstanding: |
|||||||||||||||||||
Basic |
58,007 | 56,747 | 57,820 | 56,491 | |||||||||||||||
Diluted |
61,470 | 60,430 | 61,148 | 60,710 | |||||||||||||||
(1) Stock-based compensation included in: |
|||||||||||||||||||
Cost of revenues |
$ | 42 | $ | 102 | $ | 92 | $ | 240 | |||||||||||
Research and development |
374 | 752 | 885 | 1,763 | |||||||||||||||
Sales and marketing |
(258 | ) | 391 | (3 | ) | 800 | |||||||||||||
General and administrative |
59 | 164 | 174 | 396 | |||||||||||||||
| $ | 217 | $ | 1,409 | $ | 1,148 | $ | 3,199 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
IXIA
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six months ended | ||||||||||||
| June 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 3,978 | $ | 2,031 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
2,278 | 2,460 | ||||||||||
Amortization of purchased intangible assets |
465 | |||||||||||
Provision for doubtful accounts |
150 | (50 | ) | |||||||||
Stock-based compensation |
1,148 | 3,199 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(3,613 | ) | (3,714 | ) | ||||||||
Inventories |
(769 | ) | (2,021 | ) | ||||||||
Income taxes receivable |
— | 2,164 | ||||||||||
Prepaid expenses and other current assets |
320 | 293 | ||||||||||
Other assets |
15 | (119 | ) | |||||||||
Accounts payable |
385 | 662 | ||||||||||
Accrued expenses |
1,541 | 109 | ||||||||||
Deferred revenue |
1,509 | 87 | ||||||||||
Income taxes payable |
281 | — | ||||||||||
Net cash provided by operating activities |
7,688 | 5,101 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment |
(2,491 | ) | (2,405 | ) | ||||||||
Purchases of investments |
(30,020 | ) | (68,340 | ) | ||||||||
Proceeds from redemption of investments |
26,535 | 8,247 | ||||||||||
Payments in connection with acquisition |
— | (5,254 | ) | |||||||||
Cash used in investing activities |
(5,976 | ) | (67,752 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of stock options |
971 | 868 | ||||||||||
Net cash provided by financing activities |
971 | 868 | ||||||||||
Net increase (decrease) in cash and cash
equivalents |
2,683 | (61,783 | ) | |||||||||
Cash and cash equivalents at beginning of period |
58,865 | 116,643 | ||||||||||
Cash and cash equivalents at end of period |
$ | 61,548 | $ | 54,860 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
IXIA
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
1. Business
Ixia (the “Company”) was incorporated on May 27, 1997 as a California corporation. The Company develops, markets and sells high-speed, distributed, multiport traffic generators, and performance and conformance analyzers for wire-speed verification of optical networking equipment, LAN, MAN, WAN and SAN multi-layer switches and routers. Our customers include manufacturers of network equipment, Internet and network service providers, communications chip manufacturers and network users.
2. Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2003 and for the three and six months ended June 30, 2003 and 2002, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, operating results and cash flows for the interim periods presented. The results of operations for the current interim periods presented are not necessarily indicative of results to be expected for the full year ending December 31, 2003 or any other future period.
These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
3. Inventories
Inventories consist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials |
$ | 1,219 | $ | 1,537 | ||||
Work in process |
1,038 | 1,332 | ||||||
Finished goods |
3,633 | 2,252 | ||||||
| $ | 5,890 | $ | 5,121 | |||||
4. Stock-Based Compensation
The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price. The Company accounts for stock based awards issued to non-employees in accordance with the provisions of SFAS 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees.”
6
IXIA
Notes to Condensed Consolidated Financial Statements
The Company calculated the fair value of each option grant on the respective dates of grant using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following assumptions:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Expected lives (in years) |
4 | 5 | 3 | 5 | ||||||||||||
Risk-free interest rates |
2 | % | 3 | % | 2 | % | 3 | % | ||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected volatility |
110 | % | 110 | % | 110 | % | 110 | % | ||||||||
Certain stock options have been granted with exercise prices below the fair market value of the options on the date of grant. The following table illustrates the effect on stock-based compensation, net income and earnings per share on a pro forma basis as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Stock-based compensation: |
|||||||||||||||||
As reported |
$ | 217 | $ | 1,409 | $ | 1,148 | $ | 3,199 | |||||||||
Additional stock-based
compensation expense determined
under the fair value method, net
of income tax |
2,041 | 3,489 | 4,820 | 6,384 | |||||||||||||
Pro forma |
$ | 2,258 | $ | 4,898 | $ | 5,968 | $ | 9,583 | |||||||||
Net income (loss): |
|||||||||||||||||
As reported |
$ | 2,466 | $ | 1,063 | $ | 3,978 | $ | 2,031 | |||||||||
Additional stock-based
compensation expense determined
under the fair value method, net
of income tax |
2,041 | 3,489 | 4,820 | 6,384 | |||||||||||||
Pro forma |
$ | 425 | $ | (2,426 | ) | $ | (842 | ) | $ | (4,353 | ) | ||||||
Basic net income (loss) per share: |
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